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VERIZON CALIFORNIA INC. v. PEEVEY

December 5, 2005.

VERIZON CALIFORNIA INC., Plaintiff,
v.
MICHAEL R. PEEVEY, et al., Defendants.



The opinion of the court was delivered by: THELTON HENDERSON, Senior District Judge

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION
Plaintiff Verizon California Inc. ("Verizon") challenges the interim rates for unbundled network elements established by the California Public Utilities Commission ("CPUC") on March 13, 2003, and subsequently modified on January 27, 2005. On January 13, 2004, this Court denied in part Verizon's motion for summary adjudication of its first, second, and fourth causes of action after determining that Verizon's claims were not ripe for judicial review under U.S. West Communications v. MFS Intelenet, Inc., 193 F.3d 1112 (9th Cir. 1999). The Court subsequently dismissed the case, and Verizon timely appealed the Court's ripeness ruling. In an opinion filed on July 6, 2005, the Ninth Circuit distinguished MFS Intelenet and vacated this Court's judgment against Verizon. Verizon California Inc. v. Peevey, 413 F.3d 1069 (9th Cir. 2005). The Ninth Circuit remanded the case "with instructions that the district court consider on the merits whether Verizon is entitled to the declaratory and injunctive relief" it seeks. Id. at 1072.

Following the Ninth Circuit's remand to this Court, Verizon renewed its motion for summary adjudication of its first, second, and fourth causes of action. The Court heard oral argument on Verizon's motion on Monday, November 14, 2005. After carefully considering the parties' written and oral arguments, the record in this case, and governing law, the Court now GRANTS IN PART and DENIES IN PART Verizon's motion for the reasons discussed below. BACKGROUND

  The Telecommunications Act of 1996 ("the Act"), 47 U.S.C. §§ 151 et seq., "is designed to foster competition in local and long distance telephone markets." MFS Intelenet, 193 F.3d at 1116. To facilitate that goal, the Act requires incumbent local exchange carriers ("ILECs"), such as Verizon in this case, to permit entrants to the market to use parts of its network, called unbundled network elements ("UNEs"). 47 U.S.C. § 251(c)(3).

  Under § 252 of the Act, if an entrant and the ILEC cannot agree on the terms of access to the UNEs, either party can petition the state utilities commission to conduct an arbitration to set rates in accordance with the Act. 47 U.S.C. § 252(b)(1). The state commission must comply with "the Act's provisions governing how the rates must be set and by the FCC's [Federal Communications Commission's] related regulations, 47 U.S.C. § 252(c)(1)-(2), including regulations that require state utilities commissions to use the total element long run incremental cost (`TELRIC') methodology. 47 C.F.R. § 51.505." Peevey, 413 F.3d at 1071 (citations omitted). The Act grants federal district courts jurisdiction to review a state commission's rate determinations. 47 U.S.C. § 252(e)(6).

  The parties in this case agree that the rates at issue were established as part of a so-called "generic proceeding," rather than a § 252 arbitration between Verizon and specific carriers seeking entrance into the market. However, Defendants do not contest the Court's jurisdiction to resolve this dispute. In addition, when reviewing this case on appeal, the Ninth Circuit squarely held that federal law required the CPUC to set UNE rates in compliance with TELRIC. Specifically, the court held that UNE rates must comply with TELRIC when adopted, and no exception exists for rates that a state commission designates as nominally interim rather than permanent. Id. at 1071, 1073.

  The CPUC first adopted UNE rates for Verizon in 1997. CPUC Decision 03-03-033, 2003 Cal. PUC LEXIS 168, J.A. Ex. 30, at APP 1026 [hereinafter "Interim Rate Order"] (noting that UNE rates were set by CPUC Decision 97-01-022). Although these rates were intended to be interim, they remained in place from 1997 until 2003. Id. Following a petition to revise UNE rates filed by a prospective entrant to the market, the CPUC revisited Verizon's UNE rates beginning in early 2002. Id. at APP 1027. As part of that process, the administrative law judge ("ALJ") overseeing the case set an expedited proceeding to establish revised interim and permanent UNE rates. July 23, 2002 ALJ Ruling, J.A. Ex. 10. Over the next few months, Verizon submitted several rounds of pricing proposals and comments to the CPUC, as did several entrants to the market, including AT&T Communications of California, Inc., and WorldCom, Inc. Interim Rate Order at APP 1027.

  Of relevance to Verizon's due process claim, the ALJ originally rejected the suggestion made by several entrants that the CPUC base interim rates on the rates adopted for Verizon carriers in other states. June 28, 2002 ALJ Hearing Tr., J.A. Ex. 9, at APP 168-69. After reviewing proposals submitted by Verizon and others, as well as the objections to these proposals, the ALJ reversed course and solicited new proposals based on other states' rates. Aug. 23, 2002 ALJ Ruling, J.A. Ex. 15, at APP 585-86. The parties to the rate-setting proceedings were given approximately two weeks to submit such proposals and eleven days in which to object to each other's proposals.*fn1 Id.

  After the ALJ issued a draft decision, and Verizon and prospective entrants to the market filed objections to that decision and reply comments to each other's objections, the CPUC issued its final order setting interim UNE rates for Verizon on March 13, 2003. Interim Rate Order, J.A. Ex. 30. These rates were based on modifications, using the FCC's Synthesis Model, to rates adopted for Verizon New Jersey, and the CPUC ordered that the interim rates "shall be adjusted, either up or down, once final rates are set" — i.e., subject to a "true-up." Id. at APP 1036-40. On August 21, 2003, the CPUC issued an order denying Verizon's application for rehearing of the interim rate order. CPUC Decision 03-08-074, 1993 Cal. PUC LEXIS 923, J.A. Ex. 33 [hereinafter "Order Denying Rehearing"]. While this case was on appeal to the Ninth Circuit, the CPUC granted Verizon's petition to modify the interim rates based on the New Jersey Board of Public Utilities' subsequent decision to increase Verizon New Jersey's rates. On January 27, 2005, the CPUC explained that:
In adopting interim UNE rates, the Commission relied on UNE rates recently adopted for Verizon in New Jersey, and then adjusted these rates based on the Federal Communications Commission's (FCC) Synthesis Model to compare relative costs between Verizon's operations in California and New Jersey. (D.03-03-033, p. 33.) This decision grants a petition for modification of D.03-03-033 and adjusts the interim rates to reflect recent increases in Verizon New Jersey UNE rates. In addition, this decision removes the 22% shared and common cost, or "overhead," markup initially added to the interim rates and relies instead on the overhead markup incorporated into New Jersey rates.
CPUC Decision 05-01-057, Ex. A to Hunt Decl., at 1-2. The reduction in the overhead markup resulted in reductions in certain rates, even though the base New Jersey rates had increased. More specifically, the CPUC's modifications resulted in a 2.3% decrease in Verizon's interim 2-wire loop rates; a 1.9% decrease in Verizon's interim 4-wire loop rate; and a 28.3% increase in Verizon's interim port rate. Id. at 2.

  When Verizon's motion was first before the Court in late 2003, permanent rates were scheduled to be set by the CPUC no later than July 22, 2004, if no hearings were required, or November 25, 2004, if evidentiary hearings were required. Oct. 9, 2003 ALJ Ruling, J.A. Ex. 34, at APP 1111. The CPUC failed to set permanent rates by either date, however, and the permanent rate proceedings remain ongoing. At oral argument, counsel for Defendants repeated the assertion from Defendants' written opposition that permanent rates will be established "shortly." Following oral argument, Defendants submitted to the Court by mail a draft decision by the ALJ that sets permanent UNE rates for Verizon. The draft decision was mailed by the ALJ on November 22, 2005, and Defendants' counsel represents that the matter may be placed on the CPUC's agenda for consideration by the full CPUC after a thirty-day comment period expires. In this action, Verizon challenges the interim UNE rates on five grounds: (1) that Defendants acted arbitrarily and capriciously when setting interim rates, and that the interim rates were not based on substantial evidence; (2) that Defendants failed to comply with the Act and TELRIC when setting interim rates; (3) that the interim rates were an unconstitutional taking without just compensation; (4) that the procedure by which the interim rates were set violated Verizon's due process rights; and (5) that Defendants violated 42 U.S.C. § 1983 when setting interim rates by violating federal law while acting under color of state law. Verizon now seeks summary adjudication on claims one, two, and four and asks that the Court vacate the Interim Rate Order and its modifications, reinstate the UNE rates adopted for Verizon in 1997, and remand this matter to the CPUC to set lawful UNE rates for Verizon. In the words of the Ninth Circuit, "Verizon has presented a straightforward challenge to the basis on which the CPUC set the current rates; namely the rates set in New Jersey, with alleged inadequate adjustment for Verizon's costs in California. Whether this short cut complied with federal law and the constitution is ripe for adjudication." Peevey, 413 F.3d at 1073.

  LEGAL STANDARD

  Summary judgment is appropriate when there is no genuine dispute as to material facts and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Material facts are those that may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is "genuine" if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id. The court may not weigh the evidence and must view the evidence in the light most favorable to the nonmoving party. Id. at 255.

  In this case, the parties have submitted a joint appendix of excerpts of the administrative record, and no party suggests that any factual disputes exist. Instead, the parties appear to concede, and this Court agrees, that the disputes between the parties are all questions of law rather than fact. DISCUSSION

  I. TELRIC Claim

  Verizon first seeks summary adjudication of its claim that the interim UNE rates at issue violated federal law. The Act requires a state commission to set UNE prices that are "just, reasonable, and nondiscriminatory," 47 U.S.C. § 251(c)(3), and to base such prices "on the cost . . . of providing the interconnection or network element," 47 U.S.C. § 252(d)(1)(A)(i). In setting UNE prices, the commission must use a forward-looking, cost-based methodology known as TELRIC (Total Element Long Run Incremental Cost). The TELRIC of a network element is the "forward-looking cost over the long run of the total quantity of the facilities and functions that are directly attributable to, or reasonably identifiable as incremental to, such element, calculated taking as a given the incumbent LEC's [local exchange carrier's] provision of other elements." 47 C.F.R. § 51.505(b). TELRIC does not require looking at historical costs — i.e., the costs incurred by the ILEC in putting an element into place. Instead, the TELRIC cost of an element "should be measured based on the use of the most efficient telecommunications technology ...


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