Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-02838/USCOURTS-cand-3_03-cv-02838-6/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1343 Violation of Civil Rights

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

VERIZON CALIFORNIA INC.,

Plaintiff,

v.

MICHAEL R. PEEVEY, et al.,

Defendants.

NO. C03-2838 TEH 

ORDER DENYING PLAINTIFF’S

MOTION FOR RECONSIDERATION

OF DECEMBER 5, 2005 ORDER

This matter came before the Court on Wednesday, May 10, 2006, on Plaintiff Verizon

California Inc.’s (“Verizon’s”) motion for reconsideration of the Court’s December 5, 2005

Order Granting in Part and Denying in Part Plaintiff’s Motion for Partial Summary

Adjudication. After carefully considering the parties’ oral and written arguments, including

those raised in the parties’ supplemental briefs, and the papers filed by XO Communications

Services, Inc. as amicus curiae, the Court now DENIES Verizon’s motion for the reasons set

forth below.

BACKGROUND

On December 5, 2005, the Court granted in part and denied in part Verizon’s motion

for partial summary adjudication on Verizon’s first, second, and fourth causes of action. The

Court found that the interim rates for unbundled network elements (“UNEs”) set by the

California Public Utilities Commission (“CPUC”) in Decision 03-03-033 failed to comply

with the Telecommunications Act of 1996 because they were not based on the required

TELRIC (Total Element Long Run Incremental Cost) methodology. The Court also found

that Defendants acted arbitrarily and capriciously and therefore violated Verizon’s due

process rights. As a remedy, the Court vacated the interim UNE rates established in Decision

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03-03-033 and modified in Decision 05-01-057. Dec. 5, 2005 Order Granting in Part &

Denying in Part Pl.’s Mot. for Partial Summ. Adjud. at 16. The Court further ordered that

“[t]he UNE rates adopted in Decision 97-01-022 are reinstated but shall be subject to true-up

once permanent UNE rates are established.” Id.

In the parties’ January 23, 2006 joint status conference statement, Verizon stated that

it did not intend to pursue its remaining causes of action but that it did seek reconsideration

of the Court’s order that the 1997 rates be subject to true-up. After considering Verizon’s

request and Defendants’ objections thereto, the Court orally granted Verizon leave to file a

motion for reconsideration at the January 30, 2006 case management conference.

While Verizon’s motion was pending but after the parties completed briefing on the

motion, the CPUC issued Decision 06-03-025, which set permanent UNE rates for Verizon. 

In that decision, the CPUC ordered that:

As set forth in D.03-03-033, Verizon must adjust, or “true-up”

the interim rates it has charged since March 2003 for loops and

switching to the new rates adopted in this order. In other words,

Verizon must calculate whether its interim rates are higher or

lower than today’s newly adopted rates, and whether it has over

or under-collected the appropriate revenues for any UNEs it sold

at interim rates. 

. . .

On December 5, 2005, the U.S. District Court vacated interim

rates established by D.03-03-033 and reinstated UNE rates

originally adopted for Verizon in D.97-01-022. . . . Thus, any

billing adjustments must also consider the effect of this court

action on UNE rates.

Within 90 days of the date of this order, Verizon should calculate

any billing adjustments owed to or by interconnecting carriers

based on the modification of interim rates set in D.03-03-033,

and revised in D.05-01-057, and the court’s decision vacating

interim rates. For the same reasons noted in the SBC UNE order,

we will stay the effective date of any true-up until its amount can

be calculated and further proceedings held to determine payment

options or consider other mitigations to minimize negative

financial effects of the true-up on competitive carriers. The ALJ

will issue a ruling within 30 days of this order setting a

prehearing conference to initiate the true-up phase of this

proceeding.

CPUC Decision No. 06-03-025, 2006 Cal. PUC LEXIS 107, at *212-14 (Mar. 15, 2006)

(footnote omitted). The CPUC contended in a letter to the Court that its permanent rate order

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rendered Verizon’s motion moot, and the Court subsequently ordered supplemental briefing

on the question of mootness.

On April 28, 2006, the Court tentatively granted the application of XO

Communications Services, Inc. (“XO”) to file an amicus curiae brief and ordered that the

brief would be accepted for filing unless any opposition was filed by May 4, 2006. No party

filed such an opposition, and XO’s amicus curiae brief shall therefore be accepted as filed.

DISCUSSION

I. Mootness

As an initial matter, the Court agrees with Verizon that its motion is not moot. 

Although the CPUC did not rely on the Court’s order when stating that the permanent rates

in Decision 06-03-025 shall be subject to true-up, the CPUC did rely on true-up language

from the 2003 decision. Thus, whether the Court’s decision to vacate the 2003 interim rates

means that the CPUC now lacks any authority to rely on the true-up provision from the 2003

order remains a live controversy. 

II. Appropriateness of Reconsideration

The CPUC argues that Verizon has not satisfied the criteria for a motion for

reconsideration under Civil Local Rule 7-9, but this argument is now moot because the Court

already granted Verizon leave to file such a motion. Moreover, the CPUC fails to persuade

the Court that its decision was in error. While Verizon could have briefed the true-up issue

in its original moving papers – and arguably should have done so when discussing the

appropriate remedy if the Court granted its motion – Verizon correctly points out that neither

party discussed in the original motion papers whether the 1997 rates, if reinstated, should be

subject to true-up. Verizon simply sought reinstatement of the 1997 rates, with no provision

that they be subject to true-up, and the CPUC argued only that the 2003 rates were valid and

made no alternative argument that the Court should impose or allow a true-up if it reinstated

the 1997 rates. In the absence of such an argument from the CPUC, Verizon had no reason

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to raise the true-up issue in its reply. Thus, the Court finds it appropriate to grant Verizon

leave to argue that the Court should not have allowed the reinstated 1997 rates to be subject

to true-up, notwithstanding that Verizon could have made this argument in its original

summary judgment motion papers.

III. Merits

Turning to the merits of Verizon’s motion, the parties agree that if a court invalidates

the challenged portion of an administrative agency’s decision, then the court cannot uphold

the unchallenged portion of that decision if there is “substantial doubt that the agency would

have adopted the same disposition regarding the unchallenged portion if the challenged

portion were subtracted.” North Carolina v. Fed. Energy Regulatory Comm’n, 730 F.2d 790,

796 (D.C. Cir. 1984) (citing Fed. Power Comm’n v. Idaho Power Co., 344 U.S. 17, 20-21

(1952); Addison v. Holly Hill Fruit Prods., Inc., 322 U.S. 607, 618-19 (1944)). In other

words, a court should set aside an administrative decision in its entirety if the challenged and

unchallenged portions of the decision are so “intertwined” that severance is impossible. 

Appalachian Power Co. v. Envtl. Prot. Agency, 208 F.3d 1015, 1028 (D.C. Cir. 2000).

At oral argument, Verizon relied heavily on the court’s use of the word “intertwined”

in the Appalachian Power decision. However, the court’s opinion in Appalachian Power

does not discuss in any detail how the challenged and unchallenged portions were

intertwined, and the opinion therefore sheds little light on how to determine whether an

administrative decision invalidated in part must be set aside in its entirety. This Court reads

the “intertwined” language as an alternative way of phrasing the “substantial doubt” test,

rather than as a new or different standard. Thus, the Court concludes that an administrative

decision must be invalidated in its entirety if the challenged and unchallenged provisions are

so intertwined that substantial doubt exists over whether the agency would have adopted the

unchallenged provisions even in the absence of the challenged provisions.

The primary question in this case is therefore whether substantial doubt exists that the

CPUC would have imposed a true-up in 2003 had it been aware that the interim rates it

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sought to establish in 2003 were invalid. This is a close question, particularly since the

parties agree that no court has directly addressed the question of how much uncertainty is

necessary to rise to the level of “substantial doubt.” At oral argument, Verizon asserted that

substantial doubt exists unless there is some affirmative language in the text of the agency’s

decision indicating that the agency would have adopted the unchallenged provisions standing

alone, while the CPUC argued that to find substantial doubt requires near certainty that the

agency would not have adopted the unchallenged provisions standing alone. However, the

cases discussed by the parties in their papers and at oral argument do not extend that far in

either direction; “substantial doubt” does not mean “any doubt” or “no doubt.”

Verizon cites several cases where courts have set aside entire agency decisions even

though only portions of those decisions were challenged, but those cases are distinguishable

from the facts here. First, in Southwestern Bell Telephone Company v. Missouri Public

Service Commission, the Eighth Circuit determined that price was “the overarching focus” of

the parties’ arbitration agreement, reached after two rounds of arbitration and one round of

mediation, and that the pricing decisions contained in the agreement were therefore not

severable from the rest of the agreement. 236 F.3d 922, 924 (8th Cir. 2001), vacated on

other grounds sub nom. AT&T Commc’ns of the Sw., Inc. v. Sw. Bell Tel. Co., 535 U.S. 1075

(2002). As the CPUC correctly observes, an arbitration agreement involves much give and

take between the parties, and it therefore makes sense to presume that changes in certain

terms, like price, might change what a party might be willing to accept on other terms; that is,

a more favorable price might lead a party to accept terms it would not otherwise have

accepted, and vice-versa. Here, by contrast, the 2003 rate order was the CPUC’s decision

alone, and not the result of an arbitration or mediation process in which parties are expected

to compromise, and Southwestern Bell is therefore distinguishable. Notably, in its reply,

Verizon did not rebut this argument, which the CPUC raised in its opposition papers.

Although the other cases cited by Verizon to support invalidation of the true-up did

not involve arbitrated or mediated agreements, there was much more clear evidence or

reasoning in those cases to support invalidation of the unchallenged provisions once the

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challenged provisions were invalidated. In North Carolina v. Federal Energy Regulatory

Commission, for example, the agency specifically stated that its “position is that the decision

in favor of Transco I compensation is not severable from the treatment of Transco II and III

in the December 30 order.” 730 F.2d at 796. Thus, the court held that it could not uphold

the Transco I decision after invalidating the Transco II and III decisions because the agency’s

own statements regarding non-severability were sufficient to create “substantial doubt.” Id.

No such language is present here.

As another example, in Federal Power Commission v. Idaho Power Company, the

Supreme Court considered an agency’s grant of a license to authorize construction with

certain conditions attached. The Court held that it would be improper to uphold the license

where the attached conditions were invalidated because it was unclear whether the agency

would have granted a license without conditions: “On remand the Commission might have

reissued the order without the contested conditions or it might have withheld its consent to

any license.” Fed. Power Comm’n, 344 U.S. at 20. Similarly, in Bell Atlantic Telephone

Companies v. Federal Communications Commission, 24 F.3d 1441 (D.C. Cir. 1994), the

court invalidated a rule requiring the provision of physical co-location of certain facilities. 

The rule also provided for virtual co-location where physical access was impracticable or

otherwise prohibited by law, but the court held that it could not require virtual co-location

because, “[c]ast as an exception to a general rule, virtual co-location cannot with any

coherence be thought to survive our abrogation of the rule itself.” Id. at 1447. Thus, the

court found that “[o]n this record doubt [that the unchallenged provision would have been

adopted in the absence of the challenged provision] hardens into certainty.” Id. Finally, in

Addison, the Supreme Court considered an administrative definition under the Fair Labor

Standards Act that included limitations based both on geography and number of employees. 

The Court found the limitation based on the number of employees to be invalid and thereafter

invalidated the entire definition because the Court could “hardly assume that the

Administrator would have defined ‘area of production’ merely by deleting the employee

provision, had he known of its invalidity. It would be the sheerest guesswork to believe that

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elimination of an important factor in the Administrator’s equation would have left his

equation unaffected even if he did not here insist upon its importance.” Addison, 322 U.S. at

618-19. 

In this case, the link between the interim rates and the true-up is not as clear as the

connection between the challenged and unchallenged provisions in the above cases. Unlike

the license in the Federal Power Commission case, which was issued subject to certain

conditions that were subsequently invalidated, there is no clear indication here that the actual

rates set by the CPUC in 2003 were a condition of ordering a true-up. In addition, the trueup ordered in 2003 was not an exception to a rule or a second-best alternative, as was the

case in Bell Atlantic; instead, the true-up could reasonably be viewed as a separate rule that is

capable of standing alone, without reference to the actual interim rates charged. In other

words, the decision to order a true-up and the decision to set interim rates may be viewed as

two independent acts, rather than as part of a single act, such as the promulgation of the

definition at issue in Addison.

Given the CPUC’s strong conclusion that the 1997 rates could not be permitted to

continue in effect as of March 2003 because they were so outdated – a conclusion that

Verizon does not challenge here – the Court cannot say that it would be the “sheerest

guesswork” to believe that invalidation of the 2003 interim rates would not have altered the

CPUC’s decision to impose a true-up. Addison, 322 U.S. at 619. Verizon is mistaken when

it argues that the CPUC adopted the true-up provision simply to bolster the validity of the

interim rates and to attempt to shield such rates from judicial review. To the contrary, the

imposition of a true-up of the (now invalidated) interim rates served to make the permanent

rates effective as of March 2003, and it would not be unreasonable to conclude that the

CPUC would have imposed a stand-alone true-up provision even if it did not simultaneously

set revised interim rates. The idea that the CPUC’s decision to impose a true-up did not

depend on the actual rates in effect finds support from the CPUC’s 2005 modification of the

interim rates. In Decision 05-01-057, the CPUC revised the interim rates for certain elements

based on new information available but nonetheless retained the true-up provision, thus

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indicating that the imposition of a true-up did not depend on the actual rates set in the 2003

order.

On the other hand, just as the CPUC never explicitly conditioned the 2003 true-up on

the setting of interim rates, the 2003 rate order also contains no clear language that the

decision to impose a true-up and the decision to set interim rates were separate and therefore

severable. Verizon does not dispute the CPUC’s contention that the rate order clearly sets

forth the CPUC’s position that the 1997 rates were extremely outdated and in need of

revision, and that therefore immediate relief was warranted. However, Verizon argues that

this rationale would only support imposition of interim rates, and would not support simply

making the existing rates subject to true-up once permanent rates were set, because it is only

the imposition of interim rates that could provide the immediate relief the CPUC sought to

provide by its rate order. Although making the permanent rates effective as of March 2003

would have ultimately provided relief to prospective entrants to the market, Verizon correctly

observes that such relief would not have been immediate. Verizon’s position also gains

credibility from the fact that the CPUC failed to impose a stand-alone true-up of the 1997

rates during the six-year period that those rates remained in effect; this failure indicates a

lack of clear intent to make the 1997 rates subject to true-up.

Verizon additionally notes that the CPUC declined to order a true-up of interim rates

in another case because a true-up mechanism “would create too much uncertainty for CLCs

[competitive local carriers] with respect to the rate levels they must pay, and would risk

stalling further development of the CLC resale market until permanent rates were

established.” CPUC Decision No. 97-08-059, 1997 Cal. PUC LEXIS 697, at *44 (Aug. 1,

1997). Verizon then makes a persuasive logical argument that perhaps the CPUC imposed a

true-up in this case because it believed that permanent rates would be close to the 2003

interim rates; saying that the 1997 rates would be subject to true-up, when also explaining

that the 1997 rates are extremely outdated, would have resulted in much greater uncertainty

in terms of the rates that competing carriers would ultimately have to pay.

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The parties agree that a formal remand in this case is unnecessary because the

CPUC’s 2006 permanent rate order clearly indicates that the CPUC believes a true-up is

appropriate.

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In light of all of the above, it is not a foregone conclusion that the CPUC would have

imposed a true-up in 2003 if it knew that the interim rates it attempted to set would be

declared invalid. Some uncertainty remains because the 2003 decision never states that the

true-up was designed to operate independently of the interim rates set in that decision.

However, the Court is reasonably certain that the CPUC would not have chosen to

leave the 1997 rates in place without a true-up because the CPUC clearly believed that the

1997 rates were outdated, and because the effect of the true-up provision was to make the

permanent rates effective as of the date of the 2003 rate order. Thus, while the Court cannot

say with absolute certainty that the CPUC would have imposed a true-up had it known that

the interim rates would be declared invalid, the Court also does not find that the uncertainty

in this case rises to the level of “substantial doubt” required to vacate the entire rate order,

including the true-up provision. 

Alternatively, even if the true-up provision were not severable from the setting of

interim rates, Verizon has failed to persuade the Court that it would not be within the Court’s

equitable powers to allow the CPUC to consider a true-up on remand.1

 The Court agrees

with Verizon that it might be an intrusion on the CPUC’s administrative functions if the

Court were to order that a true-up actually be imposed, but the Court’s order was intended

only as an indication that the CPUC was not barred from considering a true-up on remand. 

The CPUC correctly interpreted the Court’s order as leaving the CPUC “free to true-up the

rates, or not true-up the rates. The Court’s [December 5, 2005] Order does not interfere in

any way with the Commission’s exercise of authority over the matter.” Opp’n at 8. Verizon

did not take a contrary view in its reply papers and, in fact, relied solely on its argument that

the true-up provision was not severable; the company failed to respond to the CPUC’s

opposition to Verizon’s alternative argument that this Court’s December 5, 2005 order

somehow interfered with the CPUC’s administrative functions.

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Verizon similarly failed to offer any written response to the CPUC’s argument that

this Court should exercise its equitable powers in favor of allowing a true-up because the

true-up provision put all parties on notice that the permanent rates would take effect from the

date of the 2003 order. Beginning in March 2003, entrants to the market expected to pay for

access to unbundled network elements at whatever permanent rates were ultimately set by the

CPUC, and the Court agrees that it would be inequitable for those parties to now be forced to

pay a different rate than expected. Had prospective competing carriers not anticipated

paying new permanent rates as of March 2003 and instead expected to pay the 1997 rates

through whatever date the CPUC ultimately set permanent rates, they may have chosen not to

enter the market.

Moreover, Verizon failed to give competing carriers or the CPUC adequate notice that

it sought to vacate the true-up provision in addition to vacating the 2003 interim rates. 

Although Verizon correctly points to paragraph 51 of the complaint as containing a claim

that Verizon is entitled “to have the Rate Order vacated,” the prayer for relief in the

complaint does not specifically ask for this relief and instead specifies only that the rates

themselves should be vacated and that enforcement of those rates should be enjoined. 

Similarly, Verizon’s proposed orders for both its original motion for summary judgment,

filed on October 6, 2003, and its motion for summary judgment after remand, filed on

September 12, 2005, did not ask that the true-up provision or the rate order in its entirety be

vacated.

Verizon asserted at oral argument that it would be improper for this Court to allow the

CPUC to consider a true-up on remand because to do so would implicitly allow the setting of

retroactive rates. However, Verizon has failed to persuade the Court that the bar on

retroactive ratemaking is implicated here. All interested parties have been on notice since the

date of the 2003 rate order that the actual rates that would be charged to competing carriers

were subject to adjustment, with the net effect being that carriers would pay the permanent

rates beginning in 2003. As the D.C. Circuit has explained, “it is not that notice relieves the

Commission of the bar on retroactive ratemaking, but that it ‘changes what would be purely

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retroactive ratemaking into a functionally prospective process by placing the relevant

audience on notice at the outset that the rates being promulgated are provisional only and

subject to later revision.’” Natural Gas Clearinghouse v. Fed. Energy Regulatory Comm’n,

965 F.2d 1066, 1075 (D.C. Cir. 1992) (citation omitted). Here, even though Verizon

correctly observes that the CPUC never made the 1997 rates subject to true-up or later

adjustment, Verizon also cannot dispute that the 2003 rate order notified all parties that

whatever permanent rates were ultimately set by the CPUC would be effective as of the date

of the 2003 rate order. Thus, regardless of the actual rates charged during the interim period,

all parties were on notice that those rates were subject to revision as soon as permanent rates

were set, and imposing a true-up on the reinstated 1997 rates would therefore appear to be

“functionally prospective” rather than “purely retroactive.” 

Of course, as the Court noted in its March 29, 2006 Order Requesting Supplemental

Briefing:

Verizon may be able to challenge the CPUC’s decision to make

the reinstated 1997 rates subject to true-up, but that would need

to be the subject of a subsequent lawsuit. Whether the CPUC had

the authority to order the 1997 rates to be subject to true-up in

2003 is not before the Court in this case. Verizon only notes in a

footnote in its motion for reconsideration that it does not concede

that a stand-alone true-up provision – i.e., a true-up using existing

rates, as opposed to at true-up based on newly imposed interim

rates – would be a proper exercise of the CPUC’s authority, but

the company has never directly challenged the CPUC’s authority

to order such a provision. Similarly, this case does not concern

whether the CPUC has the authority to order a true-up of interim

rates that is retroactive to an earlier date.

Mar. 29, 2006 Order at 3 n.2. Thus, this Court does not now definitively decide whether the

CPUC’s imposition of a true-up in the permanent rate order is necessarily valid, as that issue

is not before the Court at this time. Instead, the Court holds only that Verizon has not met its

burden of persuading the Court that vacating the 2003 interim rates automatically bars the

CPUC from considering whether to apply a true-up on remand.

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CONCLUSION

When the Court ordered that the reinstated 1997 rates “shall be subject to true-up once

permanent UNE rates are established,” the Court did not intend to require that such rates

must actually be trued-up. Instead, as the CPUC properly interpreted, this language was

intended only to indicate that the CPUC may, at its discretion, consider whether the

reinstated 1997 should be subject to true-up. For the reasons discussed above, the Court

rejects Verizon’s assertion that the entire 2003 rate order, as opposed to only the challenged

interim rates, must be vacated; there is no substantial doubt in the Court’s mind that the

CPUC would have adopted a true-up provision even if it had known that the interim rates it

attempted to set would be declared invalid. Moreover, even if such doubt were present,

Verizon has not persuaded the Court that it must bar the CPUC from considering a true-up on

remand because it is not clear that the rule against retroactive ratemaking applies in this

instance. Accordingly, Verizon’s motion for reconsideration is DENIED. However, to

clarify the Court’s original intent, the disputed sentence in the December 5, 2005 order shall

be modified to read that the 1997 rates “may,” rather than “shall,” be subject to true-up.

This ruling resolves the only outstanding dispute between the parties, and it therefore

appears appropriate for the Clerk to close the file. Any party believing that issues remain in

this case for the Court’s resolution shall file a statement to that effect no later than seven

calendar days from the date of this order. If no such statements are received, then the Clerk

shall close the file.

IT IS SO ORDERED.

Dated: 06/13/06 

 THELTON E. HENDERSON, JUDGE

 UNITED STATES DISTRICT COURT

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