Indiana Law Review


Recent Developments in Telecommunications Law

Angela D. O'Brien*

Introduction

It has been four years since President Clinton signed the revolutionary and

ambitious Telecommunications Act of 1996' ("TA 96" or "the Act") in order to
remove barriers to competition in the local telecommunications market and
provide all Americans with access to affordable telecommunications service.

Since that time, and particularly within the past year, there have been a large

number of regulatory and judicial decisions at the federal and state levels that
endeavor to implement the goals ofthe Act and to regulate telecommunications

carriers under specific provisions of state law. This Article reviews some ofthe
significant developments in federal and Indiana telecommunications law^ for the

period of October 1, 1998 to October 31, 1999.

I. Implementation OF Local Competition

The Act's goal is to eliminate barriers to local competition in the
telecommunications marketplace by requiring that incumbent local exchange

carriers ("ILECs") provide access to their networks to competitive local

exchange carriers ("CLECs"). This access is facilitated by requiring ILECs

(1) to permit a requesting new entrant in the [ILECs] local market to
interconnect with the [ILECs] existing local network and thereby use
the [ILECs] network to compete with the [ILEC] in providing telephone -

services (interconnection); (2) to provide its competing

* J.D., 1 998, Indiana University School ofLaw—Indianapolis. The author is an Associate
in the Chicago office of Mayer, Brown & Piatt and a former Associate of Barnes & Thomburg,
Indianapolis. The views expressed in this Survey are the author*s own, and do not necessarily

reflect those ofthe attorneys at Mayer, Brown & Piatt or Barnes & Thomburg. The author would
like to thank Sean P. O'Brien and Mark A. Lindsey for their valuable assistance and support.

1. Pub. L. 104-104, 1 10 Stat. 56 (codified at 47 U.S.C. § 151 (Supp. Ill 1997)).

2. In addition to state law developments, this survey Article primarily concerns issues

related to the implementation ofthe local competition and universal service provisions set forth in

Title I of the Act, "Telecommunications Services,*' and does not include discussion of precedent

implementing: Title II, "Broadcast Services"; Title III, "Cable Services"; Title V, "Obscenity and

Violence." Even with these restrictions, a discussion of the precedent issued within the survey

period concerning telephony issues would constitute volumes ofmaterial. Accordingly, this survey

Article covers some ofthe issues encountered most frequently in the author's practice and that are,

or have been, the subject of proceedings before the federal and state administrative tribunals and

that have resulted in significant judicial precedent. For more information concerning the issues

discussed in this article and other telecommunications issues, see Federal Communications Law

yowr/ia/ (publishedjointly by the Indiana University School ofLaw in Bloomington and the Federal

Communications Bar Association), the Federal Communications Commission's website at

<http://www.fcc.gov> (visited July 26, 2000), or the Indiana Utility Regulatory Commission's

website at <http://www.state.in.us./iurc/index.html> (visited July 26, 2000).



1498 INDIANA LAW REVIEW [Vol. 33: 1497

telecommunications carriers with access to individual elements of the

[ILEC's] own network on an unbundled basis (unbundled access); and
(3) to sell to its competing telecommunications carriers, at wholesale

rates, any telecommunications service that the [ILEC] provides to its

customers at retail rates, in order to allow the competing carriers to resell

the services (resale).^

3. Iowa Utils. Bd. v. FCC, 120 F.3d 753, 791 (8th Cir. 1997) (footnote omitted), aff'd in

part, rev'd in part sub nom. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999). The court in
Iowa Utilities Board cited 47 U.S.C. § 251(c) (Supp. Ill 1997), which provides in relevant part:

(2) Interconnection.
—^The duty to provide, for the facilities and equipment of any

requesting telecommunications carrier, interconnection to the local exchange carrier's

network—

(A) for the transmission and routing of telephone exchange service and exchange

access;

(B) at any technically feasible point within the carrier's network;

(C) that is at least equal in quality to that provided by the local exchange carrier to

itself or to any subsidiary, affiliate, or any other party to which the carrier provides

interconnection; and

(D) on rates, terms, and conditions that arejust, reasonable, and nondiscriminatory,

in accordance with the terms and conditions of the agreement and the requirements of

this section and section 252.

(3) Unbundled Access.—^The duty to provide, to any requesting teleconmiunications
carrier for the provision of a telecommunications service, nondiscriminatory access to

network elements on an unbundled basis at any technically feasible point on rates,

terms, and conditions that are just, reasonable, and nondiscriminatory in accordance

with the terms and conditions ofthe agreement and the requirements ofthis section and

section 252. An incumbent local exchange carrier shall provide such unbundled

network elements in a manner that allows requesting carriers to combine such elements

in order to provide such telecommunications service.

(4) Resale—^The duty

—

(A) to offer for resale at wholesale rates any telecommunications service that the

carrier provides at retail to subscribers who are not telecommunications carriers; and

(B) not to prohibit, and not to impose unreasonable or discriminatory conditions

or limitations on, the resale of such telecommunications service, except that a State

commission may, consistent with the regulations prescribed by the Commission under

this section, prohibit a reseller that obtains at wholesale rates a telecommunications

service that is available at retail only to a category of subscribers from offering such



2000] TELECOMMUNICATIONS LAW 1 499

A. The Eighth Circuit: Iowa Utilities Board v. FCC

In 1996, the Federal Communications Commission (FCC), the agency
charged with implementing the Act's local competition provisions, issued In re

Implementation ofthe Local Competition Provisions in the Telecommunication

Act of 1996,^ which promulgates local competition rules. Local exchange
carriers ("LECs") and state utility commissions challenged the First Report and

Order on the grounds that the FCC exceeded itsjurisdiction in promulgating rules
regarding prices "for interconnection, unbundled access, and resale, as well as

[] the rules regarding the prices for the transport and termination of local

telecommunications traffic."^ Most ofthese challenges were consolidated by the
Eighth Circuit miowa Utilities Boardv. FCC, where the court ofappeals vacated
several ofthe FCC's local competition rules and upheld the state commissions'
authority to regulate intrastate telecommunications.^ However, the Supreme

Court granted certiorari, and, as discussed below, several ofthe Eighth Circuit's

holdings were reversed.^ In order to discuss the Supreme Court's decision, it is
necessary to briefly summarize the Eighth Circuit's determinations.*

/. FCC 's Pricing Rules.—Petitioners challenged the FCC's rules requiring
state commissions to implement the total element long-run incremental cost

(TELRIC) methodology to determine the costs ofILEC facilities^ and the proxy
rates

^'^ to be used if the state commission chooses not to employ the TELRIC.*^
The court held that under the plain language of §§ 25 1 and 252 ofthe Act and §
2(b) ofthe Communications Act of 1934,'^ the FCC lacked statutory authority to

service to a different category of subscribers.

Id.

4. CC Docket Nos. 96-98 and 95-185, 11 F.C.C.R. 15,499 (released Aug. 8, 1996)
[hereinafter First Report & Order],

5. Iowa Uiils. Bd, 120 F.3d at 792 (footnote omitted).

6. See id. at 792-94.

7. 5ee AT&T Corp. v. lowaUtils. Bd., 525 U.S. 366 (1999)j, qgrg inpart andrev 'ginpart
Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997).

8. The order and titles ofthe following issues are set forth according to the order in which

they were considered in Iowa Utilities Board v. FCC. The following summary does not cover all

ofthe FCC rules vacated by the Eighth Circuit. See Iowa Utilities Board v. FCC, 120 F.3d at 819
n. 19 for a complete list ofFCC rules and portions ofthe First Report and Order that were vacated.

9. See id at 793 (citing 47 C.F.R. §§ 51.503, 51.505 (1996)).

10. See,id (citing 47 C.F.R. §§ 51.503(b)(2), 51.513, 51.705(a)(2), 51.707).

11. See id

12. 47 U.S.C. § 152(b) (1994). This section provides in relevant part:

Except as provided in sections 223 through 227 . . . inclusive, and section 332, and

subject to the provisions of section 301 of this title . . . nothing in this chapter shall be

construed to apply or to give the [FCC] jurisdiction with respect to . . . charges,

classifications, practices, services, facilities, or regulations for or in connection with

intrastate communications service.



1500 INDIANA LAW REVIEW [Vol. 33:1497

promulgate these pricing rules.
*^

2 The "Pick and Choose " Rule.—The court vacated an FCC rule allowing
carriers requesting interconnection to "pick and choose"'* favorable terms and
conditions related to interconnection, service and network elements from existing
interconnection agreements without having to adopt the entire interconnection

agreement.'^ The court found this rule to be an "unreasonable interpretation of
subsection 252(i),"'^ reasoning that the Act as a whole reveals Congress'
preference for voluntarily negotiated interconnection agreements, and that
allowing requesting carriers to adopt provisions in a "piecemeal fashion" would
thwart this process.'^

3. Rural Exemptions.—In response to claims that 47 C.F.R. § 51.405
improperly imposed additional standards on state commissions in making
determinations concerning the exemption ofsmall or rural LECs from the duties
required of ILECs under the Act,** the court found that § 251(f) gives state
commissions the exclusive authority to determine rural LEC exemptions. *^ Thus,
the FCC did not have jurisdiction to impose standards in addition to those in §
251(f).''

4. FCC's Authority to Review State Approved Agreements.—The court
rejected the FCC's claims in the First Report and Order'* that the FCC possessed
authority under 47 U.S.C. § 208 to review and enforce the terms of state
approved interconnection agreements," and held that § 252(e)(6)'^ provides the

"exclusive means ofobtaining review ofstate commission determinations under
the Act.'"'

Id. The Act amends the Communications Act of 1934.

13. See Iowa Utils. Bd, 120 F.3d at 794, 800.

14. See id (citing 47 C.F.R § 51.809 (1997)).

15. See id.

16. Mat 800.
17. A/, at 800-01.

18. 5ee/^. at 801-02.

19. See id at S02.

20. See id at 803.

21. See First Report & Order, supra note 4, llf 1 2 1 - 1 28.
22. See Iowa Utils. Bd, 120 F.3d at 803.

23. 47 U.S.C. § 252(e)(6) (Supp. Ill 1997) provides:

Review ofstate commission actions.—In a case in which a State fails to act as described
in paragraph (5), the proceeding by the Commission under such paragraph and any

judicial review of of the Commission's actions shall be the exclusive remedies for a

State commission's failure to act. In any case in which a State commission makes a

determination under this section, any party aggrieved by such determination may bring

an action in an appropriate Federal district court to determine whether the agreement or

statement meets the requirements of section 251 and this section.

24. Iowa Utils. Bd, 120 F.3d at 804. The court further held that § 252(e) vests primary

authority with the state commissions to enforce the terms of interconnection agreements approved

under §§251 and 252 and that in any event, § 2(b) bars FCC jurisdiction over intrastate



2000] TELECOMMUNICATIONS LAW 1501

5. FCC Review ofPreexisting Agreements.—^The court rejected the FCC's
interpretation of § 252(a)(1) requiring that agreements negotiated prior to the

enactment of TA 96 to be submitted for approval by the state commission^^ on
the grounds that the FCC did not have jurisdiction under § 2(b) of the
Communication Act of 1934^^ to determine "which interconnection agreements

must be submitted for state commission approval."^^ The court also found that
nothing within the plain language of§ 252 authorized the FCC to regulate "which
interconnection agreements must be submitted for state approval."^*

6. State Compliance with FCC Rules.—The court also rejected the FCC's
interpretation of § 251(d)(3)^' preempting "state policy that conflicts with an

FCC regulation promulgated pursuant to § 25 1 ."^^ The court found this to be an
unreasonable interpretation of§ 25 1 (d)(3), holding that the states' authority over

the local telephone markets and interconnection agreements should be protected

so long as state rules are consistent with § 251.^'

7. FCC's Unbundling Rules.—Regarding the unbundled network element
rules promulgated by the FCC:

(a) The court disagreed with arguments that operational support systems

(OSS), operator services, and vertical switching features do not constitute

"network elements" subject to the Act's unbundling requirements and upheld the

FCC's rules qualifying these features as network elements.^^
(b) The court upheld the FCC's definition of "technically feasible"" as set

communications service. See id.

25. Seeid at 804-05 (citing 47 C.F.R. §5 1.303 (1997) (settings forth the FCC interpretation
of§ 252(a)(1) of the Act)).

26. 47U.S.C.§ 152(b) (1994).

27. Iowa mis. Bd , 1 20 F.3d at 805.
28. Id

29. 47 U.S.C. § 25 1(d)(3) (Supp. Ill 1997) provides:

In prescribing and enforcing regulations to implement the requirements of this section,

the [FCC] shall not preclude the enforcement of any regulation, order, or policy of a

State commission that

—

(A) establishes access and interconnection obligations of local exchange carriers;

(B) is consistent with the requirements of this section;

(C) does pot substantially prevent implementation of the requirements of this section

and the purposes of this part.

Id

30. Iowa Utils. Bd, 120 F.3d at 806.

31. SeeiddXWl.

32. See id at 808-09 (upholding 47 C.F.R. §§ 51.319(f-g) (1997)).

33

.

The Act provides for interconnection and unbundled access at any "technically feasible

point." Id at 810 (quoting 47 U.S.C. §§ 251(c)(2), (3)).



1502 INDIANA LAW REVIEW [Vol. 33:1497

forth in 47 C.F.R. § Sl.S,^'* despite claims that disregarding the economic costs
at points of interconnection (POI) could result in "[ILECs] having to incur
unwarranted expenses in order to meet the demands of competing carriers
seeking access to their networks.'*^^ Although the court upheld the FCC's
definition of "technically feasible," the court rejected the FCC's findmg "that
[because] it is technically feasible to unbundle a particular element[, there is] a

presumption that the element must be unbundled
"^^

(c) In determining which network elements ILECs should be required to
make available to requesting carriers under § 25 1(d)(2) ofthe Act, the FCC must
consider whether access to proprietary network elements is ''necessary and
whether the failure to provide access to a network elements would impair the
ability" ofthe requesting carrier to provide telecommunications service.^^ The
court upheld the FCC's interpretation ofthe "necessary" and "impair" standards
as not "requir[ing] an evaluation ofwhether a requesting carrier could obtain the
desired elements from an alternative source."^* Additionally, the court upheld
the FCC's interpretation that a proprietary network element is "'necessary' if a
requesting carrier's ability to compete would be 'significantly impaired or
thwarted'"^^ and the FCC's interpretation of "impair" as whether "the quality of
service the entrant can offer, absent access to the requested element, declines

and/or the cost of providing the service rises."
^^

(d) The court vacated the FCC's "Superior Quality Rules" which require
ILECs to provide interconnection, unbundled network elements, and unbundled
access to requesting carriers at levels of quality greater than the ILEC provides
to itself,'** on the grounds that such requirement violates the plain language of §
251(c).'2

(e) The court found that the FCC's rules that prohibited ILECs from
unbundling network elements purchased by competing carriers,"*^ were contrary

to the terms of § 251(c)(3).^ Allowing a competing carrier to purchase a

34. 47 C.F.R. § 51.5 (1999) provides in pertinent part: "A determination of technical

feasibility does not include consideration ofeconomic, accounting, billing, space, or site concerns

35. Iowa Utils. Bd, 120 F.3d at 810. The court held that additional costs would be

accounted for in the determination ofjust and reasonable rates and that "an [ILEC] will recoup the

costs involved in providing interconnection and unbundled access from the competing carriers

making these requests." Id.

36. Id. (citations omitted).

37. Id (emphasis added) (citing 47 U.S.C. § 251(d)(2)(A-B) (Supp. Ill 1997)).

38. Id. at 8 1 1 (citing First Report & Order, supra note 4, J 283).
39. Id. (quoting First Report & Order, supra note 4, ^ 282).
40. Id. at 8 1 2 (quoting First Report & Order, supra note 4, ^ 285).
41. See 47 C.F.R. §§ 51.305(aX4), 51.31 1(c) (1999).

42. See Iowa Utils. Bd, 120 F.3d at 812-13.

43. 5ee47C.F.R. §51.315(b-f).

44. See Iowa Utils. Bd, 120 F.3d at 813. The Eighth Circuit issued an Order on Petition

for Rehearing dated October 14, 1997 striking the language appearing under Part 11(G)(1)(f) ofthe



2000] TELECOMMUNICATIONS LAW 1503

complete "platform'"*^ ofthe network elements to create a finished service at cost

would eviscerate § 251(c)(4) which allows competing carriers to purchase an
ILEC's telecommunications services at wholesale rates for resale.^

8. Dialing Parity.—^In a separate proceeding/^ the court held that the FCC
lackedjurisdiction to implement its rules** regarding dialing parity*' to the extent

that those rules apply to intraLATA (local access and transport area) traffic.^°

B. The U.S. Supreme Court: AT&T v. Iowa Utilities Board

The FCC and several parties appealed the decisions, and the U.S. Supreme
Court granted certiorari^' to review the Eighth Circuit's holdings regarding the

FCC's jurisdiction to implement local competition provisions, the unbundled
network element rules, and the "pick and choose" rule.^^

I. FCC 's Jurisdiction to Implement Local Competition Provisions.—The
Court's analysis of the FCC's jurisdiction to implement local competition
provisions primarily concerned the application oftwo statutory provisions. First,

§ 20 1 (b)^^ ofthe Communications Act of 1 934 expressly gives the FCC authority
to "prescribe such rules and regulations as may be necessary in the public interest
to carry out the provisions ofthis Act."^* Reasoning that TA 96 was intended to
supplement the Communications Act of 1934, the Court concluded that the

FCC's rulemaking authority under § 201(b) extended to the Act's local
competition provisions.^^ In reaching this conclusion, the Court rejected the

Eighth Circuit's reliance on language in § 201(a), which prescribes "the dut[ies]
ofevery common carrierengaged in interstate orforeign communications,"^^ and
held thatthe FCC ' sjurisdiction extended only to those communications that were
"interstate and foreign."^^ The Court noted that a limitation on the class of
common carriers charged with the duty set forth in § 201(a) did not act as a

opinion dated July 18, 1997 found at 120 F.3d 753, 813 and substituting language which vacates

47C.F.R. §51.315(b-f).

45. Iowa Utils. Bd., 120 F.3d at 813.

46. See id.

47. See California v. FCC, 124 F.3d 934 (8th Cir. 1997).

48. 5ee 47 C.F.R. §§51.205-51.215.

49. "Dialing parity^refers to the "technological capability that enables atelephone customer

to route a call over the network of the customer's preselected carrier without having to dial an

access code of extra digits." California v. FCCy 124 F.3d at 939 (citation omitted).

50. Seeid2X9AZ.

51. 522 U.S. 1089 (1998) (mem.).

52. AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999).
53. Section201(b)wasaddedtoCommunicationsActof 1934in 1938. S'ee Pub. L. No. 75-

561, 52 Stat. 588(1938).

54. 47 U.S.C.§ 201(b) (1994).

55. AT&T, 525 U.S. at 377-78.

56. 47 U.S.C. § 201(a) (emphasis added).

57. See AT&T, 525 U.S. at 378.



1504 INDIANA LAW REVIEW [Vol. 33: 1497

limitation on the FCC's rulemaking authority set forth in § 201(b).^*
Furthermore, given the Court's construction of § 201(b), arguments that the Act
expressly confers jurisdiction on the FCC to implement the local competition
provisions only in certain sections (e.g., §§ 251(d), 251(b)(2), 251(c)(4)(B),

251(d)(2), 251(g), and 251(h)(2)) were dismissed.''

Second, some parties argued that the FCC's rulemaking authority to
implement local competition provisions was circumscribed by § 2(b)^ because
the local competition provisions are not among those sections contained in §
2(b)' s "except clause." Thus, the FCC's implementation of the local
competition provisions required an express grant of FCC jurisdiction over
intrastate service.^* The Court rejected this position, again citing the express
grant of FCC jurisdiction contained in § 201(b). Moreover, examination of §
2(b) supported the majority's conclusion that the language in § 2(b), "nothing in

this Act shall be considered to apply or to give the Commission
jurisdiction . .

.

," did not create a mutually exclusive alternative as argued by the
Respondents, but rather two distinct limitations: "[t]he term 'apply' limits the
substantive reach of the statute (and the concomitant scope of primary FCC
jurisdiction), and the phrase 'or give the Commission jurisdiction' limits, in
addition, the FCC's ancillary jurisdiction.""

58. See id. The logic of the majority's holding on this issue is exemplified by Justice

Scalia's rejection of Justice Breyer's "appealQ to our cases which say that there is a 'presumption

against the preemption ofstate police power regulations.'" Id at 730 n.6 (citation omitted). Justice

Scalia stated:

[T]he question in this case is not whether the Federal Government has taken the

regulation of local competition away from the States. With regard to the matters of

addressed by the 1996 Act, it unquestionably has. The question is whether the state

commissions' participation in the administration of the new federal regime is to be

guided by federal-agency regulations. If there is any "presumption" applicable to this

question, it should arise from the fact that a federal program administered by 50

independent state agencies is surpassing strange.

The appeals by Justice THOMAS and Justice BREYER to what might loosely be called
"States' rights" are most peculiar, since there is no doubt, even under their view, that

if the federal courts believe a state commission is not regulating in accordance with

federal policy they may bring it to heel. This is, at bottom, a debate not about whether

the States will be allowed to do their own thing, but about whether it will be the FCC

or the federal courts that draw the lines to which they must hew.

Id

59. See id at 383.

60. See id at 379 (quoting 47 U.S.C. § 1 52(b)).

61. See id ai 3^0.

62. Id. at 731 (citing Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355 (1986)).

According to the Court, the need for two limitations is "exemplified" by the two arguments raised

by the FCC in Louisiana Public Service Commission regarding its rulemaking authority over

depreciation methods used by local telephone companies. Id. In the above case, the Court rejected



2000] TELECOMMUNICATIONS LAW 1505

In addition to upholding the FCC's general rulemaking authority under §§
20 1 and 2(b), the Court upheld the FCC's authority to promulgate rules regarding
TELRIC pricing, states' review ofpreexisting interconnection agreements, rural
exemptions, and dialing parity, despite claims that certain sections of the Act

negated aspects of the FCC's authority.^^ Regarding TELRIC pricing.
Respondents cited § 252(c), which provides in relevant part:

In resolving by arbitration under subsection (b) any open issues and

imposing conditions upon the parties to the agreement, a state

commission shall—

(1) ensure that such resolution and conditions meet the

requirements of section 251, including the regulations

the FCC's argument that the intent of the Communications Act was that depreciation provisions

would apply to the states. The Court held that such provisions could not be read to negate § 2(b).

See id (citing Louisiana Pub. Serv. Comm 'n, 476 U.S. at 376-77). Alternatively, the Court rejected
the FCC's argument that it could regulate intrastate depreciation methods if such would affect

interstate telecommunications on the grounds that under § 2(b), the FCC could not regulate
intrastate telecommunications solely to further the federal goal of increasing interstate

telecommunications. See id. (citing Louisiana Pub. Serv. Comm 'n, 476 U.S. at 369).
In Texas Ojfice ofPublic Utility Counsel v. FCC, 1 83 F.3d 393, 423 (5th Cir. 1 999), the Fifth

Circuit succinctly explained the Supreme Court's holding concerning the FCC'sjurisdiction under

§ 201(b) and § 2(b):

Though § 2(b)'s language stating that "nothing in this Act shall be construed to apply

orto give the Commission jurisdiction" implies that FCC jurisdiction does not always

follow where the Act applies, the [Supreme] Court held that "the term *apply ' limits the

substantive reach of the statute . . . and the phrase 'or the Commission's jurisdiction'

limits ... the FCC's a/jci7/ary jurisdiction.

* * *

In reconciling its holding with Louisiana PSC, the Court held that the FCC must show

that the meaning of a statutory provision applies to intrastate matters in an

"unambiguous and straightforward" manner as to "override the command of § 2(b)."

If the agency fails in this initial task, it cannot use its normally broad regulatory

authority to assert what is now only ancillary jurisdiction because of the still intact

jurisdictional fence created by § 2(b). Therefore, after [AT&Tv. Iowa Utilities], § 2(b)

still serveis as (1 ) a rule ofstatutory construction requiring the FCC to fmd unambiguous
statutory authority applying to intrastate matters and (2) a jurisdictional barrier

restricting the agency from using its plenary authority to assert a/ici/Zaryjurisdiction by

"taking intrastate action solely because it fiirther[s] an interstate goal."

Texas Office, 183 F.3d at 423 (footnotes omitted) (citing AT&T, 525 U.S. at 380-81; Louisiana

Pub. Serv. Comm 'n, 476 U.S. at 374).
63. See AT&T, 525 U.S. at 385 (reinstating 47 C.F.R. §§ 51.303, 51.405, and 51.205-215

(1999)).



1506 INDIANA LAW REVIEW [Vol. 33:1497

prescribed by the Commission pursuant to section 251.

(2) establish any rates for interconnection, services, or network
elements according to subsection (d).^

Despite arguments that § 252(c)(2) confers state commissions with the authority
to "establish any rates," the Court found the TELRIC pricing rule, in prescribing
a pricing methodology, did not infringe on the State commissions' duty to
"establish [] rates for interconnection, services, or network elements"^^ any more
than the pricing standards set forth in subsection (d).^

The Court further addressed the apparent "lack of parallelism" between
subsections (c)(1) and (c)(2) evidenced by the proviso in (c)(1) concerning the
states' duty to ensure compliance with § 251 including the FCC's rules
implementing that section.^^ This "lack ofparallelism" is logically explained by
the fact that § 251(d)(1) expressly requires the FCC to promulgate rules and
regulations to implement that section.^* The Court held that regardless, any "lack
ofparallelism" did not override the FCC's authority to implement the provisions
of the Act under § 201(d).^' Under the same rationale, the Court reversed the
Eighth Circuit's decisions upholding the FCC's rules regarding preexisting
agreements, rural exemptions, and dialing parity holding that "[n]one of the

statutory provisions that these rules interpret displaces the Commission's general

64. 47 U.S.C § 252(c)(l-2) (Supp. Ill 1997) (emphasis added).

65. Id.

66. See AT&T, 525 \}.S.dX 3%^. The Court explained:

We think this attributes to [the State commissions'] task a greater degree of autonomy
than the phrase ''establish any rates" necessarily implies ... It is the States that will

apply those standards and implement that methodology, determining the concrete result

in particular circumstances. That is enough to constitute the establishment of rates.

Id.

Although this holding is consistent with Court's decisions to uphold the FCC's jurisdiction

to implement local competition rules, the Court's rationale begs the question ofthe extent to which

State commissions enjoy autonomy under the Act's express delegations of power. Pursuant to the

Court's analysis, the States' authority is severely limited. The Court noted that the Act

assume[s] a scheme in which Congress has broadly extended its law into the field of

intrastate telecommunications, but in a few specified areas (ratemaking, interconnection

agreements, etc.) has left the policy implications ofthat extension to be determined by

state commissions, which—^within the broad range of lawful policymaking left open to
the administrative agencies—are beyond federal control. Such a scheme is decidedly
novel, and the attendant legal questions, such as whether federal courts must defer to

state agency interpretations of federal law, are novel as well.

A/, at 385 n. 10.

67. Id

68. Id

69. Id



2000] TELECOMMUNICATIONS LAW 1507

rulemaking authority."^^

2. FCC's Unbundling Rules.—
(a) ILECs challenged the FCC's rules^' regarding network elements arguing

that the FCC improperly included OSS, operator services and directory assistance
("OS/DA"), and vertical switching fiinctions^^ within the definition of"network

elements."^^ ILECs argued that a "'network element' must be part ofthe physical
facilities and equipment used to provide local phone service."^"* Finding that the

definition of "network element" in § 153(29) was sufficiently broad to include
OSS, OS/DA and vertical switching functions, the Court rejected the ILECs
argument and upheld the Eighth Circuit's determination that the FCC's
interpretation of network element was reasonable^^

(b) However, the Court did not agree with the FCC's interpretation of the
"necessary" and "impair" standards under § 251(d)(2)(A & B).^^ The Court
began its analysis by noting that the FCC requires ILECs to provide requesting
carriers with a minimum of seven unbundled network elements,^^ and that a
requesting carrier can petition the state commission for additional elements.^*

ILECs argued that § 25 1(d)(2) ofthe Act served only as a means to supply access
to those network elements otherwise unavailable.^^ The FCC should therefore
"apply some limiting standard, rationally related to the goals of the Act, which
it has simply failed to do."^^ In contrast, the FCC's interpretations of the

70. Id. Furthermore, the Court noted that § 251(b)(3), governing dialing parity, "does not

even mention the States, [and thus] it is even clearer that the Commission's § 201(b) authority is

not superseded." Id.

71. See 47 C.F.R. §§51.3 19(f-g) (1999); First Report & Order, supra note 4, 11413.
72. Vertical switching functions include services such as caller I.D., call forwarding, and

call waiting. See AT&T, 525 U.S. at 386.

73. Id. A "network element" is defined by the Act as:
[A] facility or equipment used in the provision of a telecommunications service. Such

term also includes features, functions, and capabilities that are provided by means of

such facility or equipment, including subscriber numbers, databases, signaling systems,

and information sufficient for billing and collection or used in the transmission, routing,

or other provision of telecommunications service.

47 U.S.C. § 153(29) (Supp. Ill 1997).

74. y<r<&r,525U.S.at387.

75. See id. (citing Chevron v. Natural Resources Defense Council, 467 U.S. 837, 866

(1984)).

76. See id.

77. See^id. at 387-88. These network elements include: "the local loop, the network

interface device, switching capability, interoffice transmission facilities, signaling networks and

calNrelated databases, operations support system functions, and operator services and directory

assistance." Id (citing 47 C.F.R. § 51.319 (1997)).

78. See id at 388 (citing 47 C.F.R. § 5 1 .3 1 7).

79. See id

80. Id. ILECs analogized § 251(d)(2) to the "essential elements" doctrine in antitrust law

whereby the ILECs would make available "only those 'bottleneck' elements unavailable elsewhere



1508 INDIANA LAW REVIEW [Vol. 33: 1497

"necessary" and "impair" standards effectively gave requesting carriers "blanket
access" to the ILECs' networks.**

For example, the FCC's "impair" standard requires a determination as to
whether

the failure of an incumbent to provide access to a network element

would decrease the quality, or increase the financial or administrative
cost of the service a requesting carrier seeks to offer, compared with
providing that service over other unbundled elements in the incumbent

LEC's network.*^

This standard, by its terms, necessarily excludes consideration of"selfprovision
or . . . purchasing from another provider," and "[s]ince any entrant will request

the most efficient network element that the incumbent has to offer, it is hard to
imagine when the incumbent's failure to give access to the element would not
constitute an 'impairment' under this standard."*^ According to the Court, the

FCC's limitation of inquiry to ILECs under the "impair" standard unreasonably
shifts the determinations of whether access to a proprietary network element is

"necessary" and whether the failure to gain access to a non-proprietary network

element would "impair" the provision ofservice from the FCC to the requesting
carrier.*'* Furthermore, the Court rejected the FCC's reasoning that an increase
in cost or decrease in quality resulting from the denial of a network element

necessarily renders access to that element "necessary," and thus, failure to

provide access to that elementwould "impair" the ability ofthe requesting carrier
to provide service.*^

in the marketplace." Id. However, the Court declined to decide whether such standard is required

by the Act as a matter of law. See id.

81. A/, at 390.

82. First Report & Order, supra note 4, 1 285.
83. /4r&r,525U.S.at389.

84. Id

85. Id. at 389-90. To illustrate, the Court noted that a requesting carrier whose

anticipated annual profits from the proposed service are reduced from 100% of

investment to 99% of investment has perhaps been "impaired" in its ability to amass
earnings, but has not ipso facto been "impaired ... in its ability to provide the service

it seeks to offer"; and it cannot realistically be said that the network element enabling

it to raise its profits to 100% is necessary.

Id at 390.

Commenting on Justice Souter's dissent, the majority also offered the following analogy:

JUSTICE SOUTER points out that one can say his ability to replace a light bulb is
"impaired" by the absence of a ladder, and that the ladder is "necessary" to replace the

bulb, even though one "could stand instead on a chair, a milk can, or eight volumes of

Gibbon." True enough (and nicely put), but the proper analogy here, it seems to us, is

not the absence ofa ladder, but the presence ofa ladder tall enough to enable one to do

the job, but not without stretching one*s arm to its full extension. A ladder one-half
inch taller is not, "within an ordinary and fair meaning of the word," "necessary," nor



2000] TELECOMMUNICATIONS LAW 1 509

The FCC's interpretation is based upon its misinterpretation of § 25 1(c)(3),
which requires ILECs to provide access to network elements "at any technically
feasible point"*^ as imposing a duty upon ILECs to make available "all network
elements for which it is technically feasible to provide access."^^ Agreeing with

the interpretation ofthe Eighth Circuit, the Court held that § 25 1(c)(3) "indicates

'where unbundled access must occur, not which [network] elements must be*
unbundled.'"** The FCC's application ofthe "necessary" and "impair" standards
under § 25 l(d)(2)(A-B) were based on the false premise that § 25 1(c)(3) allowed

access to all network elements and thus the FCC, interpreting both § 251(c)(3)
and § 251(d)(2), reached the erroneous conclusion that "the proprietary and

impairment standards in § 251(d)(2) grant us the authority to refrain from

requiring incumbent LECs to provide all network elements for which it is
technically feasible to provide access on an unbundled basis."*^ According to the

Court:

Section 251(d)(2) does not authorize the [FCC] to create isolated
exemptions from some underlying duty to make all network elements
available. It requires the Commission to determine on a rational basis
which network elements must be made available, taking into account the
objectives ofthe Act and giving some substance to the "necessary" and
"impair" requirements.^

The Court concluded that the FCC's unreasonable application of § 251(d)(2)
governed the consideration of several network elements, and accordingly, the

Court vacated 47 C.F.R § 51.319 (1997).'^

This holding also largely disposed ofthe ILECs' argument regarding the "all

elements" rules, which allow requesting carriers to provide complete service
solely through the purchase ofunbundled network elements.^^ The Court noted

does its absence ''impair'* ones ability to do the job.

Id. at 390 n.l 1 (quoting id. at 399 (Souter, J., concurring in part and dissenting in part)) (citations

omitted).

86. Id at 391 (citing 47 U.S.C. § 251(c)(3) (Supp. Ill 1997)).

87. Id. (quoting First Report & Order, supra note 4, ^ 278).
88. Id (quoting Iowa Utils. Bd. v. FCC, 120 F.3d 753, 810 (8th Cir. 1997), afTd in part,

rev 'dinpart sub. nom. AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999)). While the Eighth Circuit's
holding regarding the FCC's interpretation of 251(c)(3) was not at issue before the Court, it was

noted that the FCC's misapplication of25 1(d)(2) "was colored by [the Eighth Circuit's] error." Id.

89. Id. (quoting First Report & Order, supra note 4, \ 279)
90. M^t 391-92.
91

.

See id. The FCC has since issued its response to the Supreme Court's mandate that it
revise the "necessary" and "impair" standards of § 251(d)(2) for the purposes of determining

unbundling obligations under § 251(c)(3). See In re Implementation of the Local Competition

Provisions of the Telecommunications Act of 1996, Third Report and Order and Fourth Further

Notice of Proposed Rulemaking, No. 96-98 15 F.C.C.R. 3696 (Released Nov. 5, 1999).

92. See AT&T, 525 U.S. at 392 (citing First Report & Order, supra note 4, fl 328-340.)
Recall that ILECs argued to the Eighth Circuit that a requesting carrier should at least partially own



1510 INDIANA LAW REVIEW [Vol. 33 : 1 497

that the FCC may, on remand, make fewer unbundled network elements available
such that the ability to provide complete service through unbundled network
elements is no longer possible.^^ Regardless, the Court agreed with the Eighth
Circuit in upholding the FCC's refusal to implement a requirement that
requesting carriers own theirown facilities before purchasing unbundled network
elements, finding that the Act did not impose such a requirement.^"*

(c) As stated, the FCC's pricing rule imposes the TELRJC pricing
methodology, allowing requesting carriers to lease network elements at cost, and

47 C.F.R. § 5 1 .3 1 9 and the "all elements" rule allow the requesting carrier to rely
solely on an ILEC's network to obtain virtually all elements on an unbundled
basis.^^ When these rules are combined with 47 C.F.R. § 51.315(b) ("Rule
3 15(b)"), which prohibits an ILEC from unbundling bundled network elements,
a requesting carrier "can lease a complete, preassembled network at (allegedly

very low) cost-based rates.
"^

Understandably, ILECs argued that such a result could not possibly be
consistent with the legislative intent underlying the Act.^^ For example, §
251(c)(4) provides that ILECs have the duty "to offer for resale at wholesale
rates any telecommunications service . . ,"^* Thus, allowing a requesting carrier

to "construct" a network to provide complete services at cost-based rates would

nullify the resale provisions ofthe Act.^ In addition, ILECs pointed out the fact
that local phone rates contain universal service subsidies to help keep rural and
residential services low.'^ These universal service subsidies are built into the

retail rates, and are thus passed on through resale rates. '°' However, a competing

carrier, by leasing its network at cost, can not only avoid the universal service

subsidy built into the retail rates but also can cherry pick business customers by
offering lower rates (that do not include the subsidy), depleting the ILECs'

source of subsidies for high-cost rural and residential customers.
^°^

its own facilities to provide local service before purchasing unbundled network elements from

ILECs. See Iowa Utils. Bd, 120 F.3d at 814.

93. See AT&T, 525 U.S. at 392.

94. See id. at 392-93. The Court stated that the Act actually suggested the opposite given

the requirement set forth in § 251(cX3) that access must be provided to "any requesting

telecommunications carrier." Id. at 393.

95. See id.

96

97

98. 47 U.S.C. § 251(c)(4) (Supp. Ill 1997) (emphasis added).

99. AT&T, 525 U.S. at 376-77; see also Iowa Utils. Bd. v. FCC, 120 F.3d 753, 813 (8th Cir.

1997), qgrdinpart, rev'dinpartsub nom. AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999).
100. See AT&T, 525 U.S. at 393. Under such universal service subsidies, "[bjusiness

customers, for whom the cost of service is relatively low, are charged significantly above cost to
subsidize service to rural and residential customers, for whom the cost ofservice is relatively high."

Id

101. See id.

102. See id.

'%Id .,

See id. M

m

^T



2000] TELECOMMUNICATIONS LAW 1511

The Court rejected out of hand these legitimate arguments stating only that
given the Court's disposition of Rule 319, ILECs concern may be rendered
"academic."*^^ The Court provided no explanation as to the apparent conflict
between the application of Rule 3 1 5(b) and the resale provisions under §
251(c)(4) as adeptly described by the Eighth Circuit:

To permit such an acquisition of already combined elements at cost
based rates for unbundled access would obliterate the careful distinctions

Congress has drawn in subsections 25 1(c)(3) and (4) between access to

unbundled network elements on the one hand and the purchase at

wholesale rates ofan incumbent's telecommunications retail services for

resale on the other.
'°^

The Court's inexplicable holding, allowing competing carriers to use Rule 3 1 5(b)
to lease a complete network at cost-based rates, obviates the Act's resale

provisions and eviscerates § 251 (c)(4)J^^ Similarly, ILECs' universal service

argument was also summarily dismissed under the reasoning that "§ 254 requires
that universal-service subsidies be phased out, so whatever possibility of

arbitrage remains will be only temporary."'^

103. Id

104. Iowa Utils. Bd, 120 F.3d at 813.

105. The Court, however, acknowledged that:

It would be a gross understatement to say that the Telecommunications Act of 1 996 is

not a model ofclarity. It is in many important respects a model ofambiguity or indeed

even self-contradiction. That is most unfortunate for a piece of legislation that

profoundly affects a crucial segment of the economy worth tens of billions of dollars.

The 1996 Act can be read to grant (borrowing a phrase from incumbent GTE) "most

promiscuous rights to the FCC vis-a-vis the state commissions and to competing carriers
vis-a-vis the incumbents—^and the [FCC] has chosen in some instances to read it that
way. But Congress is well aware that the ambiguities it chooses to produce in a statute

will be resolved by the implementing agency. We can only enforce the clear limits that
the 1996 Act contains, which in the present case invalidate only Rule 319.

AT&T, 525 U.S. at 397 (citation omitted).

106. Id. at 393-94. The Court's statement regarding the requirement that universal service

subsidies be phased out provides no specific citation to authority within § 254. Given the context

ofthe ILECs' argument and the Court's discussion, it is clear that the Court is referring to implicit,

as opposed to explicit, universal service subsidies. The Court is likely referring to § 254(f), which

provides in relevant part that:

A state n^ay adopt regulations to provide for additional defmitions and standards to
preserve and advance universal service within that State only to the extent that such

regulations adopt additional specific, predictable, and sufficient mechanisms to support

such definitions or standards that do not rely on or burden Federal universal service

support mechanisms.

47 U.S.C. § 254(f) (Supp. Ill 1997).

Section 254 has been interpreted as not requiring the elimination of implicit universal service

support mechanisms at the state level. See In re Federal-State Joint Board on Universal Service,



1512 INDIANA LAW REVIEW [Vol. 33:1497

The decision to reverse the Eighth Circuit's holding vacating Rule 315(b)
was based on the Court's beliefthat the FCC reasonably interpreted the language
of § 251(c)(3).'°^ Finding the language of § 251(c)(3) to be ambiguous as to
whether or not network elements must be separated, ^°^ the Court held that the
language in § 251(c)(3), requiring elements to be provided in a manner that
"allows requesting carriers to combine" them, did not foreclose the FCC's
prohibition on unbundling combined network elements. '^^ The Court stated that

§ 25 1 (c)(3) "does not say, or even remotely imply that elements must be provided
in this fashion and never in combined form.'"^° Additionally, the Court rejected
the notion that the language requiring ILECs to make network elements available
"on an unbundled basis" necessarily means that those network elements must be
"physically separated."'

'

' Admitting that Rule 3 1 5(b) allows competing carriers

"access to an entire preassembled network" at cost-based prices, the Court

nevertheless found that the FCC reasonably interpreted the "nondiscriminatory
access" provision in § 25 1 (cX3)' '^ in promulgating Rule 3 1 5(b) to prevent ILECs
from engaging in anti-competitive conduct by deliberately unbundling combined
network elements for no "productive reason."*'^

3. FCC's "P/cJta«^C/ioo5e"/?w/e.—Finally, the Court reversed the Eighth
Circuit and upheld the FCC's "Pick and Choose" Rule as a reasonable and most
readily apparent construction of § 252(i) of the Act,'*"* rejecting ILECs'

13 F.C.C.R. 24,744 (released Nov. 25, 1998) (Separate Statement of Public Counsel Margaret

Hogerty) ("The recommendation focuses on reasonable comparability and not on the elimination

of implicit support .... Section 254 does not require that regulators take measures to identify and

eliminate all 'implicit support' .... Consistent with our view on implicit support, there is no

recommendation that a state remove implicit support or that a state establish a universal service

fund."). This interpretation and the fact that local telecommunication services are still implicitly

subsidized, casts doubt upon the Court's opinion that "whatever possibility ofarbitrage remains will

only be temporary." AT&T, 525 U.S. at 394. In addition, whether Congress intended to put ILECs

at such a competitive disadvantage must be questioned. Although promoting competition by the

elimination of access barriers is proper, Congress most likely did not intend to saddle ILECs with

inherently unfair disadvantages.

107. See AT&T, 525 V,S. at 394.

108. Seeidai395.

109. Id

110. Mat 394.
HI. Id

112. Iowa Utils.Bd.v. FCC, 120 F.3d, 753 (8th Cir. 1997% aJjTd in part, rev 'din part sub

nom. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999).
113. AT&T, 525 U.S. 3X395.

1 1 4. See id at 396. The Court found that the "Pick and Choose" Rule, 47 C.F.R. § 5 1 .809

( 1999) tracks § 25 l(i) almost exactly. See id. Section 252(i) provides:

A local exchange carrier shall make available any interconnection, service, or network
element provided under an agreement approved under this section to which it is a party

to any other requesting telecommunications carrier upon the same terms and conditions

as those provided in the agreement.



2000] TELECOMMUNICATIONS LAW 1513

arguments that this Rule

threatens the give-and-take ofnegotiations, because every concession as

to an "interconnection, service, or network element arrangement" made
(in exchange for some other benefit) by an [ILEC] will automatically
become available to every potential entrant into the market. A carrier
who wants one term from an existing agreement [] should be required to
accept all the terms in the agreement."^

The Court correctly observed that in certain respects the "Pick and Choose" Rule
is "more generous" to the ILECs than § 252(i)."^ For example, the "Pick and
Choose" Rule exempts certain ILECs that can demonstrate that providing the
requested interconnection is "more costly than providing it to the original carrier"
or "technically infeasible,"'^^ and limits the amount oftime in which a carrier can
request an interconnection, service or network element under § 252(i)."^

Ultimately, deference to the FCC's interpretation of § 252(i) against ILECs'
opposing arguments was the result ofthe Court's recognition that "whether the
[FCC's] approach will significantly impede negotiations . . . is a matter eminently

within the expertise of the Commission and eminently beyond our ken."^'^
The Eighth Circuit's and Supreme Court's analyses ofthe FCC's rules and

regulations implementing the Act's local competition provisions demonstrate, at

the very least, the Act's ambiguity regarding the respective roles taken by the

FCC and the state commissions in regulating intrastate telecommunications. The
Supreme Court clarifies these ambiguities in its decision to uphold the FCC's
rules attacked by the state commissions and ILECs pursuant to the general grant
ofauthority under § 20 1 (b). The questions remain, however, regarding the extent
to which state commissions may determine the policy implications of the
extension of federal law into intrastate telecommunications and the extent to

which "federal courts must defer to state agency interpretations of federal
law."^^® These are frequently recurring but unanswered questions at the local

level, as the state commissions attempt to implement the Act's provisions

regarding local competition. Ultimately, it will be necessary to address these

questions lest the "surpassing strange" result ofa "federal program administered

by 50 independent state agencies" occur.
'^^

47 U.S.C. § 252(0 (Supp. Ill 1997).

115. ATi^T, 525 VS. at 396.

116. Id.

1 1 7. Id. (citing 47 C.F.R. § 5 1 .809(b)).

118. See id (citing 47 C.F.R. § 5 1 .809(c)).

119. Id

120. M at 385 n. 10.
121. /^. at 378.



1514 INDIANA LAW REVIEW [Vol. 33:1497

C. Reciprocal Compensationfor Termination ofInternet
Service Provider Traffic

Another area in which issues have arisen regarding the scope of federal and
state jurisdiction concerns reciprocal compensation for telecommunications

traffic that originates on an ILEC's network and is delivered to an Internet
Service Provider'^^ ("ISP").'^^ Section 251(b)(5) of the Act provides that each

LEC has "[t]he duty to establish reciprocal compensation arrangements for the
transport and termination oftraffic."•^'* Section 252(d)(2)(A) provides in relevant
part:

For the purposes of compliance by an incumbent local exchange carrier
with section 25 1(b)(5) ofthis title, a State commission shall not consider
the terms and conditions for reciprocal compensation to be just and

reasonable unless -

(i) such terms and conditions provide for the mutual and reciprocal

recovery by each carrier of costs associated with the transport and
termination on each carrier's network facilities ofcalls that originate on

the network facilities of the other carrier.
'^^

The FCC has determined that for the purposes of § 25 1(b)(5), a carrier is entitled
to reciprocal compensation only for traffic that "originates and terminates within

a local area . . . We disagree with [the] contention that § 251(b)(5) entitles an
[interexchange carrier ("IXC")] to receive reciprocal compensation from a LEC
when a long-distance call is passed from the LEC serving the caller to the

However, the proper classification of ISP traffic has been the subject of
debate, and problems have arisen where CLECs demand reciprocal compensation
from ILECs for calls delivered to the CLECs' ISP customers. According to the
FCC:

Generally speaking, when a call is completed by two (or more)
interconnecting carriers, the carriers are compensated for carrying that

traffic through either reciprocal compensation or access charges. When
two carriers jointly provide interstate access (e.g., by delivering a call to

122. An Internet Service Provider sometimes is referred to as an Information Service

Provider. ISPs "are companies which offer their customers connections to the Internet through the

telephone network." Illinois Bell Tel. Co. v. Worldcom Techs., Inc., 179 F.3d 566, 569 (7th Cir.

1999).

1 23

.

See id at 568 ("Through the Telecommunications Act of 1 996 Congress has opened the

door to competing local exchange carriers and has inserted both the Federal Communications

Commission (FCC) and the federal courts into the previously state-regulated monopoly. Just how

far into the scheme does the federal presence reach? is the $64,000 question.").

124. 47 U.S.C. § 251(b)(5) (Supp. Ill 1997).

125. Id § 252(d)(2)(A).

1 26. First Report & Order, supra note 4, ^ 1 034.



2000] TELECOMMUNICATIONS LAW 1515

an interexchange carrier (IXC)), the carriers will share access revenues

received from the interstate service provider. Conversely, when two
carriers collaborate to complete a local call, the originating carrier is

compensated by its end user and the terminating carrier is entitled to

reciprocal compensation pursuant to section 25 1(b)(5) ofthe Act. Until

now, however, it has been unclear whether or how the access charge
regime or reciprocal compensation applies when two interconnecting
carriers deliver traffic to an ISP.'^^

The lack of clarity is due to the nature of ISP traffic. For example, as the
customer of a competing carrier, the ISP is generally assigned a local telephone
number, and the originating caller (the person establishing the Internet

connection) is billed for a local call.'^* However, the originating caller's ultimate

connection though, is not to the ISP but rather a distant website.'^' As stated
above, § 251(b)(5) requires the provision of reciprocal compensation for calls

"originating and terminating within a local area."'^° ILECs have therefore argued
that because ISP traffic is destined for a distant website, ISP traffic is interstate

in nature, or at the very least constitutes a mixture of intrastate and interstate

traffic, and thus, is not subject to the reciprocal compensation provisions ofthe

Act. CLECs have made the opposite argument, that is, that ISP traffic actually
terminates at the ISP's local server, and thus, reciprocal compensation is due.^^'

The issue has been litigated in Indiana in proceedings before the Indiana
Utility Regulatory Commission ("lURC"),*^^ as well as before several state
commissions throughout the country which have largely concluded that traffic

delivered to ISPs is local traffic subject to reciprocal compensation.'^^ In the

1 27. In re Implementation ofthe Local Competition Provisions in the Telecommunications

Act of 1 996 and Inter-Carrier Compensation for ISP-Bound Traffic, 1 4 F.C.C.R. 3689, 1 9 (released

Feb. 26, 1999) [hereinafter ISP Order].

1 28. See Illinois Bell, 1 79 F.3d at 569.

129. See id

130. 42 U.S.C. § 251(b)(5) (Supp. Ill 1997).

131. See IS? Order, supra note 1 27, ^ 1 2.

132. See, e.g.. In re Complaint of Time Warner Communications of Indiana, L.P. against

Indiana Bell Telephone Company, Incorporated, d^/a Ameritech Indiana, for Violation of the

Terms ofthe Interconnections Agreement, No, 4 1 097 piereinafter Time Warner Complaint]. In the

discussion below, three separate orders by the lURC in Cause No. 4 1 097 are referenced as follows:

(Ind. U.R.C. Sept 16, 1998), (Ind. U.R.C. Feb. 3, 1999), and (Ind. U.R.C. June 9, 1999).

133. Seejimc Warner Complaint, supra note 132, (Ind. U.R.C. Feb. 3, 1999). Specifically,

the lURC took administrative notice of state commission decisions from Arizona, Connecticut,

Delaware, Florida, Georgia, Illinois, Maryland, Michigan, Minnesota, Missouri, New York, North
Carolina, Oklahoma, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Virginia, Washington, and

Wisconsin. See id. at 8. In Illinois Bell v. Worldcom Technologies.. Inc., 1 57 F.3d 500 (7th Cir.

1998), the court ran the statistics on the reciprocal compensation for ISP traffic litigation finding

21 state commissions deciding that reciprocal compensation was due and three district courts and

one state court enforcing the administrative decisions making '*the score at the moment . . . 25-0



1516 INDIANA LAW REVIEW [Vol. 33:1497

proceedings before the lURC, Time Warner charged Ameritech Indiana with
breach of the terms of its interconnection agreement for failing to provide

reciprocal compensation to Time Warner for traffic terminated by Time Warner's
ISP customers.'^'*

During these proceedings, the FCC also reviewed issues concerning
reciprocal compensation for ISP traffic. ^^^ Although the lURC acknowledged
the concurrent proceedings before the FCC, the lURC found

that any decision by the FCC regarding the manner in which ISPs might
be regulated if they are to be treated as telephone companies will not
resolve Time Warner's allegation of a breach of contract of the
interconnection agreement. Nor will any decision by the FCC regarding
the jurisdictional nature ofISP traffic on a going forward basis bind the

[lURC's] determination of the parties' intention of how ISP traffic
should be treated at the time the [i]nterconnection [a]greement was
executed.

'^^

Further, the lURC concluded that the Act "specifically charges the state with the
responsibility ofenforcing the provisions ofinterconnection agreements,"^^^ and

that the terms of the interconnection agreement itself expressly authorize the

lURC to resolve disputes between the parties.*^*
Ameritech Indiana argued that the FCC has recognized ISP traffic to be

exchange access traffic, and has exempted ISPs from paying access charges.

Thus ISP traffic is exchange access traffic rather than local traffic, because ifISP
traffic were local traffic, no exemption from access charges would be

necessary. '^^ The lURC rejected this argument and determined that the evidence,
the terms ofthe interconnection agreement, and the applicable precedent existing

at the time the interconnection agreement was executed, demonstrated the

parties' intent that ISP traffic would be treated as local traffic.''*^

The lURC first looked to the express terms ofthe interconnection agreement,
finding them to unambiguously indicate the parties' intention that traffic

against Ameritech and the other Baby Bells." Id. at 502.

134. See Time Warner Complaint, supra note 132 (Ind. U.R.C. Feb. 3, 1999).

135. See FCC Public Notice, Pleading Cycle Established for Comments on Request by ALTS
for Clarification ofthe Commission's Rules Regarding Reciprocal Compensation for Information

Service Provider Traffic, 12 F.C.C.R. 9715 (released July 2, 1997). This Public Notice sought

comments on whether information service traffic should be treated differently than local traffic for

the purposes ofreciprocal compensation provisions in existing interconnection agreements between

ILECs and CLECs.

136. Time Warner Complaint, supra note 132, at 2 (Ind. U.R.C. Feb. 3, 1999).

137. Id. (citing Iowa Utils. Bd, 120 F.3d at 804); see also id at 8 (Ind. U.R.C. Sept. 16,

1998).

138. See id at 2 (Ind. U.R.C. Feb. 3, 1999).

139. SeeidditS.

140. See id ai\0.



2000] TELECOMMUNICATIONS LAW 1517

terminating at ISPs be treated as local traffic.''*' The parties defined "Local

Traffic" as "local service area calls as definedby the Commission,'' and the lURC
concluded that traffic delivered to ISPs constituted "local traffic" under its

definition of "Local Service Area-Local Calling Area."'"*^ Traffic delivered to

ISPs also was not included in the parties' express exceptions to reciprocal
compensation obligations set forth in the interconnection agreement.''*^ The
lURC fiirther noted the fact that while the interconnection agreement expressly
defined certain types of traffic, such as Feature Group A traffic,"*"* it neither
defined ISP traffic nor did it establish accounting methods that in any way
differentiated ISP traffic from other traffic. "*^ Finally, the lURC determined that
treating traffic destined for ISPs as local traffic was consistent with the "unusual"
"unanimous agreement" of other state commissions''*^ and consistent with the

FCC's actions and proceedings regarding ISPs.'*^
In February 1999, the FCC attempted to provide some guidance on the issue

141. Seeid&tW.

142. Id at 10-1 1 (emphasis added). The lURC's definition of"Local Traffic" is taken from

the definition of"Local Service Area-Local Calling Area—^the area within which telephone service
is furnished to customers under a specific schedule of exchange rates and without toll charges."

IND. ADMIN. Code tit. 170, r. 7-1.1-2(21) (1996).

143. See Time Warner Complaint, supra note 132, at 1 1 (Ind. U.R.C. Feb. 3, 1999).

144. "Feature Group A" is an exchange access service and is a type of long distance call that

is initiated by dialing a seven digit number. Id. at 8. The lURC rejected Ameritech Indiana's

argument that ISP traffic is analogous to Feature Group A noting that the Michigan and Illinois
commissions have likewise rejected this argument. See id. (citing Brooks Fiber Communications

V. Ameritech Mich., consolidated Case Nos. U-1 1 178, U-1 1502, U-1 1522, U-1 1553 and Illinois

Bell Tel. Co. v. Worldcom Techs. Inc., 1998 U.S. Dist. LEXIS 1 1394 (N.D. 111. July 21, 1998)

(affirming the Illinois Commerce Commission's rejection ofAmeritech's contention that ISP traffic

is essentially the same as Feature Group A traffic)).
145. See id. The lURC also pointed to other factors outside the interconnection agreement's

"four comers" supporting its conclusion that ISP traffic is local traffic:

Ameritech's own treatment of ISP traffic is revealing. For instance, Ameritech treats

traffic to its own ISP customers as local for purposes ofbooking revenues, separations,

and ARMIS reporting, despite its argument that in this case, such traffic is exchange
access [traffic]. Ameritech's end users who make calls to an ISP served by Ameritech

within Ameritech's local calling area are not assessed toll charges, and such calls are

treated by Ameritech as local calls.

/^. atll.

146. id^n.
147. See id. Specifically, the lURC noted that "[tjhe FCC has indicated that it does not

intend to answer the question of whether ISP calls are local calls within the Interconnection

Agreements already executed and with which the state commissions are charged with enforcement"

and that "the FCC agrees with the [lURC] that the proper construction of an existing
interconnection agreement does not turn on any subsequent decision of the FCC." Id. (citing

Response ofFCCas Amicus Curiae to Motionfor Referral ofIssues in BellSouth Teleconmis., Inc.
V. US LEC, Civil Action No. 3:98-CV170-MU (W.D.N.C.)).



1518 INDIANA LAW REVIEW [Vol. 33:1497

of reciprocal compensation for ISP traffic by issuing a declaratory ruling and
Notice of Proposed Rulemaking.^** The FCC began by discussing the nature of
ISP traffic, upholding its prior precedent that the jurisdictional nature of
telecommunications traffic (i.e. whether it is interstate or intrastate) is determined

by considering the communications from inception to completion regardless of
intermediate facilities. ^^^ Accordingly, the FCC agreed with arguments advanced
by ILECs "that the communications at issue here do not terminate at the ISP's
local server, as CLECs and ISPs contend, but continue to the ultimate destination
or destinations, specifically at a Internet website that is often located in another

state.'"^'

The FCC then turned to the question of whether an Internet call constitutes
interstate telecommunications. ^^^ Generally, a call that originates and terminates
within a state is jurisdictionally intrastate, and a call that originates in one state

and terminates in a different state is jurisdictionally interstate. '^^ The analysis
concerning Internet communications does not fit within this simple construct, and

the FCC ultimately determined that ISP traffic is largely interstate in nature:

An Internet communication does not necessarily have a point of
"termination" in the traditional sense. An Internet user typically
communicates with more than one destination point during a single
Internet call, or "session," and may do so either sequentially or
simultaneously. In a single Internet communication, an Internet user

may, for example, access websites that reside on servers in various states

or foreign countries, communicate directly with another Internet user, or

chat on-line with a group of Internet users located in the same local
exchange or in another country. Further complicating the matter of

identifying the geographical destinations of Internet traffic is that the

contents of popular websites increasingly are being stored in multiple

servers throughout the Internet, based on "caching" or website

"mirroring" techniques. After reviewing the record, we conclude that,
although some Internet traffic is intrastate, a substantial portion of
Internet traffic involves accessing interstate orforeign websites

.^^^

1 48. See ISP Order, supra note 1 27.

149. See id ^ 1 1 (quoting Teleconnect Co. v. Bell Tel. Co., 10 F.C.C.R. 1626, 1629, afd
sub nom. Southwestern Bell Tel. Co. v. FCC, 116 F.3d 593 (D.C. Cir. 1997)). "[T]he [FCC]

traditionally has determined the jurisdictional nature of communications by the end points of the

communication and consistently has rejected attempts to divide communications at any intermediate

points ofswitching or exchanges between carriers.'* Id. ^ 10. Thus, the FCC "hasjurisdiction over,

and regulates charges for, the local network when it is used in conjunction with the origination and

termination of interstate calls." Id^M (quoting Petition for Emergency Relief and Declaratory
Ruling filed by BellSouth Corporation, 7 F.C.C.R. 1619, 1621 (1992)).

150. M H 1 2 (footnote omitted).
151. Seeid^n.
152. See id.

1 53. Id. (emphasis added) (footnotes omitted).



2000] TELECOMMUNICATIONS LAW 1519

Moreover, it is important to point out that, consistent with Ameritech

Indiana's argument in the Time Warner Complaint, the FCC recognizes that ISPs
provide exchange access, but exempts ISPs from paying access charges. ^^* In the

ISP Order, the FCC stated:

That the Commission exempted ESPs from access charges indicates its
understanding that ESPs in fact use interstate access service; otherwise,
the exemption would not be necessary. We emphasize that the
Commission's decision to treat ISPs as end users for access charge

purposes and, hence, to treat ISP-bound traffic as local, does not affect

the Commission's ability to exercise jurisdiction over such traffic.'"

^^ H^ i^

CLECs also argue that the traffic they deliver to ISPs must be deemed
either "telephone exchange service" or "exchange access." They
contend that ISP traffic cannot be "exchange access," because neither

LECs nor CLECs assess toll charges for the service. CLEC delivery of
ISP traffic is, therefore, according to CLECs, "telephone exchange
service," a form of local telecommunications for which reciprocal

compensation is due. . . . [T]he [FCC] consistently has characterized

ESPs as "users of access service" but has treated them as end users for
pricing purposes. Thus, we are unpersuaded by this argument. '^^

The FCC also concluded that its determination that ISP traffic is largely interstate
did not alter the current access charge exemptions for ISPs.'^^

Although the FCC essentially agreed with ILECs that Internet traffic was
substantially interstate in nature and subject to the FCC's jurisdiction, this
determination did not resolve existing reciprocal compensation issues. Because

there is no rule governing interstate compensation mechanisms, the ISP Order

sought comment on the implementation ofsuch a rule.'** In the interim, the FCC
found "no reason to interfere with state commission fmdings as to whether

reciprocal compensation provisions ofinterconnection agreements apply to ISP-

154. Seeid.^\6.

155. Id. (emphasis added) (footnotes omitted).

1 56. Id.^\l (footnotes omitted).

1 57. See id. ^ 20. While the FCC's explanation seemingly would have supported Ameritech

Indiana's access charge exemption arguments in the Time Warner Complaint proceedings, the FCC
made clear that its determinations would not be dispositive ofinterconnection disputes before state

commissions. See id. Further, as discussed below, despite the FCC's position in the ISP Order,

the Seventh Circuit was not persuaded by Ameritech Illinois' access charge exemption argument.

Following the FCC's issuance of the ISP Order, Ameritech Indiana did indeed file a Petition for

Rehearing and Reconsideration, which was denied by the lURC. See generally Time Warner

Complaint (Ind. U.R.C. June 9, 1999).

1 58. See ISP Order, supra note 1 27, \ 22.



1 520 INDIANA LAW REVIEW [Vol. 33 : 1497

bound trafFic"^^' because parties voluntarily entering into interconnection
agreements could have reasonably agreed to treat ISP traffic as local traffic so
that reciprocal compensation obligations would apply. '^ Furthermore, the FCC
determined that where parties have not voluntarily agreed on reciprocal
compensation for ISP traffic, "state commissions nonetheless may determine in
their arbitration proceedings at this point that reciprocal compensation should be

paid for this traffic."*^' According to the FCC, under the arbitration provisions
of § 252, state commissions have authority over both interstate and intrastate
matters, ^^^ and thus, "the mere fact that ISP-bound traffic is largely interstate
does not necessarily remove it from the § 251/252 arbitration process."*^^

Subsequently, the Seventh Circuit upheld a district court ruling upholding an

order by the Illinois Commerce Commission (ICC) that under specific
interconnection agreements, parties reasonably agreed that reciprocal

compensation would apply to traffic billed as local traffic, including traffic to
ISPs.^^ The court clarified that its duty

is to examine the ICC order, not to determine whether the ICC correctly
applied principles of state contract law, but to see whether its decision

violates federal law, as set out in the Act or in the FCC's interpretation.

The short answer is that it does not. The FCC could not have made
clearer that in the absence ofa rule, a state agency's interpretation ofan

agreement so as to require payment ofreciprocal compensation does not

necessarily violate federal law.*^^

Ameritech Illinois argued that the Act does not require the payment of

reciprocal compensation,^^ and that the interconnection agreements at issue

"were negotiated against a backdrop oflongstanding FCC policy that ISP traffic
is not local traffic" and thus, the parties did not intend for reciprocal

compensation to apply to ISP traffic. *^^ Rejecting these arguments, the court

cited several factors set forth in the ISP Order which the state commissions could

consider in determining whetherthe parties intended for reciprocal compensation

to apply to ISP traffic and "conclud[ed] that the factors are illustrative only and

that the state commissions, not the FCC, are the arbiters of what factors are
relevant in the determination."'^* Furthermore, the court pointed out the FCC's
finding that interconnection agreements negotiated prior to the ISP Order

159. Id%2\.

160. See id ^24.

161. ISP Order, supra note 1 27, If 25.

162. See id. (citing First Report & Order, 1 1 F.C.C.R. at 15544, 15547).
163. Id ^25.

1 64. See Illinois Bell Tel. Co. v. Worldcom Techs., Inc., 1 79 F.3d 566, 572 (7th Cir. 1 999).

165. Id

166. See id at 573.

167. Id

168. Id. (citing ISP Order, supra note 127, ^ 24) (emphasis added).



2000] TELECOMMUNICATIONS LAW 1 52

1

(including those at issue in Illinois Bell) "were negotiated in the 'context of this

Commission's longstanding policy of treating this traffic as local, and the
conduct of the parties pursuant to those agreements.'"'^' The court also
concluded that the ICC reasonably considered relevant factors such as the fact
that: calls to ISPs are billed as local calls; customers dial local numbers to reach

ISPs; and calls to ISPs are routed over local, rather than long-distance lines.
'^°

Finally, the court pointed out that the interconnection agreements at issue

"specifically granted to the ICC the right to define local traffic for reciprocal
compensation purposes.'"^'

In Bell Atlantic Telephone Co. v. FCC,^^^ the D.C. Circuit found the FCC's
determinations in the ISP Order insufficient. Specifically, the court found that

the FCC did not satisfactorily explain why dial-up calls to Internet service
providers (ISPs) are more like local "exchange access" calls rather than
"telephone exchange" traffic. '^^ Accordingly, the D.C. Circuit vacated and

remanded the ISP Order to the FCC.

II. Universal Service

A. Background of Universal Service

Section 254 requires the FCC and state commissions to establish support
mechanisms and take actions to uphold the principles of Universal Service.

''"*

169. Id. (citing ISP Order, supra note 127, f 24) (emphasis added). The court rejected

Ameritech Illinois' citations to prior statements and actions made by the FCC that could be
construed as a determination that ISP traffic is interstate traffic. See id. at 573-74. For example,

Ameritech Illinois pointed out that ISPs are exempted from paying access charges for connections

to distant websites; if ISP traffic did not contribute interstate traffic, there would be no need for

such exception. See id. Ameritech Illinois also relied upon the decisions in In re GTE Telephone
Operating Cos., 13 F.C.C.R. 22,466 (1998) and In re Bell Atlantic, Telephone Cos., Bell Atlantic

TarifNo. I , BellAtlantic TransmittalNo. 1076, 13 F.C.C.R. 23,667 (1998) for the proposition that

ISP traffic terminates on the Internet rather than on the local server. See Illinois Bell Tel. Co., 179

F.3d at 573. Without addressing Ameritech Illinois* access charge exemption argument, the court

noted that both the Bell Atlantic and GTE decisions were entered after the interconnection
agreements at issue were negotiated, and thus, the FCC's statements contained therein could not

have affected the parties' intentions. Moreover, the court quoted the FCC's statement in GTEtha.t:

This Order does not consider or address issues regarding whether local exchange

carriers are entitled to receive reciprocal compensation when they deliver to information

service prpyiders, including Internet service providers, circuit-switched dial-up traffic

originated by interconnecting LECs.

Id. at 574 (citation omitted).

170. See id.

171. Id

172. 206 F.3d 1 (D.C. Cir. 2000).

173. Mat 8.
1 74. 47 U.S.C. § 254(b) provides:



1522 INDIANA LAW REVIEW [Vol. 33: 1497

Prior to the Act, "Universal Service" meant providing "plain old telephone

service" or "POTS" (i.e. basic dial-tone service) at rates made affordable by
cross-subsidization through implicit subsidies from monopolized services. '^^

However, the Act recognizes that with advancements in technology, "universal
service" now constitutes more than POTS. Moreover, the Act contemplates that
universal service be funded by explicit funding mechanisms^^^ because implicit
subsidies cannot be maintained in a competitive environment.

'^^

Universal Service Principles.—^The Joint Board and the Commission shall base policies
for the preservation and advancement of universal service on the following principles:

(1) Quality and Rates.—Quality services should be available at just, reasonable, and
affordable rates.

(2) Access to advanced services.—^Access to advanced telecommunications and
information services should be provided in all regions of the Nation.

(3) Access in rural and high cost areas.—Consumers in all regions of the Nation,
including low-income consumers and those in rural, insular, and high cost areas, should

have access to telecommunications and information services, including interexchange

services and advanced telecommunications and information services, that are reasonably

comparable to those services provided in urban areas and that are available at rates that

are reasonably comparable to rates charged for similar services in urban areas.

(4) Equitable and nondiscriminatory contributions.—All providers of
teleconmiunications services should make an equitable and nondiscriminatory

contribution to the preservation and advancement of universal service.

(5) Specific and predictable support mechanisms.
—^There should be specific, predictable

and sufficient Federal and State mechanisms to preserve and advance universal service.

(6) Access to advanced telecommunications services for schools, health care, and

libraries.—^Elementary and secondary schools and classrooms, health care providers,
and libraries should have access to advanced telecommunications services as described

in subsection (h).

(7) Additional principles.—Such other principles as the Joint Board and Commission
determine are necessary and appropriate for the protection of the public interest,

convenience, and necessity and are consistent with this Act.

47 U.S.C. § 254(b) (Supp. Ill 1997).

175. Cross-subsidization through implicit subsidies refers to the ability of a monopoly to

artificially increase prices ofservices that are relatively low-cost to subsidize the prices ofservices

that are relatively high-cost.

176. ^ee 47 U.S.C §§ 254(e), (f).

1 77. See THOMASG. KRATTENMAKER,TELECOMMUNICATIONSLAWANDPOLICY 464 (2d ed.
1998).



2000] TELECOMMUNICATIONS LAW 1 523

The basic goal ofsection 254 is to establish rules and procedures for the

reform of universal service in a competitive market, while allowing for

periodic evaluations ofthe concept, evaluations that consider "advances

in telecommunications and information technologies and services."

Section 254 also appears to require that, in the future, favored services

be supported by direct and apparent taxes, not by implicit subsidies

hidden inside pricing schemes. Beneficiaries of universal service
support are to include low income consumers and those who reside in
rural, insular, and high cost areas, as well as schools, libraries, and

health care providers.''*

During the survey period, the FCC and the Federal-State Joint Board on
Universal Service ("Joint Board") have been hard at work at the monumental task
of implementing universal service in accordance with the Act.'^^

B. Federal Universal Service Proceedings

The FCC initiated a proceeding in CC Docket No. 96-45 to receive the Joint
Board's recommendations and to promulgate rules implementing the Act's

universal service provisions.'*^ Since the FCC's issuance of its First Report and
Order in the Universal Service Docket in 1997,'*' the FCC has issued several
subsequent Reports and Orders and Orders on Reconsideration in an effort to

implement the provisions of § 254.
'*^

178. A/, (footnote omitted).

179. The Federal-State Joint Board on Universal Service is an entity created pursuant to §

254(a)(1) to make recommendations to the FCC concerning the implementation of universal
service. See 47 U.S.C. § 254(a)(1).

180. See id § 254(a)(2).

181. See In re Federal-State Joint Board on Universal Service, 1 2 F.C.C.R. 8776 (Released

May 8, 1997) [hereinafter Universal Service First Report & Order].
182. In addition to the Local Competition and Universal Service Dockets, the FCC has

included In re Access Charge Reform, CC Docket 96-262 to the "trilogy of actions collectively
intended to foster and accelerate the introduction of competition into all telecommunications

markets, pursuant to the mandate ofthe Act." In re Access Charge Reform, Price Cap Performance

Review for Local Exchange Carriers, Transport Rate Structure and Pricing, and End User Common
Line Charges, 1 2 F.C.C.R. 1 5,982, 1| 1 , (Released May 1 6, 1 997) [hereinafter Access Reform First
Report and Order]. Specifically, the Access Charge Reform Docket addresses "Congress's

command to create secure and explicit mechanisms to achieve universal service goals, [and the

FCC's conclusion] that implicit subsidies embodied in the existing system of interstate access

charges cannot be indefinitely maintained in their current form." Id. \ 35. Similar to the First

Report and Order and the Universal Service First Report and Order discussed below, several

portions of the Access Reform First Report and Order were challenged. These challenges were

consolidated in the Eighth Circuit Court of Appeals, which deferred to the FCC's determinations

and upheld the Access Reform First Report and Order. See Southwestern Bell Tel. Co. v. FCC, 1 53

F.3d 523 (8th Cir. 1998).



1524 INDIANA LAW REVIEW [Vol. 33:1497

A significant decision within the survey period concerning the Universal
Service First Report and Order came from the Fifth Circuit Court ofAppeals in
Texas Office of Public Utility Counsel v. FCC}^^ Texas Office was the
consolidated challenge by several parties to certain provisions of the FCC's
Universal Service First Report and Order and concerned two primary sets of
challenges. The first set ofchallenges concerned "the FCC's plan for replacing
the current mixture of explicit and implicit subsidies with an explicit universal
service support system for high-cost areas."'*'* The second set concerned "the
FCC's proposal for implementing § 254(h) programs supporting schools,
libraries, and health care providers.'"*^ Although the court upheld most of the

challenged provisions of the Universal Service First Report and Order, some
FCC determinations were reversed.

7. "No Disconnect " Rule.—Bell Atlantic and various states challenged the
FCC's rule that bars "carriers receiving universal service support from
disconnecting Lifeline services from low-income consumers who have failed to
pay toll charges"**^ on the grounds that the FCC exceeded its jurisdictional
authority under § 2(b), which proscribes FCC regulation of intrastate
telecommunications service.**^ The FCC's response was based on three separate
arguments, each ofwhich the court rejected.

First, the FCC argued that § 254(b)(3) granted it unambiguous authority to
adopt policies based on the principle that low income consumers should have
access to telecommunications and information services.'** The court held that
"§ 254(b) identifies seven principles the FCC should consider in developing its
policies; it hardly constitutes a series ofspecific statutory commands," and noted
that the court had refiised to use the same "aspirational language" in § 254(b) to
require the FCC to adopt certain universal service support cost methodologies.'*^

Next, the FCC argued that the "no disconnect" rule did not attempt to
regulate intrastate service, "but merely prevent[ed] the disconnection ofinterstate

service (and, as a consequence, of intrastate service) for failure to pay toll

charges."''® Finding that the "no disconnect" rule was indeed a regulation

183. 183 F.3d 393 (5th Cir. 1999), cert, denied, 120 S. Ct 2212; 120 S. Ct. 2237, and cert,

granted sub nom. GTE Serv. Corp. v. FCC, 120 S. Ct. 2214 (2000).
184. Mat 408.
185. /c/. at 408-09.

186. Id at 421 (citing 47 C.F.R. § 54.401(b) (1999)).

187. See Texas Office, 183 F.3d at 421 (footnote omitted) (citing Universal Service First

Report & Order, supra note 181,1 390). "Lifeline" is a program that provides telecommunications
services to qualifying low-income customers. "Lifeline" services include "single-party service;

voice-grade access to the public switched network; [dual tone multifrequency] DTMF or its
functional digital equivalent; access to emergency services; access to operator services; access to

interexchange service; access to directory assistance; and toll-limitation services . . ." Universal

Service First Report & Order, supra note 181, ^ 384.
188. See Texas Office, 183 F.3d at 421 (citing 47 U.S.C. § 254(b)(3) (Supp. Ill 1997)).

189. Id

190. Ai. (footnote omitted).



2000] TELECOMMUNICATIONS LAW 1 525

proscribed by § 2(b), as "it dictates the circumstances under which local service

must be maintained,"'^' the court rejected the FCC's argument that even if the
rule was a regulation, it should be upheld under the "impossibility exception,"
whereby the FCC hasjurisdiction to regulate in instances where interstate service
cannot be separated from intrastate service. '^^ Analyzing the FCC's
"impossibility exception" argument pursuant to the framework set forth in

MarylandPublic Service Commission v. FCC,^^^ the court found that the FCC's
argument "failed to show why allowing the states to control disconnections from
local service would 'negate the exercise ofthe FCC's lawful authority . . . .'"'^*

Finally, relying on the Supreme Court's decision in AT&T v. Iowa Utilities
Board, the FCC argued that it is authorized to implement the "no disconnect"
rule because § 201(b) confers "jurisdiction over all areas, including intrastate

matters, to which the Act applies" including § 254.'^^ The court found, however,
that pursuant to the Supreme Court's reconciliation of its decision in Louisiana
PSC^ with its jurisdictional holding in AT&T v. Iowa Utilities Board,^'^'' the
question was not whether § 254 merely "applies" to intrastate matters, but
whether § 254 "does indeed 'apply' to intrastate matters in a sufficiently

'unambiguous' manner" to override the jurisdictional proscription in § 2(b).
^^*

The court answered the question in the negative, rejecting the FCC's arguments
that the language in §§ 254(b)(3), (c), and (j) unambiguously applied to intrastate

service. ^^ The court found that § 254(d), which directs interstate carriers to
contribute to the FCC's funding mechanism, and § 254(f), which directs
intrastate carriers to contribute to individual states' universal service funds

191. /^. at 422.

192. Id ("FCC has jurisdiction to prescribe the conditions under which terminal equipment

may be interconnected with the interstate telephone line network." (citing North Carolina Utils.

Comm'n v. FCC, 552 F.2d 1036, 1048 (4th Cir. 1977))).
193. 909 F.2d 1510, 1515 (D.C. Cir. 1990). This framework involves a three part test to

determine whether the FCC may appropriately intervene in local service issues:

To permit the FCC to preempt state regulation of whether to cut off low-income
subscribers, the [D.C] circuit requires the agency to show that "(1) the matter to be

regulated has both interstate and intrastate aspects; (2) FCC preemption in necessary to
protect a valid federal regulatory objective; and (3) state regulation would negate the

exercise by the FCC of its own lawful authority because regulation of the interstate
aspects of the matter cannot be unbundled from regulation of intrastate aspects."

Texas Office, 183 F.3d at 422 (quoting Maryland PSC, 909 F.2d at 1515).

194. Id

195. /J^ at 423.

196. 476 U.S. 355 (1986).

197. 525 U.S. 366 (1999).

1 98. Id. The Fifth Circuit found that AT&T v. Iowa Utilities Board provides little guidance
to answer this question, except to find that the Act has "unquestionably" "taken the regulation of

local telecommunications competition away from the States." See Texas Office, 183 F.3d at 424

Nevertheless, the Fifth Circuit noted that the Supreme Court fails to explain why. See id.

199. See id



1526 INDIANA LAW REVIEW [Vol. 33:1497

contemplate a "dual regulatory structure" distinguishable from the statutory
schemes contained in §§ 251 and 252 that solely concern intrastate issues.^^

2. RecoveryofUniversalService Contributions ThroughAccess Charges.—
Another dispute decided against the FCC concerned the FCC's interpretation of
the term "explicit" in its rules requiring ILECs to recover universal service
contributions through access charges.^^' Specifically, GTE argued that the FCC's
rules "unfairly disadvantage!] ILECs because, unlike their potential new
competitors, they cannot recover their universal service contributions through

explicit charges on their end users, but, instead, are required by the FCC to
increase their access charges on long-distance service providers."^^^ Although

GTEmay not necessarily be disadvantaged in the amounts actually recovered, the
recovery method would put GTE at a competitive disadvantage because the
customers of competitive carriers would see the cost of universal service
explicitly itemized on his bill, and the ILEC customer will pay for the cost of
universal service through higher rates.^^^ According to the FCC's interpretation,
the recovery method "'satisfies the statutory requirement that support be explicit'
by requiring each carrier to contribute a specific percentage of its end user

revenues."^^ The court found "explicit" to mean the opposite of"implicit," and
that requiring ILECs to recover universal service contributions from access
charges maintained an implicit subsidy.^^^ This violated the express statutory

mandate of § 254(e).^°^ The court therefore reversed this FCC rule.^°^
3. Contribution of Interstate Carriers on the Basis of International

Revenues.—The court also reversed the FCC's decision to include international
revenues of interstate carriers in the universal service base.^°* Under the FCC's
scheme, universal service contributions by "small interstate carriers specializing

in providing international telephone service"^^^ would exceed the interstate

revenues of those carriers, and would therefore violate the "equitable and

200. Id

201. Id at 424-25. 47 U.S.C § 254(e) (Supp. Ill 1997) provides:

Universal Service Support.—^After the date on which Commission regulations
implementing this action take effect, only an eligible telecommunications carrier

designated under section 214(e) shall be eligible to receive specific Federal universal

service support. A carrier that receives such support shall use that support only for the
provision, maintenance, and upgrading of facilities and services for which the support

is intended. Any such support should be explicit andsufficient to achieve the purposes

ofthis section.

Id. (emphasis added).

202. Texas Office, 183 F.3d at 425.

203. See id

204. Id. (quoting Universal Service First Report & Order, supra note 1 8 1 , f 854).
205. See id

206. See id.

207. See id

208. See id. at 435.

209. /^. at 433.



2000] TELECOMMUNICATIONS LAW 1 527

nondiscriminatory" provisions of § 254(d).^'^ The court held that the FCC's
discretion to "balance the competing concerns set forth in section 254(b), which
include the need for sufficient revenues to support universal service," did not

reasonably justify the inequitable and discriminatory result.^"

4, Authority toAssess Contributions on Intrastate Revenues.—Similar to the
"no disconnect" rule, the FCC's practice of assessing universal service
contributions based upon both interstate and intrastate rules was challenged on
the ground that the FCC exceeded its jurisdiction by regulating intrastate service
in violation of the proscription in § 2(b).^'^

The FCC first argued that its practice merely factored intrastate revenue into
universal service contributions and that, in any event, carriers could only recover

universal service contributions from interstate rates.^^^ Thus, the FCC's practice
did not constitute a regulation within the proscription set forth in § 2(b) or the

rule in Louisiana PSC?^^ However, looking to the express language of § 2(b),^^^

the court rejected the FCC's argument and held that "the inclusion of intrastate
revenues in the calculation of universal service contributions easily constitutes

a 'charge ... in connection with intrastate communications service.'"^'^

The FCC then contended that § 254 did in fact unambiguously apply to
intrastate matters.^*^ Specifically, the FCC cited the language of § 254(d)
concerning interstate carrier universal service contributions^** and the language

set forth in § 254(f) requiring that state adopted universal service mechanisms not

"rely on or burden Federal universal service support mechanisms,"^'^ and argued

that a comparison ofthe statutory provisions evidences Congress' intent that the

FCC "bear the primary responsibility for ensuring the sufficiency of universal
service for both interstate and intrastate universal service."^^^ The court found
that the language in §§ 254(d) and (f) did not constitute an unambiguous grant
of authority sufficient to withstand the proscription in § 2(b).^^*

210. Id. Section 254(d) provides in relevant part that "[e]very telecommunications carrier

that provides interstate telecommunications services shall contribute, on an equitable and non-

discriminatory basis, to the specific, predictable, and sufficient mechanisms established by the

Commission to preserve and advance universal service." 47 U.S.C. § 254(d) (Supp. Ill 1997).

211. Texas Office, 1 83 F.3d at 434.

212. Seg/c?. at 446-47.

213. SeeiddX^Al.

214. See id.

215. See 47 U.S.C. § 152(b) (1994).

2 1 6. Texas Office, 1 83 F.3d at 447 (quoting § 2(b)).

217. Se^id.

218. See id.

219. Id

220. Id

221. See id. In declining to defer to the FCC on this issue, the court compared its analysis
under § 2(b) and Louisiana PSC to the traditional analysis under Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984).

While under Chevron step-two, we usually give the agency deference in its



1528 INDIANA LAW REVIEW [Vol. 33:1497

On October 8, 1999, the FCC released its response to Texas Office,^^^ and
implemented the following revisions to its rules regarding universal service:

* Incumbent LECs may recover their universal service contributions
through interstate access charges or through interstate end-user charges.

To the extent an incumbent LEC is currently recovering its universal
service contributions through interstate access charges, and chooses to
recover its contribution through an interstate end-user charge, it must
make a corresponding reduction in its interstate access charges to avoid
any double recovery.

* Contributions to the FCC's universal service program will be
assessed on providers of interstate telecommunications services using a

single contribution factor based on providers' interstate and international

end-user telecommunications revenues. As directed by the court, the
FCC removed intrastate end-user telecommunications revenues from the
assessment base for the schools and libraries and rural health care
support mechanisms.

* Consistent with the court's decision, the FCC is no longer able to
prohibit local telephone companies that are eligible for universal service

support from disconnecting Lifeline service to consumers that fail to pay

toll charges.

* In response to the court's remand of this issue, providers of interstate

telecommunications service whose interstate end-user
telecommunications revenues account for less than 8 percent of their

combined interstate and international end-user telecommunications

revenues are not required to contribute on the basis oftheir international

revenues. These providers are still required to contribute on the basis of

their interstate end-user telecommunications revenues.^^^

C. State Universal Service Proceedings

In Indiana, universal service has been the subject of an ongoing and active

interpretation ofambiguous statutory language, the Supreme Court continues to require

the agency to overcome the § 2(b) statutory presumption with unambiguous language

showing that the statute applies to intrastate matters.

Texas Office, 183 F.3d at 447.

222. See Universal Service First Report and Order, supra note 181; Access Reform First

Report and Order, supra note 182; Sixteenth Order on Reconsideration in CC Docket No. 96-45,
Eighth Report and Order 96-45, Sixth Report and Order, 96-262, In re Federal-State Joint Board

on Universal Service, 15 F.C.C.R. 1679 (released Oct. 8, 1999).

223

.

FCCImplements Court 's Decision on Universal Service, Report No. 99-46, 1 999 FCC
LEXIS 5021, at 3-4 (Oct. 8, 1999).



2000] TELECOMMUNICATIONS LAW 1 529

proceeding before the lURC.^^"* Within the survey period, the lURC issued
several orders^^^ concerning universal service and access charge reform. The
following is a brief discussion of three major orders in the universal service

docket, also known as the "trilogy" of orders.^^^
L Comparability/Affordability Order.—This Order examined the standards

that the lURC should adopt to ensure that rates for services included in the FCC's
definition ofuniversal service are consistent with the affordability principles set

forth in § 254(b)(l)^^^ and § 254(i),^^* and with the comparability principles set

forth in § 254(b)(3).^^^ The following is a brief description of the lURC's
findings:

(a) Finding a formal adoption to be in the public interest, the lURC adopted
each of the principles set forth in § 254(b),^^^ including the principle of

"competitive neutrality," which was adopted by the FCC as an additional
universal service principle under the grant of authority contained in §

224. See In re Matter of the Investigation on the Commission's Own Motion Into Any and
All Matters Relating to Access Charge Reform and Universal Service Reform, Including, But Not

Limited to, High Cost or Universal Service Funding Mechanisms Relative to Telephone and

Telecommunications Services Within the State of Indiana Pursuant to: I.C. 8-1-2-51, 58, 59, 69;

8-1-2.6 et seq. and Other Related Statutes, as well as the Federal Telecommunications Act of 1996

(47 U.S.C. Sec. 151, et seq.), No. 40785, 1999 WL 236854 (Ind. U.R.C. Feb. 1, 1999).
225. These orders include the "trilogy" oforders issued in Cause No. 40785: September 1 6,

1 998 ("Comparability/Affordability Order"), October 28, 1 998 ("Loop Allocation/254(k) Order"),

and December 9, 1998 ("Access Reform Order"). Other orders issued in Cause No. 40785 in the

survey period include: In re Universal Service Reform, No. 40785, 1999 WL 236854 (Ind. U.R.C.
Feb. 1 , 1 999) (concerning the Transitional DEM Weighting Fund and Indiana High Cost Fund) and
on December 29, 1998 (concerning the mirroring of interstate carrier access tariffs). See Sue E.

Stemen, Esq., Ameritech Indiana, Telecommunications Update—Indiana State Bar Association,

April 16, 1999.

226. Following the issuance of the "trilogy" of orders, the lURC initiated three subdockets

to investigate Indiana's three largest ILECs, Ameritech Indiana, GTE, and Sprint United, and their

compliance with § 254(k) and the lURC's orders issued in Cause No. 40785. See In re

Investigation on the Commission's Own Motion into Any and All Matters to Access Charge Reform
and Universal Service Reform, No. 40785-S2, 2000 Ind. PUC LEXIS 78 (Ind. U.R.C, Jan. 26,
2000); In re Investigation on the Commission's Own Motion into Any and All Matters to Access
Charge Reform and Universal Service Reform, No. 40785-S3, 2000 Ind. PUC LEXIS 35 (Ind.
U.R.C. Jan. 26, 2000); In re Investigation on the Commission's Own Motion into Any and All
Matters to Ac^cess Charge Reform and Universal Service Reform, No. 40785-Sl, 1999 Ind. PUC
LEXIS 59 (Ind. U.R.C. Apr. 7, 1999).

227. See 47 U.S.C. 254(b)(1) (1994).

228. Section 254 provides: "Consumer Protection.—The Commission and the States should
ensure that universal service is available at rates that are just, reasonable, and affordable." 47

U.S.C. § 254(i) (Supp. Ill 1997).

229. See Comparability/Affordability Order, supra note 225, at 1

.

230. See 47 U.S.C. § 254(b).



1530 INDIANA LAW REVIEW [Vol. 33:1497

254(b)(7).''*

(b) The lURC found that quality of service standards under § 254(b)(l),''2
applied to more than those services found by the FCC to be eligible for universal
service support.'" The lURC stated that § 254(b)(1) establishes a policy that
"applies to all states and to the following services: interexchange services;

advanced telecommunications services; information services; and basic telephone

services."''^ The lURC justified the application of § 254(b)(1) to the additional
services because "ifCongress had intended section 254(b)( 1 ) to apply only to the

supported universal services, it would not have been necessary to include a
separate protection for these services in § 254(i) ofthe Act."''^ The lURC found
that service quality standards found in 170 IAC 7-1.1-1 should apply to the
provisioning of universal service,''^ and noted that under current statutory

provisions,'^^ the lURC retained the authority to monitor local providers' service
quality.'^*

(c) The lURC then considered that standards to be adopted to ensure that the
services and rates for universal service met the "comparability" standards set
forth in § 254(b)(3).''^ The lURC adopted a standard whereby "people in urban
and rural or high cost areas or those with low incomes pay pretty much the same
for services that are pretty much the same," and "[gjenerally available services
at the price generally available in urban areas is the standard of comparison."'''^

Further, no single set of "reasonably comparable" rates should apply statewide
for all providers, because allowing such could potentially "disincent competitive

entry by other local service providers in both urban and non-urban areas and thus

would be inconsistent with one of the prime tenets of TA 96."'^** The lURC
determined that these standards should be considered "concurrently with a

specific LEC's section 254 rate rebalancing as a measurement of the

23 1

.

Comparability/Affordability Order, supra note 225, at 10.

232. See 47 U.S.C. § 254(b).

233. These services include: '*[v]oice grade access to the public switched network; local

usage; dual tone multifrequency ('DTMF*) signaling or its functional equivalent; access to

emergency services; access to operator services; access to interexchange services; access to

directory assistance; and toll limitation for qualifying low-income customers.**

Comparability/Affordability Order, supra note 225, at 1 (citing 47 C.F.R. § 54. 1 1 (a) ( 1 998)).

234. Id.

235. Id.

236. See id. (citing IND. ADMIN. CODE tit. 170, r. 7-1.1-1 (1996)). The lURC did however

note that its rules regarding service quality were more than 20 years old, and thus were probably

inadequate given technological advances. See id. at * 1 1 . The lURC directed an agent to initiate

an investigation of service quality with the goal of identifying necessary revisions to the service

quality rules. See id.

237. See, e.g., iND. CODE §§ 8-1-2-58; 8-1-2-69 (1998).
238. See Comparability/Affordability Order, supra note 225, at 1 1

.

239. IddXm.
240. Id

241. Id

}^



2000] TELECOMMUNICATIONS LAW 1 53

1

reasonableness of any such proposal in the pricing of universal service."^*^

(d) Finally, Regarding the appropriate standard(s) for "affordability" under

§§ 254(b)(1) and 254(i), the lURC considered factors set forth in the Universal
Service First Report and Order including "subscribership levels, in conjunction

with rates for other services (such as local and toll) and certain non-rate factors"

such as the size of calling scope, consumer income levels, cost of living,

population density, and local variations in rate design.^^^ Citing the lack of

competition in Indiana, the lURC was unable to set an absolute affordability
level.^"*^ Nevertheless, based in part on evidence concerning current service

penetration levels, the lURC concluded that rates in Indiana are affordable.^^
Regarding § 254(i), which specifically addresses services eligible for universal

service support,^"^ the lURC defined the term "affordable"to mean

that the package of supported universal services should be available at

a price that all consumers are able to pay, and that no individual

consumer should bear a substantial burden in order to subscribe to the
universal service package. An affordable rate, for the purposes of
Section 254(i), must be defined from the perspective of the individual

consumer and should not depend on the cost of providing universal

service to that consumer.^*^

The lURC also concluded that affordability can also be accomplished through
existing Lifeline and Link-Up programs targeted to low-income customers.^**

2 Loop Allocation/254(k) Order,—On October 28, 1998, the lURC issued
the second, and largest, in its "trilogy" of Orders^^' in an effort to establish

guidelines for carriers seeking to rebalance their rates to comport with the

provisions of § 254(k).^^° Although space constraints preclude an analysis and

technical explanation of the lURC's findings, the reader should know that the

242. Mat 13.
243

.

Id. (citing Universal Service First Report & Order, supra note 181,^114-117).
244. See id.

245. Seeid?LX*n.

246. See 47 U.S.C. § 254(i) (Supp. Ill 1997).

247. Comparability/Affordability Order, supra note 225, at 14 (citing Testimony filed on

behalf of the Office of the Utility Consumer Counselor).

248. See id

249. See Loop Allocation/254(k) Order, supra note 225.

250. Section 254(k) provides:

(k) Subsidy of Competitive Services Prohibited.—A telecommunications carrier may
not use services that are not competitive to subsidize services that are subject to

competition. The lURC, with respect to interstate services, and the States, with respect

to intrastate services, shall establish any necessary cost allocation rules, accounting

safeguards, and guidelines to ensure that services included in the definition ofuniversal

service bear no more than a reasonable share ofthe joint and common costs offacilities
used to provide those services.

47 U.S.C. § 254(k).



1532 INDIANA LAW REVIEW [Vol. 33:1497

Loop Allocation/254(k) Order contains findings concerning the following issues:
the lURC's confiscation liability; the services to be included in the definition of
universal service; the first sentence of § 254(k) prohibiting subsidization ofnon-
competitive services by competitive services; and the second sentence of §
254(k) concerning cost allocation and joint and common costs.^^

3. Access Reform Order.—On December 9, 1998, the lURC issued the last
in its "trilogy" of orders. In the Access Reform Order, the lURC sought to
address issues concerning intrastate access charge reform for price cap non-rural

ILECs "prior to implementing or approving company-specific "rate rebalancing"
plans."''^

The lURC also addressed a possible process for implementing intrastate
access charges when and ifmirroring ofinterstate access charges is discontinued,
and addressed issues related to interexchange services and rates with regard to

§ 254(g)^^ ofthe Act. Similar to the Loop Allocation/254(k) Order, an analysis
of the lURC's findings requires a discussion of underlying technical issues that
are beyond the scope of this article. However, the following is a very brief
summary of the lURC's findings.

(a) The lURC adopted legal definitions concerning "telecommunications
service" and "intrastate access," and determined that in the context of section 8-

l-2-88.6(b) of the Indiana Code, "'interexchange carrier' is a provider of

telecommunications services 'between exchanges,' and includes both interLATA
and intraLATA carriers."^^'*

(b) In order to comply with the objectives of § 254(g), e.g., that rates for
interexchange services for rural or high-cost customers shall not be higher than

the rates to customers in urban areas,^^^ the lURC found that "all Indiana retail
intrastate interexchange toll rates are to be geographically averaged."^^^

However, the lURC recognized that the switched carrier access structure
mirrored by some ILECs includes some geographic deaveraging, and allowed
continued deaveraging of such provided that this practice does not cause a

25 1

.

See generally Loop Allocation/254(k) Order, supra note 225.

252. Access Reform Order, supra note 225, at 1-2.

253. Section 254(g) provides:

(g) Interexchange and Interstate Services.—Within 6 months after the date ofenactment
of the Telecommunications Act of 1996, the Commission shall adopt rules to require

that the rates charged by providers of interexchange telecommunications services to

subscribers in rural and high cost areas shall be no higher than the rates charged by each

such provider to its subscribers in urban areas. Such rules shall also require that a

provider of interstate interexchange telecommunications services shall provide such

services to its subscribers in each State at rates not higher than the rates charged to its

subscribers in any other State.

47 U.S.C. § 254(g).

254. Access Reform Order, supra note 225, at 10.

255. See id.

256. Id



2000] TELECOMMUNICATIONS LAW 1533

violation of §254(g).2^'

(c) Regarding mirroring, the lURC found that it would be appropriate "to
mirror the structure of interstate access charges on an interstate basis, as that

structure has been reformed by the FCC.""* However, the lURC discontinued
the practice ofmirroring interstate access charge rate levels}^^ Consistent with

these findings, the lURC ordered Indiana ILECs "to mirror the structure,
relationship between recurring and non-recurring charges, and the terms and

conditions of interstate access services in the cost studies filed with the

Commission as part of their company-specific rate-rebalancing cases."^^
(d) While citing the findings set forth in the Loop Allocation/254(k) Order,

the lURC noted that intrastate access charges are now included within the
category ofservices regulated bythe lURC, but not included within the definition

ofuniversal service, and a company is free to allocate thejoint and common costs
ofthese services as it sees fit subject to lURC approval. Additionally, the lURC
stated that a company can use any cost basis and methodology for cost studies
presented to the lURC, so long as the same methodology is used for any
confiscation claims.^^^ Accordingly, the lURC rejected claims that access charge
rates must be based on the cost of unbundled network elements using the

TELRIC methodology.^^^
(e) Finally, regarding a requirement that IXCs, ILEC toll providers, and

other intrastate toll providers pass through decreases in access charge rate levels,

the lURC found that a "demonstration of such pass through for interLATA toll
providers" and for "toll providers in areas where intraLATA equal access has
been implemented" is not required at this time.^^^ However, the lURC expressly
stated that it may revisit this issue in the future.^^ Moreover, the lURC found
that reporting requirements showing the benefits of access charge reductions

passed through to the customers may be necessary, and that such reporting
requirements would be considered in company-specific rate compliance
proceedings.^^^

III. The Merger Between SBC and Ameritech

One of the most significant and publicized developments in Indiana law
during the survey period concerned whether section 8-l-2-83(a) of the Indiana

Code^^ gave the lURC authority to approve the merger (worth approximately

257. SeeiddXn.

258. Id.

259. See id.

260. Seeid.^XU.

261. Seeid^iW.

262. See id.

263. Id at 12.

264. See id.

265. See id.

266. IND. Code § 8-l-2-83(a) (1998) provides in relevant part:



1534 INDIANA LAW REVIEW [Vol. 33:1497

$60 billion) between SBC Communications Corporation ("SBC") and Ameritech
Corporation ("Ameritech").^^^ On an Emergency Petition to Transfer, the Indiana
Supreme Court appropriately answered this question in the negative in Indiana
Bell Telephone Co. v. Indiana Utility Regulatory Commission}^

Prior to the merger, Ameritech was the corporate parent and holding
company of Indiana Bell Telephone Company Incorporated d/b/a Ameritech
Indiana ("Ameritech Indiana").^^^ Ameritech Indiana is the public utility that

operates sixty-five percent of the local exchange telephone access lines in

Indiana.^^^ The transaction between SBC and Ameritech involved a merger
between Ameritech and a wholly-owned subsidiary of SBC and a stock-swap
whereby Ameritech shareholders transferred shares ofAmeritech stock to SBC
in exchange for shares of the SBC subsidiary.^^' The transaction transferred
control of Ameritech Indiana to SBC, though Ameritech Indiana itself did
nothing to effectuate the transaction. Upon closing, Ameritech Indiana became
a wholly-owned subsidiary of Ameritech, which, in turn, became a wholly-
owned subsidiary of SBC.^^^ Ameritech Indiana remains '*the same regulated

No public utility, as defined in section 1 [Ind. Code § 8-1-2-1] of this chapter, shall
sell, assign, transfer, lease, or encumber its franchise, works or system to any other

person, partnership, limited liability company, or corporation, or contract for the

operation of any part of its works or system by any other person, partnership, limited

liability company, or corporation, without the approval ofthe commission after hearing.

Id.

267. This issue also affected the proposed mergerbetween GTE Corporation and Bell Atlantic
Corporation.

268. 715N.E.2d351(Ind. 1999). 5ee o/^o GTE Corp. v. Indiana Util. Regulatory Comm'n,
715 N.E.2d 360 (Ind. 1999) (upholding the decision in Indiana Bell unanimously and denying the

lURC jurisdiction under section 8-l-2-83(a) of the Indiana Code to approve the merger between

GTE Corporation and Bell Atlantic Corporation).
269. See Indiana Belly 715 N.E.2d at 353. Ameritech was also the corporate parent and

holding company of the operating telephone public utilities in Michigan, Wisconsin, Ohio, and

Illinois. See id.

270. See id,

271. See id

272. See id. Generally, such mergers also require approval by the FCC. The Ameritech/SBC

merger has been approved by the FCC subject to certain conditions. See In re Applications of
Ameritech Corp., Transferor, and SBC Communications Inc., Transferee, for Consent to Transfer

Control of Corporations Holding Commission Licenses and Lines Pursuant to Section 214 and

3 10(d) ofthe Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 ofthe Commission's

Rules, 14 F.C.C.R. 14,712 (released Oct. 8, 1999). Other mergers currently pending before the

FCC include mergers between MCI WorldCom and Sprint, US West and Qwest, AT&T and TCI,
and GTE Corporation and Bell Atlantic Corporation. For more information concerning these
mergers, see Merger of Common Carriers Requiring FCC Approval (visited June 12, 2000)
<http://www.fcc.gov/ccb/mergers.html>.

Additionally, some states have enacted statutes that specifically require approval by state

commissions ofthe transfer ofa controlling interest in a utility such as the SBC/Ameritech merger.

Mk



2000] TELECOMMUNICATIONS LAW 1 535

utility . . . with the same assets and liabilities, the same customers and suppliers,

and the same corporate structure and capitalization."^^^
In September 1998, the lURC issued an Order initiating an investigation of

the merger under sections 8-1-2-58, 83, and 84 ofthe Indiana Code, and for the

purposes of filing comments with the FCC on the grounds that "we believe the
merger of SBC, which also operates various telephone subsidiaries in Indiana,
with Ameritech Indiana's parent could affect the state oftelephone competition

in Indiana, and might also impact employment levels, quality ofservice, and even

rates
"^^"^ Following eight months ofinvestigation, the lURC issued an Order

on May 5, 1999, asserting jurisdiction to approve or disapprove the merger
pursuant to section 83(a).^^^ In doing so, the lURC overruled its own prior
precedent^^^ and distinguished Indiana Supreme Court precedent^^^ holding that
section 83(a) ofthe Indiana Code does not provide the lURC withjurisdiction to
approve transfers of stock. The lURC stated:

Prior Commission decisions to the contrary notwithstanding, we thus
find a transaction in which at least fifty percent of a public utility's

voting capital stock is sold, transferred, etc. necessarily constitutes a sale

transfer, etc. of that public utility's franchise, works, or system. And
when a corporation qualifies as a public utility under I.C. 8- 1 -2- 1 (a) and
a transaction would involve the sale, assignment, transfer, lease or
encumbrance ofa majority ofthe voting capital stock in that corporation

to some other person or corporation, we find that Section 83(a) requires
our review ofthe proposed transaction.^^*

Respondents SBC, Ameritech, and Ameritech Indiana appealed.^^^
The Appellants argued that the express language of section 83(a) clearly

evinces the legislative intent that transactions at the holding company level

See Indiana Bell, 715 N.E.2d at 357. The state commissions of Illinois and Ohio both approved

the merger between SBC and Ameritech. See id

273. Id at 354.

274. In re Ameritech Corp., No. 41255, 1998 WL 999989, at 1 (Ind. U.R.C. Sept. 2, 1998).
275. See Indiana Bell, 715 N.E.2d at 353.

276. See In re DalecarliaUtil. Corp., No. 38827 (Ind. U.R.C. Apr. 1 1, 1990); In re Madison

Light & Power Co., 1 924C P.U.R. 5 1 7 (PISC 1 994).
277. See Office ofthe Util. Consumer Counselor v. Public Serv. Co., 608 N.E.2d 1 362 (Ind.

1993) [hereinafter OUCC v. PSI].
278. In re Investigation on the Commission's Own Motion into All Matters Relating to the

Merger ofAmeritech Corp. and SBC Communications, Inc., No. 41255, at *5-6 (Ind. U.R.C. May

5, 1999).

279. Under section 8-1-3-1 ofthe Indiana Code, final orders ofthe lURC are appealed to the

Indiana Court of Appeals. See Ind. Code § 8-1-3-1 (1998). However, in this case, the Indiana

Supreme Court granted an Emergency Petition to Transfer filed by Respondents SBC, Ameritech

and Ameritech Indiana pursuant to Indiana Appellate Rule 4(A)(9) and set an expedited briefing

schedule. See Indiana BelL 715 N.E.2d at 353.



1536 INDIANA LAW REVIEW [Vol. 33:1497

involving transfers of stock not be regulated by the lURC.^*^ The lURC and
Office of the Utility Consumer Counselor ("OUCC") argued that the merger is
the "fiinctional equivalent of a transfer of all of [Ameritech Indiana's] assets to
SBC" and that the merger would shift "control" of Ameritech Indiana from
Ameritech to SBC.^*^ Thus, the lURC and OUCC argued that the lURC had
jurisdiction to approve or disapprove the merger.^*^

The court first looked to the express language ofsection 83(a) ofthe Indiana
Code, and examined the meanings of "public utility" and "franchise, works, or
system."^*^ The court noted that "public utility" is expressly defined in section
8- 1-2- 1(a) of the Indiana Code to mean an entity "that may own, operate,
manage, or control any plant or equipment within the state."^^"* The court held
that while this language could be interpreted to include within the definition of

"public utility" an entity that has "control" of the plant or equipment through

stock ownership, "a very sizeable body of precedent points in the other
direction."^*^ Including holding companies within the definition of public

utilities "would effect a major change in relatively settled doctrine," calling into
question several past transactions involving holding companies.^*^ Furthermore,

the court noted that ifholding companies are public utilities within the statutory

definition, then "a vast number of very public violations of these sections have
been committed over the years in full view of the [lURC], the courts and the

General Assembly" without concern evidencing the "common understanding"
that holding companies are not public utilities within the statute.^"^

Next, the court analyzed what constitutes the "franchise, works, or system"

of the utility. Noticeably absent from the phrase "franchise, works, or system"

it is the term "stock."^^* Therefore, a transfer of outstanding shares of stock

should not fall within the mandate of section 83(a). This is precisely how the
Indiana Supreme Court interpreted the language in section 83(a) in OUCC v.
PSI}^^ There, the court held that section 83(a) did not give the lURC authority
to approve a transaction that involved PSI's creation of a holding company in
which shares ofthe operating company were exchanged for shares ofthe holding
company.^^ Appellees attempted to distinguish this precedent on the grounds
that the transaction at issue in OUCC v. PSIdxd not involve a transfer in control
ofthe utility, because following the transaction the same shareholders, the board

280. See id. at 354.

281. Id.

282. See id.

283. Id at 355-56.

284. Id. at 355 (emphasis added) (quoting IND. CODE § 8- 1 -2- 1 ).

285. Id

286. Id

287. Id

288. Id at 355-56.

289. See id at 356 (citing OUCC v. PSI, 608 N.E.2d 1362 (Ind. 1993)).
290. See id

.m\



2000] TELECOMMUNICATIONS LAW 1537

ofdirectors and management still controlled.^^' While the court agreed that the
OUCC V. PS7transfer differed from the merger between SBC and Ameritech in
this respect, the court noted that the rationale in OUCC v. ^57concerned the fact
that the object of the transfer—^the stock—^was not the "franchise, works, or
system" of a public utility and not whether there was an absence of a
"transfer."^^ Accordingly, the court rejected Appellees' distinction and

reaffirmed the holding of OUCC v. PSfthat transactions by a public utility's
shareholders do not require [lURC] approval.

"^^^

The court rejected Appellees' arguments that section 83(a) should be read to
apply to stock transactions because it should be construed in pari materia with

sections 83(b) and (d), which both expressly refer to the "stock" of a public

utility
.^'"^ However, the fact that sections 83(b) and (d) each expressly refer to

"stock" led the court to the opposite conclusion that the general assembly

consciously excluded "stock" from the transaction affected by section 83(a)

because "the General Assembly knows how to say stock when it means stock."^^^
The court was also persuaded by Appellants' presentation ofthe legislative

history of section 83(a), which according to the court, "embodies a specific
choice by the legislature not to require approval of shareholder transactions. .

.

. [T]he General Assembly has repeatedly made the conscious decision not to
include holding companies within the definition of 'public utility.'"^^^ In the

1 920s and 1 930s, abuse ofthe holding company structure was "rampant," and the
General Assembly was called upon on three separate occasions to regulate public
utility holding companies.^^^ On each occasion, the General Assembly declined
to extend the statutory definition of "public utility" to include holding

29 1

.

See PSI, 608 N.E.2d at 1 364.

292. Id.

293. Id The court also rejected the lURC's reliance on Illinois-Indiana Cable Television

Association, Inc. v. Public Service Commission^ 421 N.E.2d 1 100 (Ind. Ct. App. 1981) finding the

opinion to have "no bearing on a transfer by shareholders of a public utility's holding company."

Indiana Bell, 715 N.E.2d at 359. Even if the case did have bearing, the opinion is a court of

appeals opinion superseded by the Indiana Supreme Court's holding in OUCC v. PSI. See id. at
359. Additionally, the court rejected the OUCC's reliance on In re Central Vermont Public Service

Commission, 84 P.U.R.4th 213 (F.E.R.C. 1987) which held that the Federal Energy Regulatory

Commission ("FERC") had jurisdiction over the creation of a holding company by the sale of a

utility's stock under the Federal Power Act. See Indiana Bell, 715 N.E.2d at 359.

294. Id. at 356. iND. CODE § 8-l-2-83(b) (1998) provides in relevant part: "No such public

utility shall direcjtly or indirectly purchase, acquire, or become the owner of any of the property,

stock, or bonds ofany other public utility . . . unless authorized to so by the commission." Id. iND.

Code § 8-l-2-83(d) provides in relevant part: "Every contract by any public utility for the

purchase, acquisition, assignment, or transfer to it of any of the stock of any other public utility .

. . without the approval of the commission shall be void and of no effect . . ." Id.

295. Indiana Bell, 715 N.E.2d at 356.

296. Id

297. Id at 357.



1538 INDIANA LAW REVIEW [Vol. 33:1497

companies.^^'' In 1933, however, the General Assembly enacted a statute, now
codified at section 8-1-2-49 of the Indiana Code, authorizing the lURC^^ to
investigate a public utility's affiliates.^°° The court concluded that:

In light ofthe three failed attempts in the preceding six years to include
holding companies in the definition of public utility, this addition must
be viewed as a compromise that brought holding companies under
limited scrutiny of the Commission by providing access to affiliate
information, but did not go so far as to subject them to all requirements
imposed on a public utility. In short, we agree with appellants that
section 49 "reflects a continued legislative choice to use indirect, rather
than direct, regulation of holding companies."^^*

Turning to the lURC's prior precedent interpreting section 83(a), the court
noted that as recently as 1990 the lURC held that it does not havejurisdiction to
approve stock transfers at the shareholder level.^^ Although the lURC has
recently approved several transactions involving holding companies, each case

concerned a voluntary request for approval by the public utility and its holding

company parent, and thus the issue ofthe lURC's section 83(a) jurisdiction was
not questioned or litigated.^°^ Such voluntary submission to the lURC's
jurisdiction does not affect the scope ofthe lURC's statutory jurisdiction under
section 83(a).^^ The lURC further argued that it is not bound by its prior
decisions and that the change in interpretation of its jurisdiction under section

83(a) is necessary "in order to avoid the * shipwrecking justice' in light of the

'modem economic reality that holding-company transactions ... are the method
dujour by which control ofutilities is transferred. "'^°^ Although the court agreed

that the lURC is not bound by its prior rulings, it held that the legislative history
demonstrates that the lURC's authority under section 83(a) had been resolved by
the General Assembly and the issue is not open to administrative or judicial

interpretation.^^

Similarly, the court found that the doctrine of legislative acquiescence lent

298. Id. (citing 1 925 JOURNAL OF THESTATE Senate of Indiana, 1 1 - 1 2, 1 78-79; Senate Bill

1 8, 74th General Assembly (Ind. 1 925); 1 929 JOURNAL OFTHE STATEHouseof Representatives

OF Indiana, 448-49; and 193 1 Journal of the State Senate of Indiana, 1 2 1 , 62 1 -22).

299. At that time, the lURC was called the Public Service Commission of Indiana.

300. See Indiana Bell, 1 1 5 N.E.2d at 357 (citing ACTSOFTHE INDIANA GENERAL ASSEMBLY,

1933, ch. 190, § 6.)

301. Id.

302. See id (citing In re Dalecarlia Util. Corp., No. 38827, 1990 Ind. PUC LEXIS 1 14, at
4(Ind. U.R.C.Apr. 11, 1990).

303. See id at 358 (citing In re Frontier Corp., No. 40205, 1995 WL 735627 (Ind. U.R.C.
July 12, 1995); In re Rochester Tel. Corp., No. 40099, 1995 Ind. PUC LEXIS 40 (Ind. U.R.C. Feb.

8, 1995)).

304. See id.

305. Id. (citation omitted).

306. See id. at 358, 360.



2000] TELECOMMUNICATIONS LAW 1539

credence to the lURC's prior precedent holding that it did not have jurisdiction

under section 83(a):

[W]e assume that if the General Assembly were dissatisfied with the
Commission's long-standing interpretation of section 83(a) or this

court's decision in PSI, it would have amended the Act to include
holding companies in the definition of "public utility," or to regulate

transactions in control of a utility regardless of the parties to this

transaction.^^^

The court further dismissed arguments by the lURC that Appellants could not
rely upon the doctrine of legislative acquiescence without a showing of

detrimental reliance.^°* The court stated that even if Appellants could not make
such a showing, a holding that the lURC has jurisdiction to approve or
disapprove stock transfers at the holding company level would have profound
implications on transactions by other holding companies relying upon the

previous lURC precedent.^^
Finally, citing the potential for abuse by holding companies. Appellees

argued that public policy requires that the lURC have jurisdiction to approve or
disapprove transactions such as the merger between SBC and Ameritech in order
to adequately protect the interests of the ratepayers.^ '° The court conceded that
such public policy arguments were "compelling"^ '^ and that authorizing the

lURC to approve or disapprove such mergers may indeed be more effective and
efficient in protecting the interests of ratepayers.^ ^^ Nonetheless, such

"arguments are for the General Assembly, not this Court or the [lURC]."^'^

IV. Opportunity Indiana

Another proceeding that was before the lURC and the Indiana Court of
Appeals during the survey period concerned Ameritech Indiana's alternative

regulation under section 8-1-2.6 of the Indiana Code^'* commonly known as

307. /</. at358.

308. See id.

309. See id. at 358-59.

310. 5ee iV/. at 360.

311. M.

312. See id.

313. Id. On October 6, 1 999, the lURC issued an order acknowledging that given the Indiana

Supreme Court's decision, it did not have jurisdiction to approve or disapprove the merger.

314. IND. Code § 8-1-2.6 is hereinafter referred to as the "alternative regulation statute."

*'Alternative regulation" refers to a manner ofregulation different than regulation under a traditional

rate ofreturn methodology. See iND. CODE §§ 8-1-2.6-1, -8 (1998). For a discussion oftraditional

rate of return methodology, see City ofEvansviiie v. Southern Indiana Gas & Electric Co., 339
N.E.2d 562, 568-71 (Ind. App. 1975). iND. Code § 8-1-2.6-1(5) authorizes the lURC to

formulate and adopt rules and policies as will permit the commission, in the exercise of

its expertise, to regulate and control the provision oftelephone services to the public in



1 540 INDIANA LAW REVIEW [Vol. 33: 1497

an increasingly competitive environment, giving due regard to the interests of

consumers and the public and to the continued availability of universal telephone

service.

Id. IND. Code § 8-1-2.6-2 allows the lURC to decline to exercise jurisdiction over telephone
companies or services providing in relevant part:

(a) Notwithstanding any other statute, the commission may . . . enter an order, after

notice and hearing, that the public interest requires the conmiission to commence an

orderly process to decline to exercise, in whole or in part, itsjurisdiction over telephone

companies or certain telephone services.

(b) In determining whether the public interest will be served, the commission shall

consider:

(1) Whether technological change, competitive forces, or regulation by other state

and federal regulatory bodies render the exercise ofjurisdiction by the commission

unnecessary or wasteful;

(2) Whether the exercise ofcommission jurisdiction produces tangible benefits to

telephone company customers; and

(3) Whether the exercise ofcommissionjurisdiction inhibits a regulated entity from

competing with unregulated providers of functionally similar telephone services or

equipment.

Id. iND. Code § 8-1-2.6-3 authorizes the lURC to adopt alternative regulatory procedures and

provides in relevant part:

Notwithstanding any other statute, the commission may . . . adopt rules or by an order

in a specific proceeding provide for the development, investigation, testing, and

utilization of regulatory procedures or generic standards with respect to telephone

companies or services. The commission shall adopt the rules or enter an order only if

it fmds, after notice and hearing, that the regulatory procedures or standards are in the

public interest and promote (1) or more of the following:

( 1

)

Telephone company cost minimization to the extent that atelephone company ' s

quality of service and facilities are not diminished.

(2) A more accurate evaluation by the commission of a telephone company's
physical or fmancial conditions or needs, as well as a less costly regulatory procedure

for either the telephone company, its consumers, or the commission.

(3) Development of depreciation guidelines and procedures that recognize

technological obsolescence.

(4) Increased telephone company management efficiency beneficial to consumers.

(5) Regulation consistent with a competitive environment.



2000] TELECOMMUNICATIONS LAW 1541

Opportunity Indiana. The proceedings before the lURC resulted in the Final
Order on Interim Relief ("Final Order")^*^ that changed the way Ameritech
Indiana was regulated under Opportunity Indiana, required a rate reduction for
residential and business basic local services, and ordered Ameritech Indiana to

comply with infrastructure investment commitments that were a part of the
settlement agreement that established Opportunity Indiana.^ '^ Ameritech Indiana

appealed the Final Order,^'^ and on October 14, 1999, the Indiana Court of

Appeals issued its opinion in Indiana Bell v. OUCC?^^
First and foremost, the court held that the lURC unlawfully ordered

Ameritech Indiana to reduce its rates for residential and business basic local

services.^ ^^ In the Opportunity Indiana proceedings, the lURC was not acting
pursuant to its traditional rate making authority,^^^ but rather pursuant to the
authority contained in the alternative regulation statute.^^' Consequently, in

adopting the alternative regulation and rate reduction in the Final Order, the

lURC was required to act according the provisions set forth in section 8-1-2.6-
3?^^ These provisions require the lURC to provide an opportunity for notice and
hearing prior to adopting any alternative regulatory standards, to find that the

alternative regulatory standards are in the public interest, and to find that the

Id.

315. Ameritech Indiana's original alternative regulatory plan under Opportunity Indiana

expired on December 31, 1997. Under the terms of the settlement agreement establishing

Opportunity Indiana, the earliest date Ameritech Indianacould petition for a'"successor" alternative

regulatory plan was May 1, 1997. See Indiana Bell Tel. Co. v. Office ofUtil. Consumer Counselor,

717 N.E.2d 613, 618 (Ind. Ct. App. 1999). On May 1, 1997, Ameritech Indiana petitioned the

lURC for such relief. However, there was not enough time to establish a permanent alternative

regulatory plan prior to the expiration of Opportunity Indiana 1 . The lURC directed Ameritech

Indiana to proceed on the issue ofwhat interim relief should apply pending the lURC's final order

on permanent alternative regulatory relief. See id. On December 30, 1997, the lURC issued the

Final Order on Interim Reliefwhich was the subject ofthe appeal discussed below.'* See generally

id. The background and specifics of Opportunity Indiana will not be covered in this article.

However, the court's opinion in Indiana Bell v. OUCC does an excellent job of succinctly stating
the factual and procedural history ofOpportunity Indiana, and the reader is referred to the court's

opinion for further background information. See id. at 616-20.

316. See In re Petition of Indiana Bell Telephone Co. d/b/a Ameritech Indiana for the

Commission to Decline to Exercise in Whole or in Part its Jurisdiction Over, and to Utilize

Alternative Regulatory Procedures for, Ameritech Indiana's Provision ofRetail and Carrier Access

Services Pursuantto I.C. 8-1-2.6 etseq.^^Q. 40849, 1999 WL 590486 (Ind. U.R.C. Dec. 30, 1997).
3 1 7. Th^ OUCC cross-appealed.
318. See Indiana Bell, 1\1 N.E.2d at 613.

319. 5ee/^. at 624-25.

320. Under its traditional ratemaking authority, if the lURC finds that rates are unjust or

unreasonable, it is authorized to fix "just and reasonable rates" for the future. See Ind. Code § 8-

1-2-68 (1998).

321. See Indiana Bell, 717 N.E.2d at 622.

322. See id



1542 INDIANA LAW REVIEW [Vol. 33:1497

alternative regulatory standard promotes at least on ofthe standards set forth in
section 8-1-2.6-3.^2^

The court found that the lURC did not comply with the notice and hearing
requirements before adopting the alternative regulation and rate reduction.

^2^*

Ameritech Indiana's Petition for Interim Relief requested that if an order on
permanent relief could not be issued prior to the expiration of Opportunity

Indiana, that the alternative regulatory procedures contained in Opportuni^
Indiana continue in the interim.^^^ While notice and a hearing were provided to
determine whether interim relief was appropriate, notice and a hearing
concerning the adoption of an alternative regulatory standard were not
provided.^2^ According to the court, this was not sufficient to meet the notice and
hearing requirements of section 8-1-2.6-3:

We interpret the statute as requiring the Commission to give notice of
the specific alternative regulatory procedure it is considering with

sufficient specificity to allow interested parties to present evidence and

participate in a hearing on that procedure. It is not sufficient for the
Commission to give notice that it is considering some undecided form of
alternative regulatory procedure.^^'

The court also held that the Final Order did not set forth the requisite findings
showing that the alternative regulation and rate reduction are in the public

interest and promote the criteria set forth in section 8- 1-2.6-3.^^^ Accordingly,

the court held the Final Order to be contrary to law and reversed and remanded
the Final Order to the lURC to make a determination as to interim relief
consistent with the court's holding."^

Pending the lURC's determinations, the court held that Ameritech Indiana's
rates on file with the lURC upon the expiration of Opportunity Indiana should
remain in place."^ Under section 8-1-2-44 ofthe Indiana Code, a public utility
must charge the rates on file with the lURC until such rates are changed in
accordance with the Public Service Commission Act.^^' Thus, in order to
lawfully change Ameritech Indiana's rates, the lURC must act pursuant to either
its traditional ratemaking authority or through section 8-1-2.6-3, which as

323. See id.

324. See id

325. See id.

326. See id. at 622-23. The IURC*s preliminary order on interim relief set a procedural

schedule that included an evidentiary hearing to consider additional evidence on the form that

interim relief should take. See id. at 622. This procedural schedule was subsequently vacated,

prefiled testimony was stricken, and parties were directed to submit briefs based on the existing

record. See id. at 623,

327. Id

328. 5ee/V/. at624.

329. See id.

330. Seeidd!i615.

331. See id (citing I>4D. CODE § 8-1-2-44 (1998)).



2000] TELECOMMUNICATIONS LAW 1543

discussed, requires the opportunity for notice and hearing."^

Citing section 8-1-2-68 of the Indiana Code, which provides that the lURC
may fix just and reasonable rates only to be applied in the^/wre,"^ the court
further rejected OUCC's argument that Ameritech Indiana's interim rates should
be subject to further review and refund."^ It is settled law in Indiana that the

lURC may not engage in retroactive ratemaking,"^ and thus, the lURC is not
authorized "to fix Ameritech[] [Indiana's] rates on an interim basis, rescind those
rates after further review and require any overcharges to be returned to

consumers."^^^

Finally, the court disagreed with Ameritech Indiana that the Final Order was
contrary to law because it effectively "rewrites" Ameritech Indiana's

infrastructure investment commitments in the Opportunity Indiana settlement
agreement.^^^ Specifically, the evidence in the proceedings before the lURC
showed that Ameritech Indiana only provided $15.6 million in infrastructure
investments out ofthe agreed "$20 million per year for each year 1994-1999 to

provide digital switching and transport facilities ... to every interested school,

hospital and major government center . . ."^^* Ameritech Indiana argued,

however, that it was unable to generate interest in schools, hospitals, and
government centers sufficient to meet this obligation.^^^ The lURC was not
persuaded, and found that Ameritech Indiana failed to comply with its
infrastructure investment obligation.^*^ The lURC stated that if Ameritech
Indiana "has trouble generating sufficient interest, it should try harder, perhaps

with the advice and assistance ofother parties to the Settlement Agreement . .

.

or to otherwise propose some other means for its shareholders to provide
infrastructure improvements consistent with (the terms of Opportunity

Indiana).'"*^

The court agreed with the lURC and found that Ameritech Indiana
"undertook an unconditional commitment to make certain infrastructure
investments that would be in effect for the six-year period of 1994 through

1 999," and upheld the Final Order in this respect.^'*^ While the court agreed with

Ameritech Indiana that it would be error for the lURC to impose upon Ameritech
Indiana infrastructure commitments not specified in the Opportunity Indiana

332. See id

333. See IND. Code § 8-1-2-68.

334. See Indiana Bell, 717 N.E.2(i at 625.

335. S^e id.

336. Id

337. See id at 625-26.

338. Id at 626.

339. See id.

340. See id

341. Id. (citation omitted).

342. Id. (emphasis added).



1 544 INDIANA LAW REVIEW [Vol. 33 : 1497

settlement agreement, the Final Order "merely states that Ameritech [Indiana]
may propose alternative methods by which it might provide the required
infrastructure investments in a manner which would comply with the terms and
the intent of Opportunity Indiana."^"*^

343 . Id. at 627 n. 1 2. The court discussed the potential contract liability ofAmeritech Indiana.

Finding the Opportunity Indiana settlement agreement to be properly enforced according to the

general principles of contract law, the court held that Ameritech Indiana's failure to provide the

infrastructure investments could be construed as a breach of contract. The court stated that if the

lURC found such breach, Ameritech Indiana could be liable for damages and be required "to return

to the public of over $100 million in funds which were supposed to be made available for

infrastructure improvements as well as any damages which might be proven by other settling parties

under Opportunity Indiana." Id. at 627-28 n.l2.