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POSTED BY Alexander D. Schultheis

The Telecommunications Act of 1996 (TCA), codified at 47 U.S.C. § 222, was a major step forward in improving competition for Competitive Local Exchange Carriers (CLECs) in their respective marketplaces.  A recent ruling by the SecondCircuit in Southern New England Telephone Co. v. Comcast Phone of Connecticut, Inc., 718 F.3d 53, (2nd Cir. 2013), made sure the TCA’s purpose was not undermined. The Second Circuit held that “former” monopolist ILECs, such as AT&T, are still required to provide indirect transit service access to CLECs at regulated rates, despite no longer holding exclusive monopolies under state law.

Section 251(a) of Title 47 of the United States Code requires all telecommunications carriers to “interconnect” their networks with one another for the sharing and mutual exchange of traffic. Specifically, § 251(c)(2) and § 252(d)(1) require ILECs, like AT&T, to connect all other carriers (including CLECs) at what is known as Total Element Long-Run Incremental Cost (TELRIC). This is a regulated rate by the TCA, and uses a complex formula to determine a price range for what ILECs may charge. The policy in requiring ILECs to connect all other carriers into their network, and in some cases their physical facilities, is to ensure that they do not exploit their previous monopoly status prior to the TCA’s passage.

There are two kinds of interconnection: Direct and indirect. Direct interconnection occurs where the carriers link or attach their equipment to the actual network infrastructure of another ILEC. Indirect interconnection occurs where the carriers attach their equipment to the physical facilities or equipment of the ILEC, thus gaining access to the network in a “round-a-bout” manner. The main difference between the two methods of interconnection boils down to financials. When carriers are directly connected to one another, there is a free-flow of exchanging traffic between them. However, new market entrants (the CLECs) do not possess the balance sheet to directly connect to the network infrastructure of the ILEC, and thus choose to attach their equipment to the ILEC’s equipment and facilities. Naturally, the ILECs charge a rate of use for this service, which routes traffic transit service between the ILEC and the CLEC.

In the particular case at issue, a small communications company known as Pocket Communication (Pocket), a CLEC based in Connecticut, negotiated a transit service agreement with AT&T. Pocket originally petitioned the Connecticut Department of Public Utility Control (DPUC) to review the terms of the agreement. Pocket alleged AT&T violated Connecticut state law and the DPUC’s prior 2003 decision in a proceeding under the auspices of the TCA involving Cox Communication, both which required AT&T to charge the TELRIC regulated rates for transit service. Specifically, Pocket alleged AT&T engaged in price discrimination by charging Connecticut carriers higher rates than carriers in other states, and requested the DPUC to lower them. AT&T argued that its service did not constitute interconnection under § 251, thus allowing them to charge higher negotiated rates. The DPUC ultimately sided with Pocket, and ordered the rates lowered not only to Pocket but to other carriers who provided transit service through AT&T as well.

On first appeal, the District Court rejected AT&T’s argument that the DPUC was “preempted” by the FCC into adjudicating this matter. The District Court held that “interconnection” under § 251 of the TCA included indirect interconnection through transit service with other CLECs because the goal of the TCA was to promote competition, and it would be very difficult for CLECs to compete without at least minimal, indirect interconnection. Thus, the DPUC’s order to lower rates to Pocket was affirmed. However, the District Court reversed the mandatory lowering of rates, especially to carriers in other states who were not parties to the litigation. This is because the TCA’s preferred rate-setting method is still private contract negotiations, with the TELRIC rates serving as a guide of sorts in determining what to charge.

On a second appeal, the Second Circuit had to answer the classification question: Does AT&T’s status fall under § 251(a), which addresses the general duties of all telecommunications carriers, thus allowing them to charge higher negotiated rates, or are they under § 251(c), which addresses the obligations of “former” monopolists, who must provide service at the lower regulated rates? The Second Circuit held that AT&T’s obligation to provide indirect interconnection transit service is an obligation under § 251(c), because it ensures that indirect interconnection will facilitate mutual transit service between new CLECs in the market. The Court reasoned that while AT&T may argue they fall under § 251(a), this section only provides a broad policy goal that all carriers interconnect, but does not specify how, whether direct or indirect. Whereas, under § 251(c), ILECs are required to provide at least indirect interconnection to any CLEC who asks to be connected to their network.

Given the importance of disseminating information in today’s marketplace, there is an increasing importance to ensure competition in the telecommunications industry. It is important to ensure that industries like this do not contain a high degree of concentration, for such concentration may act as a barrier to communicating salient and valuable information between consumers and businesses alike. By strengthening the TCA’s primary goal of increasing competition, the Second Circuit has taken a step towards ensuring that consumers are not left with a limited number of choices from which to access information, or having to pay higher rates to access this information. This public benefit far outweighs any private commercial gain that ILECs may experience through charging higher negotiated rates CLECs.

In particular, it is persuasive that the Second Circuit pointed out that while ILEC “giants,” like AT&T, no longer possess state-sanctioned monopolies because of the TCA’s implementation, they still do possess leverage by controlling access to their network. If “former” ILECs were permitted to still charge higher negotiated rates for access to their transit services, despite no longer possessing a state-sanctioned monopoly, they could effectively continue their dominance of the industry, preventing its de-concentration, and thus limiting competition. Given how important Local Exchange Carriers are today in providing a means of communication across the nation, the Second Circuit’s ruling is consistent with ensuring the TCA’s primary goal of increasing competition, and, as a secondary matter, ensuring the public’s benefit to accessing information from a carrier of their choice.

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