Opinion
Civil No. 03-2942 (ADM/AJB)
April 8, 2004
Robert E. Cattanach, Esq., Dorsey Whitney LLP, Minneapolis, MN, for and on behalf of Plaintiff
Jason D. Topp, Esq., Qwest Corporation, Minneapolis, MN, for and on behalf of Plaintiff
John M. Devaney, Esq., Perkins Coie LLP, Washington, D.C., for and on behalf of Plaintiff
Gary R. Cunningham, St. Paul, MN, for and on behalf of Defendants
Gregory R. Merz, Esq., Gray, Plant, Mooty, Mooty Bennett, PA, Minneapolis, MN, for and on behalf of Intervenors/Defendants, MCI Worldcom Communications, Inc., MCImetro Access Transmission Services Inc., LLC, and ATT of the Midwest States, Inc.
Michael B. DeSanctis, Esq., and Kathleen R. Hartnett, Esq., Jenner Block LLC, Washington D.C., for and on behalf of Intervenors/Defendants MCI Worldcom Communications, Inc., and MCImetro Access Transmission Services, Inc., LLC.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
Plaintiff Qwest Corporation's ("Qwest") appeal [Docket No. 1] of the Minnesota Public Utilities Commission ("MPUC") Order of April 4, 2002 ("April 4 Order") was argued before the undersigned United States District Judge on February 4, 2004. The parties addressed only the lawfulness of the true-up mechanism contained in the April 4 Order.See Order Establishing Interim Rates of April 4, 2002 (Compl. Ex. B). Qwest's objections to rate determinations will be argued at a later hearing. Qwest seeks a declaratory judgment and an injunction barring the MPUC from enforcing the April 4 Order, and asserts that the true-up requirement constitutes retroactive ratemaking in violation of the 1996 Federal Telecommunications Act, 47 U.S.C. § 251-261 ("1996 Act"). For the reasons explained below, the MPUC's April 4 Order is affirmed as a lawful true-up mechanism.
II. BACKGROUND
The April 4 Order concerns the rates that Qwest, an incumbent local exchange carrier ("ILEC") may charge competitors ("competitive local exchange carriers" or "CLECs") who lease Qwest's local telephone network. The 1996 Act requires ILECs to lease their networks to CLECs, but also authorizes Qwest and other Bell Operating Companies to enter the long distance market after complying with certain provisions. 47 U.S.C. § 251(c), 271. These requirements reflect the 1996 Act's goal of opening local telephone service markets to new competitors.
The 1996 Act outlines procedures for determining lease rates.Id. § 252. Section 252 allows ILECs and CLECs to negotiate lease terms themselves in interconnection agreements, but when private negotiations fail, state public utilities commissions ("state commissions") are granted authority to arbitrate rates. Id. FCC rules require state commissions to establish rates based on a cost methodology called Total Element Long Run Incremental Cost ("TELRIC").See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order, 11 F.C.C.R. 15499 ¶¶ 674-690 (1996). The FCC rules also establish default proxies that state commissions may implement on an interim basis while developing TELRIC-based rates. Id. ¶¶ 767-798.
The true-up provision in the April 4 Order reflects the MPUC's efforts to adjust lease rates for unbundled network elements ("UNEs"), some of which the MPUC had previously set in a generic cost proceeding and were based on TELRIC. See In the Matter of a Generic Investigation of US West Communications. Inc.'s Cost of Providing Interconnection and Unbundled Network Elements. (Hammel Aff. Ex. 3). A group of CLECs contended that some rates were no longer TELRIC — compliant because of changes in market conditions and technology. Qwest and the CLECs presented evidence that UNE rates would change, and the MPUC concluded that in the face of this uncertainty, all rates under review, including TELRIC-based rates, would be deemed interim and subject to true-up payments after the MPUC set permanent rates. See April 4 Order at 4-5. The MPUC filed an order establishing permanent rates on March 24, 2003, the effect of which creates a liability by Qwest to the CLECs of almost $13 million in true-up payments which began accruing on April 4, 2002. See In the Matter of the Commission's Review and Investigation of Owest's Unbundled Network Element Prices. (Compl. Ex. F); Brotherson Dec. ¶ 3. Qwest filed this appeal on April 23, 2003, arguing that the true-up provision violates the prohibition on retroactive ratemaking, and the requirement that the MPUC review interconnection agreements before issuing orders that could alter such contracts.
III. DISCUSSION
Qwest appeals the April 4 Order under 47 U.S.C. § 252(e)(6), which authorizes federal district court review of state commission actions. In considering these appeals, federal courts apply de novo review to questions of law. See Mich. Bell Tel. Co. v. MFS Intelnet of Mich. Inc., 339 F.3d 428, 433 (6th Cir. 2003); S.W. Bell Tel. Co. v. Apple, 309 F.3d 713, 717 (10th Cir. 2002); MCI Telecomm. Corp. v. Bell Atlantic Pa., 271 F.3d 491, 517 (3d Cir. 2001); S.W. Bell Tel. Co. v. Pub. Util. Comm'n 208 F.3d 475, 481 (5th Cir. 2000); GTE S., Inc. v. Morrison, 199 F.3d 733, 742 (4th Cir. 1999). Thus, the Court will review de novo whether the April 4 Order's true-up provision violates the 1996 Act or various FCC rules that implement the 1996 Act.
Qwest argues first that the true-up provision is unlawful because it constitutes retroactive ratemaking. The rule against retroactive ratemaking prohibits a commission from "adjusting current rates to make up for a utility's over-or under-collection in prior periods."Consol. Edison Co. v. FERC, 347 F.3d 964, 969 (D.C. Cir. 2003) (citations omitted); see also OXY USA. Inc. v. FERC, 64 F.3d 679, 699 (D.C. Cir. 1995) (explaining that normally agencies may not alter rates retroactively). However, the rule is inapplicable if parties receive notice that rates are temporary and may be changed.See OXY USA. Inc., 64 F.3d at 699. Providing notice turns retroactive ratemaking into a "functionally prospective process" by informing the relevant individuals that "the rates being promulgated are provisional only and [are] subject to later revision." Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1075 (D.C. Cir. 1992) (citations omitted).
The April 4 Order does not violate the rule against retroactive ratemaking because the MPUC informed all interested parties that the disputed rates were interim and subject to true-up payments once permanent rates were set. See April 4 Order at 4-5. Retroactive ratemaking occurs when a commission changes rates without first providing notice. See Natural Gas Clearinghouse, 965 F.2d at 1075. However, starting on April 4, 2002, Qwest, along with the CLECs, knew that rates were going to change and that they might have to pay additional fees reflecting the adjusted rates. The April 4 Order does not require true-up payments for rates paid prior to April 4, 2002.See April 4 Order at 5. Therefore, the Court declines to overturn the April 4 Order based on Qwest's retroactive ratemaking argument.
Qwest argues next that true-up payments for rates which, when adopted, complied with the 1996 Act and FCC pricing rules, impermissibly conflict with the 1996 Act's language and policies. Section 251 outlines ILECs' duties and obligations, and requires ILECs to negotiate with CLECs in good faith in accordance with section 252 in attempting to establish interconnection agreements. 47 U.S.C. § 251(c). Interconnection agreements, whether created through negotiation or arbitration, must include rates for network elements. See Id. § 252.
Qwest notes that "retroactivity is not favored in the law" and explains further that "congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result." See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988). From this, Qwest asserts that the true-up payments are unlawful because the 1996 Act does not require retroactive application. However, this argument lacks merit because the parties received notice which exempts the true-up payment provision from violating the rule forbidding retroactive ratemaking.
Qwest contends that by this inclusion of a rates requirement "Congress wanted parties to know the rates for network elements prior to the transactions to which they would apply," and that true-up provisions are consequently impermissible. Qwest's Errata Reply Br. at 6. However, Qwest's argument lacks support because nothing in the 1996 Act prohibits state commissions from implementing interim rates subject to true-up. While establishing permanent rates from the outset would admittedly provide greater predictability, concluding that the 1996 Act disfavors an interim-rate, true-up pricing methodology infers limitations that are not present in the statute. Section 252(c)(2) requires state commissions that arbitrate interconnection agreements to set rates for services and network elements, but does not forbid including interim rates or true-up payments. Because the 1996 Act is simply silent on the issue, Qwest's textual interpretation does not provide grounds for overturning the April 4 Order.
Qwest additionally claims that the 1996 Act's policy goals discourage true-up payments that impact TELRIC-based rates. Qwest argues that the 1996 Act and FCC rules were designed to facilitate a competitive, market-driven telecommunications system, create predictable rates, and encourage negotiations between ILECs and CLECs. See 47 U.S.C. § 251; Pac. Bell v. Pac-W. Telecomm., Inc., 325 F.3d 1114, 1127 (9th Cir. 2003); Iowa Utils. Bd. v. FCC, 120 F.3d 753, 801 (8th Cir. 1997), rev'd on other grounds, ATT v. Iowa Utils. Bd., 525 U.S. 366 (1999): In re Review of the Commission's Rules Regarding the Pricing of Unbundled Network Elements and the Resale of Service by Incumbent Local Exchange Carriers. Notice of Proposed Rulemaking, 18 F.C.C.R. 18, 945, 20, 265 ¶ 7 (FCC rel. Sept. 15, 2003) ("TELRIC NPRM"). Qwest also suggests that the 1996 Act permits regulatory lag. See Worldcom, Inc. v. FCC, 308 F.3d 1, 8 (D.C. Cir. 2002).
Regulatory lag refers to the time gap between a change in the actual cost of providing a service and a commission's alteration of rates reflecting that change. See id.
While Qwest accurately outlines the policies furthered by the 1996 Act, none of these goals prohibits a state commission from designating TELRIC-based rates as interim, subject to true-up. The true-up provision in the April 4 Order does not unduly thwart competition or discourage ILEC and CLEC negotiations, but reflects the MPUC's efforts to implement reasonable and fair rates. See April 4 Order at 4-5. Further, though some regulatory lag in rate adjustment is foreseen as inevitable, this does not render true-up payments unlawful. See Worldcom, Inc., 308 F.3d at 8. The case law concerning regulatory lag suggests instead that FCC rules do not require commissions to revise rates and implement true-up provisions every time prices become slightly outdated. Id. True-ups are not precluded in all situations, however. Id. Moreover, a "rate that is long out of date . . . frustrates the goals of TELRIC." ATT Communications of Ill. Inc. v. Ill. Bell Tel. Co., 349 F.3d 402, 411 (7th Cir. 2003). Therefore, Qwest's argument that they should benefit from outdated rates because the Act envisions regulatory lag is unpersuasive.
Qwest's third argument is that the FCC orders do not support retroactive adjustment of TELRIC-based rates "absent misconduct by the incumbent LEC." Qwest's Initial Br. at 6. The FCC has authorized state commissions to implement interim rates subject to true-up in § 271 orders. See In re Application of SBC Communications. Inc. et al. to Provide In-Region, InterLATA Services in California, 17 F.C.C.R. 25, 650 ¶¶ 1, 33, 36-7 (FCC rel. Dec. 19, 2002) ("California 271 Order"); In re Application by SBC Communications Inc. et al. to Provide In-region. InterLATA Services in Texas, 15 F.C.C.R. 18, 354 ¶¶ 1, 85-90 (FCC rel. June 30, 2000) ("Texas 271 Order"); In re Application by Bell Atlantic New York to Provide In-Region. InterLATA Service in the State of New York, 15 F.C.C.R. 3953 ¶¶ 256-60 (FCC rel. Dec. 22, 1999) ("New York 271 Order"). Additionally, the FCC has recognized that implementing interim rates subject to true-up is appropriate "in certain circumstances."See In re Application of Verizon New England. Inc. et al. to Provide In-Region. InterLATA Services in Massachusetts, 16 F.C.C.R. 8998 ¶ 34 (FCC rel. Apr. 16, 2001) ("Mass. 271 Order"). Finally, the FCC permits its Wireline Competition Bureau, a body that conducts arbitration proceedings between ILECs and CLECs, to establish interim TELRIC-based rates which are subject to true-up upon adoption of final rates by the FCC. See In re Petition of Worldcom, Inc. Pursuant to Section 252(e)(5) for Preemption of the Jurisdiction of the Virginia State Corp. Comm'n re Interconnection Disputes with Verizon. Va., Inc., 18 F.C.C.R. 17, 722 ¶ 26 (FCC rel. Aug. 29, 2003) ("Va. Arbitration Order").
While Qwest alleges that the FCC restricts approval of interim rates and true-ups to rates which are not TELRIC-compliant, the FCC orders do not contain this limitation. First, no FCC order expressly forbids state commissions from declaring TELRIC-based rates interim, subject to true-up. This includes the TELRIC NPRM, where the FCC acknowledges that is has allowed interim rates when permanent rates have not been set.See TELRIC NPRM ¶ 151. Second, in approving interim rate provisions, the FCC has deliberately avoided establishing broad rules and has instead relied on the facts of each particular case. Specifically, the FCC has emphasized that the appropriate inquiry in adopting interim rates subject to true-up is whether they are "reasonable under the circumstances." California 271 Order ¶ 37; see also Mass. 271 Order ¶ 34; Texas 271 Order ¶ 88. Third, the FCC approved TELRIC-based interim rates in the Texas 271 Order, suggesting that the TELRIC-non-TELRIC inquiry is not dispositive.See Texas 271 Order ¶¶ 88-90. Rather, in the California, New York and Texas 271 Orders, the FCC emphasized state commissions' commitment to FCC pricing rules, and general reasonableness and fairness concerns in approving interim rates. See California 271 Order ¶¶ 33, 37; Texas 271 Order ¶¶ 88-90; New York 271 Order ¶¶ 258-59. The FCC Wireless Bureau's ability to declare TELRIC-based rates interim, subject to true-up, also discounts Qwest's argument, as it reveals that the FCC does not oppose this pricing methodology. Va. Arbitration Order 126.
Limiting true-up payments of TELRIC-based rates to instances of ILEC misconduct is similarly absent from the FCC 271 orders, the TELRIC NPRM, and the Va. Arbitration Order. Qwest argues that the FCC's approval of the rate adjustment in the 271 California Order occurred because the ILEC, Pacific Bell, delayed the ratemaking process by failing to comply with state commission orders and requirements to submit updated cost studies. See California 271 Order ¶¶ 23, 37 n. 85. Though it is difficult to discern from the California 271 Order whether this factor contributed to the California state commission's ("CPUC") decision to establish interim rates, it is certain that in approving the interim rate provision, the FCC considered other variables as well, including the CPUC's adherence to TELRIC principles and diligence in establishing TELRIC-based rates. Id. ¶¶ 33, 37. Therefore, Qwest's attempt to confine true-up adjustments to cases of ILEC misconduct is unavailing.
Finally, Qwest argues that the MPUC violated the 1996 Act by imposing interim rates and true-up payments without first determining whether these changes conflicted with the parties' interconnection agreements. Qwest bases this argument on the Ninth Circuit's analysis in Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114 (9th Cir. 2003), where the court held that the CPUC violated § 252 by issuing a generic order that designated all calls to internet service providers ("ISPs") as local traffic, subject to reciprocal compensation provisions in the parties' interconnection agreements.Id. at 1120-21, 1127. The CPUC did not review any of the interconnection agreements before issuing the order, despite Pacific Bell's insistence that the generic order constituted a "wholesale revision" of the interconnection agreements. Id. at 1121.
Qwest's Pacific Bell argument is flawed. First, § 252 does not specifically require state commissions to review interconnection agreements before issuing new rates. See 47 U.S.C. § 252. Second, while Qwest promotes a broad reading of the holding, the facts in the non-precedential Pacific Bell case favor a narrow interpretation. The Ninth Circuit concluded that the CPUC could not use its general rule-making authority to deem "interstate" ISP traffic as local for reciprocal compensation provisions. See Pac. Bell, 325 F.3d at 1127-28. Unlike the MPUC's actions in issuing the April 4 Order, the CPUC interpreted a specific term included in the parties' interconnection agreements without reviewing a single agreement.See id. at 1121. Further, the CPUC ordered "all carriers subject to interconnection agreements" to follow this interpretation, regardless of their contracts' specific terms. The April 4 Order, in contrast, does not attempt to interpret interconnection agreements or redefine their terms, making review of specific agreements unnecessary.
In an order dated October 22, 1998, the CPUC concluded that ISP traffic was "intestate for jurisdictional purposes and local for purposes of interconnection agreements." Id. at 1120. However, the CPUC later modified the order to reflect an FCC decision which determined that ISP traffic creates interstate jurisdiction. Id. at 1121-23, 1125.
Qwest's failure to delineate limits to the proposed review requirement weakens its argument further. Qwest appears to argue that state commissions must review interconnection agreements before adopting regulations that potentially impact such contracts, however indirect the effect. Qwest also stresses the 1996 Act's emphasis on a creating a market-driven system as requiring review. However, the 1996 Act's pro-competition focus must be balanced against regulatory efficiency.See S.W. Bell Tel. Co. v. FCC, 153 F.3d 523, 539 (8th Cir. 1998) (recognizing the necessity of balancing the 1996 Act's competing goals). Implementing a comprehensive review requirement would add unnecessary delay and expense to an already complicated rate-making process. Further, the 1996 Act allows state commissions to establish rates for UNEs in generic proceedings, suggesting that commissions need not review interconnection agreements before setting UNE rates.See 47 U.S.C. § 252(g). Therefore, the MPUC's failure to review the parties' interconnection agreements does not invalidate the April 4 Order.
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY ORDERED that: Plaintiff Qwest Corporation's appeal of Minnesota Public Utilities Commission orders [Docket No. 1] is DENIED to the extent that it is premised on the unlawfulness of the interim rates and true-up provision contained in the April 4, 2002 Order.