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3-02-0738

IN THE

APPELLATE COURT OF ILLINOIS

HIRD DISTRICT

A.D., 2003

JUSTICE SCHMIDT delivered the opinion of the court:

This is an appeal from a series of orders issued by theIllinois Commerce Commission (the Commission). The orders setforth parameters to which the petitioner, Illinois Bell TelephoneCompany (d/b/a Ameritech Illinois), must adhere when allowingcompeting local exchange carriers (CLECs) access to its localnetwork. Petitioner takes issue with three mandates containedwithin the orders.

The orders forced the petitioner to file a tariff relatingto its local network. Petitioner claims that the Commissionlacked the authority to order certain provisions contained withinthe tariff. Petitioner further claims that other aspects of theorders, related to ensuring petitioner's compliance withperformance goals, were arbitrary and capricious and notsupported in fact.

The CLECs and the Commission, respondents, believe theCommission acted properly when issuing its orders.

BACKGROUND

In 1998, Ameritech Illinois (and its parent company,Ameritech Corporation) and SBC Communications, Inc., began themerger process. Ameritech Illinois filed an application seekingthe Commission's approval of the merger. The Commission approvedthe application in September of 1999 subject to certainconditions. These conditions were contained within the "mergerapproval order" (merger order) which took effect on the mergerclosing date of October 8, 1999. The merger order was consentedto by Ameritech Illinois, SBC Communications, Inc., and theCommission.

The merger order contained language noting that "[e]xceptwhere other termination dates are specifically established, allconditions set out below shall cease to be effective and shall nolonger be binding in any respect three years after the MergerClosing Date." At issue in this appeal is Condition 30, titled"Performance Measuring, Benchmarks and Liquidated Damages," whichdid not specifically establish an alternative closing date.

True to its title, Condition 30 directed petitioners to"establish performance measurements, benchmarks and provide forliquidated damages." The merger order then described a processthrough which these items would be established. Approximately 150performance measurements divided into 3,000 categories wereestablished. The liquidated damages established took the form ofautomatic payments to be made to the CLECs and State of Illinoisin the event that performance standards were not met. This planof determining performance measurements and then payingliquidated damages for not meeting acceptable standards becameknown as the "remedy plan." The remedy plan agreed to bypetitioners at the time the merger order was entered was premisedon a similar plan in effect in Texas.

A system containing such a large number of performancemeasurements broken down into an even greater number ofcategories lends itself to random variations. These randomvariations may give the appearance of noncompliance withperformance standards when in fact compliance is occurring. TheTexas remedy plan originally proposed contained a "k-table,"which is a statistical mechanism put in place to prevent theimposition of payments based solely on random variation.

Condition 30 further set forth a collaborative process bywhich performance measurements, standards, benchmarks andremedies could be adjusted. The collaborative process includedrepresentatives from Ameritech, the CLECs and the Commission. The final paragraph of Condition 30 allowed any participant inthe collaborative process to recommend amendments to the remedyplan. If a dispute over the recommended amendment could not beresolved by the parties through the collaborative process, thenthe party recommending the amendment could ask the Commission toresolve the dispute.

Ameritech and the CLECs came to terms regarding many itemsduring the collaborative process but could not agree on the levelof payments Ameritech would be required to pay if it failed tomeet performance standards. A joint petition was filed byAmeritech and the CLECs asking the Commission to resolve thisdispute. For the next 17 months, hearings were held, testimonypresented and multiple briefs filed by both parties. Eventually,the Commission ruled on the disputed items and entered a "finalorder" on July 10, 2002.

The final order put in place the "revised remedy plan,"which doubled the amount of liquidated damages set forth in themerger order to be paid by Ameritech in the event it fails tomeet performance standards. Moreover, the final order eliminatedthe k-table, opting to set a standard 5% error rate to accountfor the effect of random variation.

The Commission also commented on the duration of the remedyplan in the final order. The Commission noted:

"The only conclusion that can be reached isthat Condition 30, and consequently theRemedy Plan, expires in three years. ***Additionally, no party has given us a legalbasis for extending the deadlines included inthe Merger Order. We are therefore left withthe conclusion that the Remedy Plan, as acondition to merger approval, expires inthree years from the merger closing date, orOctober 2002."

The final order discusses who may avail themselves to therevised remedy plan. Commission's staff recommended:

"Ameritech should also be required to reviseits existing tariff to reflect the changesmade pursuant to this Order. This willensure that those carriers that do not havean Interconnection Agreement with Ameritechwill have the benefit of the Remedy Plan. Additionally, Staff proposes that pending thefiling of such a tariff, the Modified RemedyPlan ordered in this docket should be offeredto the CLECs that are currently using thePlan through an 'opt-in.'

In its analysis and conclusions section, the Commissionnoted:

"We also agree with Staff that Ameritechshould be required to file a tariff toreflect the changes made pursuant to thisOrder. At present, Ameritech's tariff andInterconnection Agreements incorporate thecurrent Remedy Plan. The Performance RemedyPlan in this Docket shall replace the currentRemedy Plan in Ameritech's pertinent tariff,and, it shall be incorporated into allcurrently effective InterconnectionAgreements in the form of an Amendment to theInterconnection Agreement.

So the record is clear, the Revised Planattached hereto supercedes the previousRemedy Plan, and, any 'opting in' by acurrent or new CLEC should be followed withan Amendment to the InterconnectionAgreement."

The final order then directs Ameritech to "file a tariff toreflect the revisions to the Plan that are reflected in thisOrder."

When Ameritech filed its tariff, it included language in afootnote stating that the tariff would expire on October 8, 2002,which was the three-year anniversary of the merger approvalorder. On October 1, 2002, without notice to Ameritech, theCommission entered an "Order on Reopening," which directed thechief clerk of the Commission to strike the footnote inAmeritech's tariff that indicated the tariff expired on October8, 2002. The petitioner filed an application for rehearing ofthe order on reopening, which was denied. This appeal followed.

STANDARD OF REVIEW

The Illinois Commerce Commission is an administrativeagency, and judicial review of its orders is limited. IllinoisPower Co. v. Illinois Commerce Comm'n, 316 Ill. App. 3d 254, 736N.E.2d 196 (2000). The Commission's findings of fact are primafacie correct and will not be overturned by a reviewing courtunless they are against the manifest weight of the evidence,beyond the statutory authority of the Commission, or violative ofconstitutional rights. People ex rel. Hartigan v. IllinoisCommerce Comm'n, 148 Ill. 2d 348, 592 N.E.2d 1066 (1992). However, the Commission's interpretation of a question of law isnot binding on a court of review. Archer-Daniels-Midland Co. v.Illinois Commerce Comm'n, 184 Ill. 2d 391, 704 N.e.2d 387 (1998). The review of a question of law in an appellate court is denovo. Continental Mobile Telephone Co. v. Illinois CommerceComm'n, 269 Ill. App. 3d 161, 645 N.E.2d 516 (1994).

ANALYSIS

Doubling of the Remedies

Petitioner contends that the Commission's doubling of the"remedies" is arbitrary, capricious and lacks evidentiarysupport. We note that petitioner violates Supreme Court Rule 341(188 Ill. 2d R. 341) by not including a concise statement of theapplicable standard of review for each issue. However, we takepetitioner's statement, that the Commission's actions lackedevidentiary support, to mean petitioner is claiming such actionswere against the manifest weight of the evidence. We disagree.

After taking evidence and hearing arguments for 17 months,the Commission determined that original remedy amounts failed toprovide an adequate incentive to Ameritech to provide acceptablelevels of service to the CLECs . This conclusion was based uponevidence that performance deficiencies existed in "nearly half"of the measured categories for a three-month period. Moreover,the assessments against Ameritech called for in the Texas remedyplan did not influence Ameritech's behavior whatsoever. TheCommission found that "the Ameritech Plan will not providesufficient incentives for Ameritech to improve its service" andthat "the current system is not working and something must bedone to give Ameritech meaningful incentive to provide the CLECswith service that is not substandard."

Petitioner offers no argument to dispute evidence introducedthat it failed to meet performance standards or opinions that theremedies called for in the original plan provided inadequateincentive to meet performance standards. Instead, petitionerargues that doubling the remedies is punitive. Petitionercontinues with hornbook law regarding prohibitions againstenforcing liquidated damages which are punitive. Petitionernotes that the merger approval order refers to the remedies asliquidated damages more than 30 times but the final order refersto the assessments for inadequate service as "payments."

Petitioner contends that this is an impermissible attempt bythe Commission to change the nature of the remedy plan from oneput in place to ensure compliance with acceptable performancestandards to one merely seeking to punish the petitioner. Wedisagree.

While petitioner spends a great deal of time illustratingthe amount payments increased as a result of the new plan, itoffers no explanation as to why this amount is punitive and notmerely the amount necessary to provide Ameritech with an adequateincentive to provide quality service. Despite petitioner'sprotestations to the contrary, there is ample evidence in therecord to support the Commission's finding that increasedremedies were necessary to ensure that Ameritech would meet anacceptable level of performance standards and that the increasesare not punitive in nature.

Elimination of the k-table

As stated above, the purpose of the k-table in the remedyplan was to account for random variations associated withmonitoring the large number of performance standards. TheCommission found "that Staff's proposal, to set a standard 5%Type 1 error rate for all individual tests and to eliminate thek-table, is supported by the evidence and properly accounts forthe effect of random variation." Petitioner claims the recorddoes not support the deletion of the k-table and implementationof a standard 5% error rate to account for random variation. Wehold that there is sufficient evidence in the record to supportthe Commission's findings.

Numerous witnesses, including Dr. Michael Kalb, Dr. MelanieK. Patrick and Karen W. Moore all testified as to the inadequacyof the k-table. They opined that the use of the k-table allowedfor repeated failures in service to occur. The k-tablecharacterized such failures as random variations when in factthey were clearly performance failures. Ms. Moore stated, "[i]tis possible, and in this case actually occurred, for a submeasureto fail month after month after month, and never be remedied."

Illinois courts give great deference to the Commission'sdecisions, as they are the judgments of an administrative bodywith tremendous expertise in the field of public utilities andwith the qualifications to interpret specialized and highlytechnical evidence. United Cities Gas Co. v. Illinois CommerceComm'n, 163 Ill. 2d 1, 643 N.E.2d 719 (1994). We find there wasample evidence in the record to support the Commission's decisionto eliminate the k-table and impose a standard 5% error rate tocompensate for random variation.

Commission's Authority

Petitioner contends that the Commission lacked the authorityto force it to file a tariff extending Condition 30 past thethree-year duration contained within the merger approval order. Petitioner challenges the Commission's actions on numerousgrounds including due process, preemption, estoppel and that theorder is an arbitrary and capricious departure from theCommission's prior conclusions.

The Commission's final order makes it clear that "thosecarriers that do not have an Interconnection Agreement withAmeritech will have the benefit of the Remedy Plan." Thus, thetariff Ameritech was forced to file allows any CLEC, whethercurrently doing business with Ameritech or one hoping to in thefuture, to have the benefit of the remedy plan. Ameritech claimsthe Commission does not have the authority to make such an order. We agree.

State law is preempted under the supremacy clause (U.S.Const., art. VI, cl. 2) in three circumstances. First, Congresscan define explicitly the extent to which its enactments preemptstate law. Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 77 L. Ed.2d 490, 103 S. Ct. 2890 (1983). Second, in the absence ofexplicit statutory language, state law is preempted where thereis a "scheme of federal regulation *** so pervasive as to makereasonable the inference that Congress left no room for theStates to supplement it." Rice v. Santa Fe Elevator Corp., 331U.S. 218, 230, 91 L. Ed. 1447, 1459, 67 S. Ct. 1146, 1152 (1947). Finally, state law is preempted to the extent that it actuallyconflicts with federal law. English v. General Electric Co., 496U.S. 72, 110 L. Ed. 2d 65, 110 S. Ct. 2270 (1990).

Petitioner argues that the Commission's order actuallyconflicts with section 252 of the Telecommunications Act of 1996.47 U.S.C.