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Pacific Bell Telephone Co. v. Public Utilities Commission of the State of California


April 6, 2005


The opinion of the court was delivered by: Susan Illston United States District Judge


On March 17, 2005, the Court heard arguments on the motions for summary judgment filed by each plaintiff in these two related cases. Having carefully considered the arguments of counsel and the papers submitted, the Court hereby VACATES the CPUC's January 30, 2003 Decision; and REMANDS the matter to the CPUC in order for it to adopt regulations in compliance with FCC regulations. The parties' motions for summary judgment are accordingly GRANTED in part and DENIED in part.


This action arises out of the alleged violation by the California Public Utilities Commission ("CPUC" or "Commission") of the Federal Telecommunications Act of 1996 ("1996 Act" or "Act"), the Federal Communications Commission ("FCC") rules implementing the 1996 Act, and the Takings and Due Process Clauses of the United States Constitution and the California Constitution. On January 30, 2003, the CPUC issued Decision No. 03-01-077 ("Decision") requiring Pacific Bell Telephone Company ("SBC California") to: (i) provide competing local exchange telecommunications carriers ("CLECs") with access to the high-frequency portion of the electronic spectrum of a copper loop ("HFPL") in SBC California's network as an unbundled*fn1 network element*fn2 ("UNE");*fn3 (ii) charge a monthly recurring price of zero ($0.00) for the HFPL; and (iii) refund to CLECs that have purchased the HFPL all of their previous payments for the HFPL, which were made under the interim monthly price of approximately $5.00 per HFPL. Id. at ¶ 1.

The CPUC implemented these requirements even though the FCC decision initially determining that the HFPL was a UNE was vacated by the D.C. Circuit in United States Telecom Association v. Federal Communications Commission, 290 F.3d 415 (D.C. Cir. 2002) ("USTA I") as inconsistent with the 1996 Act. At the time the CPUC issued the Decision, the FCC had not yet issued a new decision or rules addressing the issue.

In response to the D.C. Circuit's ruling in USTA I, the FCC released its order containing the new rules, i.e., the "Triennial Review Order" or "TRO," on August 21, 2003. See In the Matter of Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, 2003 WL 22175730 (Aug.21, 2003). The TRO did not require unbundling of HFPL on a nationwide basis. TRO at ¶ 255. The FCC reversed itself based on its findings that CLECs could engage in line splitting, in which one CLEC provides voice service on the low frequency portion of the loop and the other provides DSL on the high frequency portion. Id. at ¶ 259. The FCC also considered competition from cable companies, which provide nearly 60 percent of all high speed lines. Id. at ¶ 262. Based in part on these findings, the FCC determined that the "costs of unbundling the HFPL outweigh the benefits." Id. at ¶ 263.

The D.C. Circuit upheld this portion of the TRO in United States Telecom Association v. Federal Communications Commission, 359 F.3d 554 (D.C. Cir. 2004) ("USTA II"). State regulatory commissions also were parties to the action and had argued that the TRO "improperly preempts state unbundling regulations that exist independent of the Commission's federal unbundling regulations enacted pursuant to [47 U.S.C.] § 251." USTA II, 359 F.3d at 594. However, the D.C. Circuit found that the states' claim was not ripe: "The general prediction voiced in ¶ 195 [that a state's decision to unbundle a network element would likely conflict with the federal regime] does not constitute final agency action, as the Commission has not taken any view on any attempted state unbundling order." Id. To this date, the FCC has still not taken any view on the CPUC's decision to unbundle HFPL.

On May 5, 2004, this Court denied intervenor-defendant Covad Communication Company's ("Covad") motion to dismiss and granted defendant CPUC's motion to hold the proceedings in abeyance until the Supreme Court decided whether it would grant certiorari to review the D.C. Circuit's decision in USTA II. On July 29, 2004, Verizon California, Inc. ("Verizon") also filed a complaint in this Court against the CPUC, seeking declaratory and injunctive relief because the CPUC Decision is inconsistent with the FCC's TRO and substantially prevents the FCC's implementation of the provisions of the 1996 Telecommunications Act. This Court issued an order relating the Verizon case (C 04-3092 SI) to the Pacific Bell/SBC California case (C 03-1850 SI) already before this Court.

On October 12, 2004, the Supreme Court denied certiorari in USTA II. As a result, on January 14, 2005 plaintiffs in each action filed motions for summary judgment, renewing their argument that the CPUC's requirement to unbundle HFPL is preempted by the FCC's holding in the TRO. Both motions are before the Court today.


Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).


1. Unbundling of HFPL

A. The TRO

The TRO reflected the FCC's attempt to comply with the 1996 Act, after the D.C. Circuit found in USTA I that the FCC had failed to consider the requirements of 47 U.S.C. § 251(d)(2)*fn4 when ordering ILECs to unbundle the high frequency of the loop and offer it to competitors. The FCC was directed by the D.C. Circuit to consider the costs associated with unbundling and balance those costs against the benefits of unbundling in making the determinations under section 251(d)(2). TRO at ¶ 256.

In the TRO, the FCC considered the increased revenue possibilities if a CLEC purchased a stand-alone loop (both LPFL and HPFL). These included voice, voice over xDSL, data, and video services. Id. at ¶ 258. The FCC found that these increased revenue opportunities offset the increased costs associated with obtaining the entire stand-alone loop. Id. Additionally, the FCC found that CLECs could obtain the HFPL from other CLECs through line splitting, and provided examples of partnerships that had already occurred. Id. at ¶ 259.

The FCC also considered competition from cable broadband providers, and found that it is the most common form of broadband access. Id. at ¶ 262. The FCC found that the "cable modem's lead in broadband deployment is not dispositive in our impairment analysis, [but] the fact that broadband service is actually available through another network platform and may potentially be available through additional platforms helps alleviate any concern that competition in the broadband market may be heavily dependent upon unbundled access to the HFPL." Id. at ¶ 263.

We find that allowing competitive LECs unbundled access to the whole loop and to line splitting but not requiring the HFPL to be separately unbundled creates better competitive incentives than the alternatives. This is largely due to the difficulties in pricing the HFPL as a separate element. As we explained in the Line Sharing Order, the same physical loop is used for multiple services, and there is no single correct method for allocating loop costs among these services and the HFPL. Pricing the HFPL thus creates a dilemma: either incumbent LECs are allowed to over-recover their loop costs by fully charging for both the HFPL and the low frequency portion of the loop, or competitive LECs are allowed to purchase the HFPL at a price of roughly zero. Following our pricing rules, most states did the latter. The result is that competitive LECs purchasing only the HFPL have an irrational cost advantage over competitive LECs purchasing the whole loop and over incumbent LECs. In contrast, allowing competitive LECs unbundled access to the whole loop and to line splitting but not requiring the HFPL to be separately unbundled puts competitive LECs using only the HFPL in a more fair competitive position with respect to other competitive LECs and to the incumbent LECs.

Id. at ¶ 260.

Based on this finding by the FCC, plaintiffs argue that the CPUC's requirement to unbundle the HFPL is preempted by the TRO under the Supremacy Clause of the United States Constitution. Plaintiffs find support in AT&T v. Iowa Utilities Board, 525 U.S. 366, 378 n. 6 (1999), which holds that the Telecommunications Act of 1996 has taken the regulation of local telecommunications competition away from the states. The Court held that "if the federal courts believe a state commission is not regulating in accordance with federal policy they may bring it to heel." Id. Based on this case law, plaintiffs argue that California's unbundling requirement is inconsistent with the TRO and ask this Court to "bring [the CPUC] to heel."

Defendant CPUC argues that section 251(d)(3)*fn5 of the Act demonstrates Congress' intent to preserve state authority to establish unbundling regulations. Therefore, CPUC claims that the FCC exceeds the scope of its authority in the TRO by overriding Congress' preservation of state law. This argument, and the other arguments made by CPUC regarding the invalidity of the FCC's TRO, may not be considered by this Court. Under the Hobbs Act, 28 U.S.C. § 2342(1), the courts of appeal have exclusive jurisdiction to review all FCC orders. Nor may parties attack an FCC order indirectly. FCC v. ITT World Communications, Inc., 466 U.S. 463, 468 (1984).

The CPUC's decision to order unbundling of HFPL in California can be preempted if the decision is found to be inconsistent with the Act or with the FCC's regulations. TRO at ¶ 193; Section 251(d)(3). The Supreme Court has held that the FCC has the rulemaking authority to carry out the Telecommunications Act, and that state commissions must be guided by federal regulations. AT&T Corp., 525 U.S. at 378 n. 6. Therefore, state regulations that conflict with or are inconsistent with federal regulations are nullified under the Supremacy Clause. Geier v. American Honda Motor Co., 529 U.S. 861, 873-74 (2000).

However, contrary to plaintiffs' arguments, the federal regulatory regime does not prevent all state regulation regarding unbundling: "We do not agree with incumbent LECs that argue that the states are preempted from regulating in this area as a matter of law. If Congress intended to preempt the field, Congress would not have included section 251(d)(3) in the 1996 Act." TRO at ¶ 192. Based on section 251(d)(3), the TRO holds that "state authority . . . is limited to state unbundling actions that are consistent with the requirements of section 251 and do not 'substantially prevent' the implementation of the federal regulatory regime." TRO at ¶ 193.

The FCC's recognition of state unbundling actions is further demonstrated in the TRO: Parties that believe that a particular state unbundling obligation is inconsistent with the limits of section 251(d)(3)(B) and (C) may seek a declaratory ruling from this Commission. If a decision pursuant to state law were to require the unbundling of a network element for which the Commission has either found no impairment -- and thus has found that unbundling that element would conflict with the limits in section 251(d)(2) -- or otherwise declined to require unbundling on a national basis, we believe it unlikely that such decision would fail to conflict with and "substantially prevent" implementation of the federal regime, in violation of section 251(d)(3)(C). Similarly, we recognize that in at least some instances existing state requirements will not be consistent with our new framework and may frustrate its implementation. It will be necessary in those instances for the subject states to amend their rules and to alter their decisions to conform to our rules.

Id. at ¶ 195.

To the Court's knowledge, the plaintiffs have not sought a declaratory ruling from the Commission regarding the CPUC's unbundling requirements.

Therefore, the federal regulations allow state commissions to issue unbundling actions. Plaintiffs assert that ¶ 195 of the TRO holds that any state decision requiring the unbundling of a network element which the Commission has declined to require be unbundled "would conflict" with the federal regime and would be preempted. However, that is a misstatement of the TRO; instead, the TRO provides that it is "unlikely that such a decision would fail to conflict with" the federal regime. The TRO does not explain when the state unbundling requirement would not conflict with the federal regime; however, the FCC clearly recognized that an exception could occur based on the language used.

B. The CPUC's Decision

Although the Court "cannot now imagine" the "very limited circumstances" of a successful CPUC unbundling requirement for HPFL, it is possible that the CPUC could implement an unbundling requirement that will comply with the Act. Indiana Bell v. McCarty, 362 F.3d 378, 395 (7th Cir. 2004). However, the CPUC Decision was issued on January 30, 2003, nearly one month before the TRO was released by the FCC.

Therefore, the CPUC's decision did not take into consideration the analysis provided by the FCC and the Court finds that the Decision directly contradicts the TRO in several respects. The CPUC found that line sharing was required because CLECs could not compete if they were required to purchase the stand-alone loop, given that ILEC's could offer DSL service at a lower cost. CPUC Decision at 14. However, this does not take into consideration the FCC's discussion of the benefits of enhanced revenues from partnerships with other CLECs and line-splitting. The Decision ignores this analysis and states that "line sharing is the only viable option for a CLEC who seeks to compete with the incumbent ILEC in providing DSL service to residential customers." Decision at 14. Additionally, another factor considered by the CPUC is the lack of cable broadband access to nearly one-third of all Californians. Id. This is one of the CPUC's strongest arguments and one that defendants rely on repeatedly in their briefs to support their assertion that the FCC did not take into account local factors when determining whether HFPL should be unbundled. However, the TRO found that the prevalence of cable broadband was "not dispositive" to its impairment analysis. TRO at ¶ 263.

Finally, the CPUC held that "this Commission is not bound by the necessary and impair test." Decision at 15. The Commission relies upon § 709.7 of the California Public Utilities Code to support this assertion. However, the CPUC maintains its regulatory authority only to the extent that "the State's requirements are not inconsistent with this part or the Commission regulations to implement this part." 47 U.S.C. § 261(C). Furthermore, Congress clearly stated that state regulation must be "consistent with the requirements of this section." 47 U.S.C. § 251(d)(3)(B). One of the requirements of the section is a consideration of whether the access through unbundling is necessary and whether the failure to provide access would impair the ability of the telecommunications carrier seeking access to provide service. 47 U.S.C. § 251(d)(2). The CPUC disagreed with this provision of the code, and found that "Section 251(d)(2) does not apply to the states; it applies only to the FCC." Decision at 41. Given the clear language of § 251(d)(3)(B), the CPUC is incorrect in stating that the "necessary and impair test" does not apply to their unbundling determinations. Therefore, the CPUC's Decision wrongfully assumed that the "necessary and impair" test did not apply and the legal basis for its determination was flawed.

The CPUC has continued to enforce its Decision, which is based on assertions that clearly contradict the determinations made by the TRO and fails to apply the "necessary and impair" test. Although it is possible for states to unbundle a network element that the FCC has declined to require be unbundled under the TRO, it is "unlikely" that the decision would not conflict with the FCC's regulations and, therefore, avoid preemption under the Supremacy Clause. While it is "possible" in theory to avoid preemption, the CPUC's Decision in question today certainly does not qualify. The Decision makes assumptions that directly contradict the TRO and relies on an incorrect legal standard. The CPUC has failed to "amend [its] rules and alter [its] decisions to conform to [the FCC's] rules" as specifically required under the TRO. TRO at ¶ 195. Accordingly, the Court VACATES the CPUC's Decision of January 30, 2003 ordering the unbundling of HFPL.

C. Remand to CPUC

Although the CPUC's current decision is invalid, the Court recognizes that it is possible for a state to require the unbundling of a network element for which the Commission has found no impairment without conflicting with the federal regime. TRO at ¶ 195. Therefore, the Court finds that the proper course of action is for the case to be remanded to the CPUC, in order for the Commission to make a determination whether HFPL is a UNE that corresponds to the policies of the TRO and the provisions of the law described above. This will allow the CPUC to re-examine the issue in light of the discussion in the TRO. TRO at ¶ 195. Courts have recognized that the FCC has not foreclosed the possibility of a state regulatory commission to craft an unbundling requirement for a network element that the FCC has refused to unbundle. See Indiana Bell, 362 F.3d at 395. The Court REMANDS the issue to the CPUC, in order to allow the Commission to reach a decision that conforms with the Telecommunications Act and FCC regulations.*fn6

2. CPUC's Pricing Requirements

The plaintiffs assert that the CPUC's pricing requirements for "transition" HFPLs, "grandfathered" HFPLs and new unbundled HFPLs after October 2004 are preempted because they do not comply with the TRO's pricing requirements. The CPUC argues that the TRO is invalid because it infringes upon regulatory authority that Congress has designated to the states. As discussed above, the Court will not evaluate the merits of the CPUC's attack on the validity of the FCC's orders, because the courts of appeal have exclusive jurisdiction over that issue. Therefore, the Court finds that the CPUC's pricing requirements for HFPLs are invalid to the extent that they conflict with the TRO and other FCC regulations. The Court REMANDS to the CPUC, and instructs the CPUC to adopt pricing requirements that comply with the TRO and refund any amount owed to plaintiffs as a result of the pricing requirements in conflict with the TRO.


For the foregoing reasons, the Court VACATES the CPUC's January 30, 2003 Decision ordering the unbundling of HFPL and REMANDS the matter to the CPUC to adopt unbundling regulations and pricing requirements that comply with the TRO. [C 03-1850 SI, Docket #112; C 04-3092, Docket # 20.]


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