SW Bell Telephone LP v. Public Util Cmsn TX, et al

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United States Court of Appeals
Fifth Circuit
F I L E D
October 4, 2006
Charles R. Fulbruge III
Clerk
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 05-50131
SOUTHWESTERN BELL TELEPHONE, L.P. d/b/a SBC TEXAS,
Plaintiff-Appellant,
versus
PUBLIC UTILITY COMMISSION OF TEXAS, PAUL HUDSON,
in his official capacity as chairman of the Public Utility Commission of Texas,
BARRY SMITHERMAN, in his official capacity as Commissioner of the
Public Utility Commission of Texas; JULIE C. PARSLEY, in her official
capacity as Commissioner of the Public Utility Commision of Texas;
and AT&T COMMUNICATIONS OF TEXAS, L.P.,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Texas, San Antonio Division
Before KING, STEWART, and DENNIS, Circuit Judges.
CARL E. STEWART, Circuit Judge:
Southwestern Bell Telephone, LP d/b/a SBC Texas appeals from the district court’s grant of
summary judgment to the Public Utilities Commission of Texas (“PUCT”) and AT&T
Communications (“AT&T”). The issue on appeal is whether the PUCT acted arbitrarily and
capriciously in issuing Order No. 45, which modified the Performance Remedy Plan of the Texas 271

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Agreement, without the consent of SBC Texas. SBC Texas contends that the PUCT violated federal
law and breached a binding contract by altering the terms and conditions of the State’s model
interconnection agreement. The district court determined that Congress’s grant of authority to state
utility commissions includes the interpretation and enforcement of modifications to the agreement,
and the PUCT did not exceed its authority in this instance. We AFFIRM the district court’s
judgment.
I. Facts and Procedural Background
Under the Telecommunications Act of 1996, 47 U.S.C. §§ 251, 252 (the “Act”), the Federal
Communications Commission (the “FCC”) restructured local telephone markets. Prior to the Act,
SBC Texas held a monopoly on local service throughout Texas pursuant to a certificate of
convenience and necessity from the State or locality. Congress preempted these arrangements to
allow the Bell companies to enter into the long-distance market in exchange for opening its local
service monopolies to competition.
Before gaining access to the long-distance market, an incumbent local exchange carrier
(“ILEC”), such as SBC Texas, must meet the requirements of a competitive checklist and submit an
application demonstrating its ability to open its networks to competitors. See 47 U.S.C.
§271(c)(2)(B). Both the state commission and FCC review an ILEC’s application. Under
§271(d)(2)(B) of the Act, the FCC consults with the state commission for a recommendation on
whether to approve the ILEC’s application, but the FCC ultimately determines whether an ILEC
meets the competitive requirements.
During the application process, the ILEC may begin to enter into interconnection agreements
with competitive local exchange carriers (“CLEC”) through either negotiations or compulsory

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arbitration. 47 U.S.C. §§ 251, 252. The state commission must then approve or reject the
interconnection agreements. 47 U.S.C. §252(e)(1). Interconnection agreements set forth the terms
and conditions for the ILEC and CLEC to fulfill their respective statutory duties. After approval, the
state commission monitors the ILEC and CLECs for compliance with specified performance
measures.
In July 1996, and again in May 1997, the PUCT instituted arbitration proceedings to solidify
the terms of interconnection agreements between SBC Texas and various CLECs. Between the
arbitrations, the PUCT initiated a separate proceeding, pursuant to section 271 of the Act, to
determine whether SBC Texas satisfied the competitive checklist required as a precondition to
entering the long-distance market. SBC Texas worked with the Justice Department, competitors, and
the PUCT to create the list of performance measures necessary to receive a recommendation of
approval for its application. In October 1999, the PUCT issued an order to require certain changes
and approve the Texas 271 Agreement (the “T2A”) as modified. Order No. 55, Investigation of
Southwestern Bell Telephone Company’s Entry into the Texas InterLATA Telecommunications
Market, Project No. 16251 (Tex. PUC Oct. 13, 1999).
On December 16, 1999, the PUCT voted to recommend that the FCC approve SBC Texas’s
application. SBC Texas filed an application and supplement with the FCC. On June 30, 2000, the
FCC approved SBC Texas’s application; meaning, the FCC permitted SBC Texas to “enter the in-
region, interLATA market in Texas based on evidence that SWBT [SBC Texas] ha[d] taken the
statutorily required steps to open its local exchange access markets to competition.” The order stated
in pertinent part that:

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As a result of the Texas Commission’s efforts, competition has taken root, and is
expanding in local telecommunications markets, which ultimately benefits consumers.
The Texas Commission utilized a number of effective methods to ensure the local
markets in Texas are open to competition today, and will remain so in the future...
As part of its section 271 review, the Texas Commission also developed clearly
defined performance measurements and standards, and adopted a performance remedy
plan to discourage backsliding. In a continuing effort to refine and monitor
performance measurements, the Texas Commission has a six month review process
in place. The Texas Commission is currently considering modifying existing
measurements and adding new measurements based on input from SWBT [SBC
Texas] and competing carriers.
Memorandum Opinion and Order, FCC 00-238, In the Matter of Application of SBC
Communications Inc., et al., CC Docket No. 00-65, 15 F.C.C.R. 18, 354, 2000 WL
270853 (June 30, 2000)
Attachment 17 of the T2A contains the Performance Remedy Plan (the “Plan”). The Plan
enumerates performance measures, which create standards to measure SBC Texas’s performance in
providing non-discriminatory access to its network. The Plan also mandates that SBC Texas pay
automatic liquidated damages to affected CLECs for non-compliance with specified performance
measures. The liquidated damages serve as an incentive for SBC Texas to fulfill its obligations under
the interconnection agreements.
In the Plan, “K Values” limit the number of measures classified as non-compliant. Through
random variation, a certain number of measures will indicate substandard performance even though
SBC Texas’s actual performance may be at parity or benchmark levels. To balance random variation
and errors, the K Values permit a prescribed number of non-compliant performance measures before
SBC Texas becomes liable for liquidated damages. For some performance measurements, the K
exemption does not apply when SBC Texas was non-compliant in the prior two consecutive months,
but the K exemption applies again after two consecutive months of compliance.

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On October 17, 2002, the PUCT signed Order No. 45 (the “Order”). Order No. 45, Section
271 Compliance Monitoring of Southwestern Bell Tel. Col. Of Texas, Project 204000 (Oct. 17,
2002). The Order provides that the K exemption will not apply after one month of non-compliance;
and the K Value will not include performance measures with less than ten transactions. The Order
also included two other adjustments meant to ensure that the damage calculation accounts for the
severity and volume of transactions with substandard performance. According to SBC Texas, the
modifications increased the liquidated damages due to competitive carriers, regardless of whether the
CLECs experienced comparable harm.
SBC Texas filed a motion to reconsider, asserting that SBC Texas did not consent to the K-
Table modifications as required by §6.4 of the Plan, which provides that modifications require the
mutual agreement of the parties. The PUCT denied this motion. SBC Texas then filed suit alleging
that the PUCT violated 47 U.S.C. §§ 251 & 252 by ordering SBC Texas to alter certain terms and
conditions of the Performance Remedy Plan, contained in binding interconnection agreements, that
SBC Texas entered into with approximately 225 CLECs in Texas. The PUCT maintained that it
issued the Order, pursuant to its compliance monitoring docket, to ensure the Plan operates as
intended. The PUCT, AT&T, and SBC Texas, each filed motions for summary judgment.
The district court concluded that a previous FCC order, interpreting similar contractual
language in other states, supported the PUCT’s actions. Further, Congress granted state commissions
the power to interpret and enforce, as well as approve or reject, interconnection agreements. Finding
that the PUCT did not act arbitrary and capriciously, the district court granted the summary judgment
motions filed by the PUCT and AT&T, and denied the motion filed by SBC Texas. SBC Texas
moved to modify or alter the judgment. SBC Texas agreed with the district court’s conclusion that

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Congress’s grant of power to state commissions included the power to interpret and enforce
interconnection agreements; yet, SBC Texas reiterated that §6.4 of the Plan restricts the PUCT’s
authority and its refusal to reconsider the Order was arbitrary and capricious. The district court
denied SBC Texas’s request to set aside the summary judgments. The central issue in this appeal
concerns whether the PUCT possessed authority to enforce modifications without SBC Texas’s
consent in light of §6.4 of the Plan.
II. Standard of Review
A grant of summary judgment is reviewed de novo, applying the same standard as the district
court. Conserv LLC v. Sw. Bell Tel. Co., 350 F.3d 482, 486 (5th Cir. 2003). A district court reviews
an interconnection agreement between an ILEC and CLEC, as interpreted by the state commission,
for compliance with federal law and related matters of statutory interpretation de novo. Id.; Sw. Bell
Tel. Co. v. Pub. Util. Comm’n of Tex., 208 F.3d 475, 482 (5th Cir. 2000); Mich. Bell Tel. Co. v.
MFS Intelenet of Mich., Inc., 339 F.3d 428, 433 (6th Cir. 2003); Millennium One Comm’n., Inc. v.
Pub. Util. Comm’n., 361 F.Supp.2d 634, 638 (W.D. Tex. 2005). If this review uncovers no
illegality, whether the state commission correctly interpreted the challenged interconnection
agreement and the determination of all other issues are reviewed under the arbitrary and capricious
standard. Sw. Bell Tel. Co., 208 F.3d at 482; Millennium One, 361 F.Supp.2d at 638.
III. Discussion
A.
Neither SBC Texas nor the PUCT contend that the substance of Order No. 45’s modifications
violate the Act. In this appeal, SBC Texas only asserts that Order No. 45 exceeds the PUCT’s
authority under the plain language of the T2A, which prohibits unilateral changes.

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B.
Now we must decide whether the PUCT’s interpretation of §6.4 of the Plan, under Texas law,
constitutes an arbitrary and capricious construction or stands unsupported by substantial evidence.
Under this standard of review, the court may not “substitute its judgment for that of the agency. The
agency must articulate a rational connection between the facts found and the choice made.” Bowman
Transp. Inc. v. Arkansas-Best Freight Systems, Inc., 419 U.S. 281, 285 (1974).
This Circuit has determined that “the Act’s grant to the state commissions of plenary authority
to approve or disapprove these interconnection agreements necessarily carries with it the authority
to interpret and enforce the provisions of agreements that state commissions have approved.” Sw.
Bell Tel. Co., 208 F.3d at 479-80. Thus, interpretation of an agreement is an authorized state
commission determination under Section 252; and parties are bound by their interconnection
agreements as interpreted and enforced by the state commission. BellSouth Telecomms., Inc. v.
MCImetro Access Transmission Servs., Inc., 317 F.3d 1270, 1276 (11th Cir. 2003) (en banc)). On
the other hand, a state commission cannot undercut the purpose of sections 251 and 252 via its
general rule-making authority. Pacific Bell v. PacWest Telecomm, Inc., 325 F.3d 1114 (9th Cir.
2003); Verizon North, Inc. v. Strand, 309 F.3d 935 (6th Cir. 2002).
The interconnection agreement and state law principles govern the interpretation and
enforcement of agreement provisions. Sw. Bell Tel. Co., 208 F.3d at 485. Under Texas law,
unambiguous contracts are interpreted by a court as a matter of law. Universal Health Servs., Inc.
v. Renaissance Women’s Group, P.A., 121 S.W.3d 742, 746 (Tex. 2003). To determine whether a
contract contains an ambiguity, the court must consider the contract as a whole in light of the
circumstances present when the parties entered the contract. Id. (citing Columbia Gas Transmission

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Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996)). If the contract language reveals
a certain or definite meaning, then it is not ambiguous and should be interpreted by a court as a matter
of law. Enterprise Leasing Co. of Houston v. Barrios, 156 S.W.3d 547, 549 (Tex. 2004) (citing
Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)). An ambiguity does not arise simply because the
parties advance conflicting interpretations of the contract; instead, both interpretations must be
reasonable. Columbia, 940 S.W.2d at 589 (citing Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132,
134 (Tex. 1994)). If the contract is subject to two or more reasonable interpretations after applying
the pertinent rules of construction, then the contract is ambiguous, which creates a fact issue on the
parties’ intent. Id.
The T2A represents a collaborative effort between many interested parties to develop a model
interconnection agreement. The PUCT’s approval of the T2A symbolized a milestone in SBC
Texas’s pursuit to gain the PUCT’s recommendation for FCC approval under section 271 of the Act.
The T2A provides a contractual blueprint available to any CLEC operating in Texas and ensures
nondiscriminatory access to SBC Texas’s network. More specifically, the Plan’s provisions
demonstrated to both the PUCT and FCC that SBC Texas satisfied and would continue to satisfy the
section 271 competitive checklist. Section 6.4 of Attachment 17 provides in pertinent part that:
Every six months, CLEC may participate with SWBT [SBC Texas], other CLECs,
and Commission representatives to review the performance measure to determine
whether measurements should be added, deleted, or modified; whether the applicable
benchmark standards should be modified or replaced by parity standards; and whether
to move a classification of a measure to High, Medium, Low, Diagnostic, Tier-1 or
Tier-2... Any changes to existing performance measures and this remedy plan shall
be by mutual agreement of the parties and, if necessary, with respect to new measures
and their appropriate classification, by arbitration. The current measurements and
benchmarks will be in effect until modified hereunder or expiration of the
interconnection agreement.

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The plain language of the provision appears unambiguous. As argued by SBC Texas, §6.4 of
the Plan leads one to assume that any modification of the remedy plan, including those affected by
Order No. 45, require the PUCT to gain SBC Texas’s consent. But under Texas law, we must
consider the Plan’s plain language in light of the surrounding circumstances at the time SBC Texas
and the PUCT entered the contract.
The PUCT argues that §6.4 of the Plan imposes an obligation upon SBC Texas to participate
in good faith in the six-month review process; attempt to reach agreements with the CLECs on any
changes and additions to the existing performance measurements; and submit to binding arbitrations
on new measures disagreed upon by SBC Texas and the CLECs. However, the mutual agreement
language, under no circumstance, proscribes the PUCT from making modifications to fine-tune the
Plan. Based on this premise, the PUCT modified the Plan’s liquidated damages calculation to ensure
that the payments accurately reflect substandard performance without unfairly penalizing SBC Texas
due to the statistical random variation in the reported data.
The PUCT’s interpretation of the contract provisions to permit minor modifications comports
with the circumstances surrounding its approval of the T2A and the intent of the Plan. In the PUCT’s
evaluation to recommend that the FCC approve SBC Texas’s application, the PUCT stated that:
In addition, a six-month review process is in place to assure that the plan is not static
in nature. The Texas Commission, in conjunction with SWBT [SBC Texas] and the
CLECs, will engage in a comprehensive review of the performance measures to
determine if commercial experience indicates that changes are necessary. In this way,
the Texas Commission can carry out its goal of making sure that the process reflects
new experiences and changes in the marketplace as competition continues to evolve.
In the Matter of Application by SBC Communications, Inc., Southwestern Bell
Telephone Company, and Southwestern Bell Communications Services, Inc. d/b/a
Southwestern Bell Long Distance, CC Docket No. 00-4.

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In the FCC’s order, which approved SBC Texas’s application, the FCC wrote that:
As noted in the Introduction, we accord the Texas Commission’s verification of
SWBT’s compliance substantial weight based on the totality of its efforts and extent
of its expertise on section 271 issues... The Texas Commission also developed a
comprehensive performance measurement and remedy plan which it continues to
monitor and refine.
FCC Memorandum Opinion and Order, June 30, 2000.
These two written pronouncements, from the PUCT and FCC, indicate that the PUCT did
not intend to surrender its power over modifying the terms and conditions of the Plan after approving
the T2A. To the contrary, both the FCC and PUCT expressed an expectation for the PUCT to
continually monitor SBC Texas’s progress, and to refine the interconnection agreement as necessary
to fulfill the goal of nondiscriminatory, competitive telephone markets. Further, neither statement
mentions an obligation for the PUCT to collaborate with either the ILEC or the CLECs in pursuing
the goal. In Order No. 45, the PUCT fine-tuned the Plan by honing the statistical methodology for
measuring SBCTexas’s compliance with established standards. The Order’s modifications align with
the underlying purpose of the K Value: to account for the random variation of reported data.
The Proposed Interconnection Agreement Matrix, which documents discussions conducted
while drafting the T2A, also supports the PUCT’s interpretation. The Matrix provides the following
with respect to §6.4 of the Plan:
SWBT [SBC Texas] Proposed Language and Rationale: SWBT does not agree with
AT&T’s other suggestions, which would alter the precisely defined scope of six-
month reviews. The reason for the defined scope was to strike a balance between
permitting necessary adjustment to the Plan, on the one hand, and avoiding wholesale
major reviews on the other hand. As currently worded, and as approved by the
Commission, this section allows sufficient scope to address anymodifications. SWBT
cannot agree to turning the six-month reviews into a complete revisitation of the Plan.

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The Commission found that it agreed with “SWBT [SBC Texas] as to the scope of the six-month
review; therefore, section 6.4 should remain unchanged.” Under SBC Texas’s interpretation,
accepted by the PUCT, §6.4 of the Plan does not create an absolute preclusion to the PUCT making
“necessary adjustments to the Plan.” SBC Texas argues that its comments during the T2A review
referred only to AT&T’s proposed language, not the mutual agreement provision. The record,
however, provides no indication that SBC Texas’s comments are limited to AT&T’s proposed
language, as opposed to the entire section. For this reason, we cannot find, based on SBC Texas’s
assertion, that the PUCT acted arbitraryand capriciously by relying upon SBC Texas’s representation
at the time of drafting §6.4 of the Plan. To the contrary, SBC Texas’s comments support the
reasonableness of the PUCT’s interpretation that the T2A permits it to fine-tune the Plan.
Order No. 45 follows a pattern of the PUCT making modifications to the T2A, as deemed
necessary within the PUCT’s discretion. As a result of the two six-month reviews prior to the third
review, which produced Order No. 45, the PUCT modified the Plan over objections from the CLECs
and SBC Texas. For example, in July of 2000, the PUCT eliminated thirty-one measures, added
eighteen measures, and revised eighty-five measures. Order No. 13, Section 271 Compliance
Monitoring of Southwestern Bell Telephone Co. Of Texas, Project No. 204000 (Tex. PUC July 19,
2000). Although SBC Texas opposed the changes to the performance measures, SBC Texas did not
seek judicial review and did not file a motion to reconsider. SBC Texas’s present argument, that the
PUCT impermissibly made a unilateral change to the interconnection agreement, never arose after
these modifications. SBC Texas argues that its decision not to seek judicial review implied the
necessary consent. This argument fails to persuade the court in any definitive direction on the central
issue. SBC Texas’s decision to not seek a judicial appeal on previous unilateral modifications does

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not prove that SBC Texas consented to the changes, nor does the decision preclude SBC Texas from
filing suit pursuant to the contract. These facts demonstrate, however, that the PUCT did not act
arbitrarily and capriciously when issuing Order No. 45; instead, the PUCT acted consistent with past
conduct.
SBC Texas also argues that at the time of the third six-month review, SBC Texas’s
performance had improved dramatically over previous years. Therefore, the PUCT’s decision to
enhance the liquidated damages clause, despite SBC Texas’s improvement, seems not only
inconsistent with the T2A, but evidences the arbitrary and capricious nature of the PUCT’s conduct.
In reviewing the record, SBC Texas provides no comparative point of reference for its improved
performance. We cannot glean whether SBC Texas’s improvement means it is now doing an
excellent job of complying with the performance measures, or it is barely satisfying the competitive
checklist. Moreover, the Act permits state public utility commissions to modify interconnection
agreements without seeking a substandard performance determination from the FCC as a prerequisite.
Section 251(d)(3) of the Act explicitly states that:
[T]he Commission shall not preclude the enforcement of any regulation, order, or
policy of a State commission that establishes access and interconnection obligations
of local exchange carriers; is consistent with the requirements of this section; and does
not substantially prevent implementation of the requirements of this section and the
purposes of this part.
And the FCC’s Order approving SBC Texas’s applications states that:
We stand ready to exercise our various statutory enforcement powers quickly and
decisively in appropriate circumstances to ensure that the local market remains open
in Texas. We are confident that cooperative state and federal oversight and
enforcement can address any backsliding that may arise with respect to SWBT’s entry
into the Texas long distance market.
FCC Memorandum Opinion and Order, June 30, 2000.

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The Act’s language, and the FCC’s recognition of the PUCT’s role in maintaining an open
market, support the PUCT’s actions. The PUCT need not sit with its hands tied until SBC Texas
commits an egregious violation, or until the FCC grants permission for select adjustments; instead,
the PUCT can make refinements to the T2A as the occasion arises so long as the changes do not
contravene the Act. Based on the surrounding circumstances at the time of drafting and approving
the T2A, and evidence supporting the PUCT’s rationale for Order No. 45, we find that the PUCT
did not act impermissibly arbitrary and capricious.
IV. Conclusion
In Order No. 45, the PUCT redefined the existing terms of the Remedy Plan in the Texas 271
Agreement. Order No. 45 creates neither new nor different contractual terms. Based on the
circumstances surrounding the PUCT’s approval of the T2A, we find that the PUCT’s issuance of
Order No. 45 was not arbitrary and capricious. Accordingly, we AFFIRM the district court’s grant
of summary judgment in favor of the PUCT.

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