                                                                                  United States Court of Appeals
                                                                                           Fifth Circuit
                                                                                        F I L E D
                     IN THE UNITED STATES COURT OF APPEALS
                                                                                         October 4, 2006
                                  FOR THE FIFTH CIRCUIT
                                                                                    Charles R. Fulbruge III
                                                                                            Clerk
                                           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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