                              In the
 United States Court of Appeals
                For the Seventh Circuit
                          ____________

Nos. 07-3557 & 07-3683
ILLINOIS B ELL T ELEPHONE C OMPANY,
                                                 Plaintiff-Appellant,
                                                     Cross-Appellee,
                                  v.


C HARLES E. B OX, et al., Commissioners
of the Illinois Commerce Commission,
                                              Defendants-Appellees,
                                                  Cross-Appellants,
                                 and


A CCESS O NE, INC., et al.,
                             Intervening Defendants-Appellees.
                          ____________
         Appeals from the United States District Court for the
           Northern District of Illinois, Eastern Division.
            No. 06 C 3550—Virginia M. Kendall, Judge.
                          ____________
         A RGUED M AY 6, 2008—D ECIDED M AY 23, 2008
                          ____________


   Before E ASTERBROOK, Chief Judge, and W OOD and
T INDER, Circuit Judges.
2                                   Nos. 07-3557 & 07-3683

   E ASTERBROOK, Chief Judge. The Telecommunications Act
of 1996 directs established local phone companies—
successors to the Bell Operating Companies that were
subsidiaries of AT&T before its breakup in 1983—to lease
parts of their networks to rivals on an à la carte basis.
47 U.S.C. §251(c)(3). Particular circuits or services, called
unbundled network elements, must be furnished at a
price, and under conditions, specified by the Federal
Communications Commission. Its method of setting the
price, called TELRIC (for total element long-run incre-
mental cost), was approved by Verizon Communications
Inc. v. FCC, 535 U.S. 467 (2002). That decision disap-
proved some of the FCC’s views about which elements
must be made available, however, and many questions
remained open until the FCC’s regulations in the wake of
its third Triennial Review were approved by the D.C.
Circuit. Covad Communications Co. v. FCC, 450 F.3d 528
(D.C. Cir. 2006).
   Today’s case poses two questions about incumbents’
obligations under the FCC’s regulations. The first is
whether these firms, called ILECs (for incumbent local
exchange carriers), must allow their rivals, called CLECs
(for competitive local exchange carriers), to use “entrance
facilities” at TELRIC prices for interconnection (that is,
transferring voice and data traffic from a CLEC’s network
to the ILEC’s, and the reverse). The second is whether
ILECs must lease fiber-optic circuits to deliver voice and
data services to the CLECs’ business customers. The 1996
Act provides that, when phone companies cannot agree
on the answer to questions such as these, state public-
utility commissions may decide. 47 U.S.C. §252(b). The
statute misleadingly calls this process “arbitration,” but
it bears none of the features—such as voluntary consent,
Nos. 07-3557 & 07-3683                                        3

a privately chosen adjudicator, and finality—that marks
normal arbitration. See generally AT&T Communications of
Illinois, Inc. v. Illinois Bell Telephone Co., 349 F.3d 402 (7th
Cir. 2003); Mpower Communications Corp. v. Illinois Bell
Telephone Co., 457 F.3d 625 (7th Cir. 2006). The state com-
mission’s decisions don’t implement private agreements;
they subject unwilling ILECs to public commands.
   The Illinois Commerce Commission concluded that
Illinois Bell, the ILEC in northern Illinois—which does
business as AT&T following a series of corporate transac-
tions that need not be recounted—must allow CLECs to
use entrance facilities at TELRIC prices. It also concluded
that AT&T must allow the CLECs to use its fiber-optic
loops, except for service to “mass-market customers.” The
1996 Act allows such decisions by state agencies to be
reviewed by federal courts. See Verizon Maryland Inc. v.
Public Service Commission of Maryland, 535 U.S. 635 (2002).
The district judge concluded that the state commission
was right about entrance facilities and wrong about fiber-
optic loops. See 2007 U.S. Dist. L EXIS 70551 (N.D. Ill.
Sept. 21, 2007). AT&T has appealed on the entrance-facility
issue; the commission has appealed on the local-loops
issue.
  An “entrance facility” is a connection between a
switch maintained by an ILEC and a switch maintained
by a CLEC. In other words, it is a means of transferring
traffic from one carrier’s network to another. The con-
nection may be by copper cable, fiber-optic cable, or radio-
frequency link. The connection may be long or short;
multiple carriers’ switches may even be in the same
building (this is known as co-location). ILECs built en-
trance facilities to comply with their obligation to inter-
change traffic among networks. 47 U.S.C. §251(c)(2). Once
4                                   Nos. 07-3557 & 07-3683

the links between ILECs and CLECs networks existed,
CLECs began to use them to transport traffic from the
customers of one CLEC to the customers of another, using
the ILEC’s circuits as intermediaries. A given CLEC also
might route traffic among its own customers over the
ILEC’s network. Using an entrance facility to move voice
or data traffic among CLEC customers has come to be
known as “backhauling,” though again the nomenclature
is misleading: intra-CLEC traffic is related only loosely
to loading freight on a truck, train, or boat at its destina-
tion for delivery to the vehicle’s point of origin.
  In the third Triennial Review Remand Order, the FCC
concluded that CLECs do not need entrance facilities for
backhauling and should build their own equipment for
handling CLEC–to–CLEC traffic. ILECs need not pro-
vide unbundled network elements to CLECs that can
serve customers without “impairment” through their
own network elements. 47 U.S.C. §251(d)(2)(B). (“Impair-
ment” is a complex concept that need not be expli-
cated here.) No one contests the FCC’s conclusion in
this litigation.
  What then of the original (and principal) use of an
entrance facility: linking networks to allow CLEC–to–ILEC
traffic (and ILEC–to–CLEC traffic)? The FCC stated:
    [O]ur finding of non-impairment with respect to
    entrance facilities does not alter the right of
    [CLECs] to obtain interconnection facilities pursu-
    ant to section 251(c)(2) for the transmission and
    routing of telephone exchange service and ex-
    change access service. Thus, [CLECs] will have
    access to these facilities at cost-based rates to
    the extent that they require them to interconnect
    with the [ILEC’s] network.
Nos. 07-3557 & 07-3683                                       5

Triennial Review Remand Order at ¶140. The state com-
mission relied on this passage when ordering AT&T to
make entrance facilities available at TELRIC prices to
CLECs for interconnection.
  AT&T protests that this nullifies the FCC’s order. What’s
the point of specifying that CLECs cannot demand access
to entrance facilities as unbundled network elements,
AT&T inquires, if state commissions can turn around and
require the same access at the same price anyway? The
answer, as the district court observed, is that CLECs do
not enjoy the “same” access to entrance facilities under
the state commission’s decision as they did before the
FCC’s order. Until then CLECs could use entrance
facilities for both interconnection and backhauling.
Under the state’s order, CLECs use entrance facilities
exclusively for interconnection, just as the FCC said in
¶140. The state commission tells us that ILECs can
detect and block any attempted use of an entrance
facility for backhauling. (Every carrier, ILEC or CLEC,
must be able to determine the traffic’s destination in
order to route it accurately.)
  Section 251(c)(2) allows a CLEC to interconnect at any
technologically feasible place. An entrance facility, de-
signed for the very purpose of linking two carriers’ net-
works, meets the requirement of feasibility, so a CLEC is
entitled to hand off traffic to an ILEC at any entrance
facility. The real dispute is not whether entrance facilities
will be used for interconnection, but how much the ILEC
can charge. Apparently AT&T has filed tariffs for the
use of entrance facilities as interconnection gateways,
and the tariffs specify prices exceeding the fee calcu-
lated according to TELRIC. AT&T wants to be able to
charge the tariff price. Whether it can do so is not related to
6                                   Nos. 07-3557 & 07-3683

the scope of an ILEC’s obligations under §251(c)(3) to
furnish unbundled network elements.
   What the FCC said in ¶140 is that ILECs must allow
use of entrance facilities for interconnection at “cost-
based rates”. TELRIC is a cost-based rate, though not the
only one. We asked at oral argument whether anything
in the 1996 Act or the FCC’s regulations prohibits a
state commission from using TELRIC to tell ILECs what
they may charge for interconnection. Counsel for AT&T
allowed that the state commission could do this. Well,
that is effectively what the state commission has done.
Instead of suspending AT&T’s tariff for interconnec-
tion services and ordering a rate reduction, the state
commission has reached the same result by an “arbitra-
tion” under the 1996 Act. If there is any objection to this
procedure, it must rest on state rather than federal law.
Whether the state commission has followed the require-
ments that Illinois imposes for overriding a utility’s
published tariff is of no consequence in this federal suit.
It is enough for us to conclude that federal law permits a
state agency to use the TELRIC method to regulate the
price for the interconnection services that an ILEC must
furnish under §251(c)(2).
  On to optical fiber. The CLECs want, and the state
commission ordered AT&T to provide, local loops that
include optical fiber. A “local loop” is the set of wires and
routing facilities needed to transmit a signal between a
switch and a customer’s premises. New entrants find
local loops the most valuable unbundled network ele-
ments, because the switch-to-customer connection is the
most costly to build from scratch. (A belief that the
local loop was a natural monopoly was a principal rea-
son for regulating the Bell Operating Companies in the
Nos. 07-3557 & 07-3683                                    7

first place.) Regulations implementing the 1996 Act re-
quire ILECs such as AT&T to supply CLECs with local
loops based on copper wire. More recently both ILECs
and CLECs have added circuits based on optical fiber,
which is cheaper than copper wire and can carry more
traffic. Telecom firms may build new loops entirely from
fiber; these are called “fiber to the home” or FTTH
(whether “home” is a residence or an office). More com-
monly optical fiber is used to connect a switch to a junc-
tion near a home or office, and wire installed long ago
carries the signal into the customer’s premises; these
loops are called “fiber to the curb” or FTTC. Finally, there
are hybrid loops “composed of both fiber optic cable,
usually in the feeder plant, and copper wire or cable”.
47 C.F.R. §51.319(a)(2).
  Federal regulations provide that ILECs need not pro-
vide optical loops to rival carriers, and, although hybrid
loops must be supplied as unbundled network elements,
the incumbents are entitled to restrict the use to which
these may be put. 47 C.F.R. §51.319(a)(2), (3). The FCC
found that CLECs’ access to ILECs’ loops based on tradi-
tional copper wire means that they are not “impaired” by
lack of access to ILECs’ loops based on optical fiber.
Carriers are building new circuits using optical fiber; the
FCC concluded that CLECs, no less than the ILECs,
can and should do this for themselves. As long as CLECs
rely on network elements supplied by ILECs, real com-
petition is hampered; the ILECs’ facilities continue to be
monopolies and require regulation. See Graeme Guthrie,
Regulating Infrastructure: The Impact on Risk and Invest-
ment, 44 J. Econ. Literature 925 (2006). One goal of the
1996 Acts’ “impairment” clauses is to wean CLECs from
reliance on unbundled network elements so that fully
8                                 Nos. 07-3557 & 07-3683

competitive landline networks will be built, now that
there is widespread agreement that local service is no
longer a natural monopoly.
  The state commission understood the FCC’s regulation
as limited to “mass-market customers” (which the
state commission defined as those that use fewer than
4 phone circuits) and directed AT&T to furnish optical
and hybrid local loops between central offices and all
other customers to its rivals as unbundled network ele-
ments. The district court set this portion of the state
commission’s order aside, and sensibly.
  Although the parties spend a good deal of time debating
what the FCC “intended” by its regulation, it is enough
to implement what the FCC said. The regulation as writ-
ten is unqualified. It says that ILECs need not furnish
optical-fiber local loops as unbundled network elements
and may restrict the use to which CLECs put hybrid
loops. Nothing turns on the customer’s identity or the
number of phone lines a given customer uses. Access to
copper-based loops is available for all customers; that’s
why the FCC concluded that access to optical loops is not
required to avoid impairment.
  Commentary in the Triennial Review Order shows that
the regulations mean what they say. The FCC wrote that,
“in light of a competitive landscape in which [CLECs] are
leading the deployment of [fiber to the home], removing
unbundling obligations on [fiber to the home] loops
will promote their deployment of the network infrastruc-
ture necessary to provide broadband services to the mass
market.” Order at ¶278. It added: “though our loop
unbundling analysis focuses upon the customer classes
most likely to be served by a specific type of loop, the
unbundling rules we adopt apply with equal force to
Nos. 07-3557 & 07-3683                                      9

every customer served by that loop type.” Id. at ¶197
n.623. And it drove the point home at ¶210: “while we
adopt loop unbundling rules specific to each loop type,
our unbundling obligations and limitations for such
loops do not vary based on the customer to be served.” The
state commission’s order, which does make the obliga-
tion “vary based on the customer to be served”, is pre-
empted by the FCC’s rules.
  One final issue requires brief treatment. The district
court implemented its decision by issuing an injunction.
The state commission does not dispute the order’s ade-
quacy under Fed. R. Civ. P. 65(d) but does say that the
district court should have used a kinder, gentler, remedy,
such as a declaratory judgment. Perhaps this would be
right—if this suit were an action for review of admin-
istrative action after the fashion of the Administrative
Procedure Act. The 1996 Act authorizes judicial review
of state agencies’ decisions along the APA’s lines. 47
U.S.C. §252(e)(6). But state agencies objected, saying that
direct review would impinge on their sovereignty. The
Supreme Court finessed that question in Verizon Maryland
by holding that, whether or not §252(e)(6) properly autho-
rizes suits against states or state agencies in their own
names, state commissions’ decisions may be re-
viewed indirectly in suits against commissioners, in
their official capacity.
  In other words, the Court concluded, Ex parte Young,
209 U.S. 123 (1908), comes to much the same end as
§252(e)(6). Two things distinguish suits under Ex parte
Young from direct review. First, the state and its agency
are not named parties to the suit. Second, to ensure that
the state is nonetheless bound by the decision, an injunc-
tion issues against state actors in their official capacities.
10                                  Nos. 07-3557 & 07-3683

Verizon Maryland treated injunctions as the normal out-
come of such proceedings, and declaratory judgments as
permissible (but not required) supplements. 535 U.S. at
645–48. The state commission’s members do not tell us
why the court should proceed otherwise today; indeed,
their brief does not even cite Verizon Maryland.
  Illinois is free to waive its sovereign immunity and
consent to litigation under §252(e)(6). If it does so, and
the state (or its agency) becomes a formal party, then a
district court should enter the same sort of judgment
that would be appropriate in cases against federal
agencies under the APA. As long as a state insists that the
approach of Ex parte Young be used, however, an injunc-
tion is the normal remedy.
                                                A FFIRMED




                   USCA-02-C-0072—5-23-08
