Opinion ID: 3032515
Heading Depth: 4
Heading Rank: 1

Heading: Verizon’s Alleged Uncompensable Harm

Text: In its complaint seeking declaratory and injunctive relief, Verizon alleged that the CPUC’s interim rate order caused immediate harm to Verizon by requiring Verizon both: (1) to subsidize CLECs in the form of unlawfully low rates, which resulted in Verizon’s loss of retail customers; and (2) to bear the credit risk that the CLECs benefitting from the interim rates will not exist at the time the true-up takes effect or will lack the wherewithal to pay the difference between the interim rates and the permanent rates for the period of time the interim rates were in effect. Verizon further alleged that the promised true-up would not compensate Verizon for either of these harms: ILECs would be irreparably harmed if state commissions could impose artificially low UNE rates subVERIZON v. PEEVEY 7851 ject to the promise of a later true-up. Even assuming that a true-up were actually to occur at some future date, the [interim] Rate Order’s below-cost UNE rates cause Verizon California irreparable harm because they give CLECs an arbitrary competitive advantage that allows them to take customers away from Verizon California. This harm cannot be cured by the prospect of a future true-up of the Commis- sion’s erroneous rates. Moreover, any true-up could be years away, thus exacerbating the harm. There is, moreover, no guarantee that CLECs who have received the benefit of below-cost rates will still exist and have the resources to pay back their windfall — let alone do so willingly without protracted litigation — at some future point when the Commission cor- rects its erroneous rates. .... . . . . As a result of the interim UNE rates set by the Commission, Verizon California has been aggrieved within the meaning of Section 252(e)(6) of the 1996 Act, 47 U.S.C. § 252(e)(6). California’s “interim” UNE rates will enable Verizon California’s competitors to procure UNEs from Verizon California at rates well below Verizon California’s costs of providing UNEs. Further, they will enable Verizon California’s competitors to win over Verizon California’s customers, not because the competitors are more efficient or innovative, but because they have won a substantial regulatory windfall in the form of below-cost UNE rates. Compl. ¶¶ 44, 46 (emphasis added).3 3 There is, in my view, no merit in the argument by the CPUC and the intervenors that harm resulting from Verizon’s loss of customers is not cognizable because the very purpose of the Act is to promote competition 7852 VERIZON v. PEEVEY Nor does the CPUC contest that the future true-up will afford Verizon no real remedy for the losses Verizon alleged. Indeed, at oral arguments, the CPUC conceded not only that the true-up as contemplated will not account for these losses, but that federal law would not permit the CPUC to set future rates so as to compensate Verizon for past harms resulting from artificially low rates. Jan. 12, 2005 Oral Arg. at 00:33:59-00:34:58. The CPUC’s stated position at oral arguments is quite correct. Where any party requests compulsory arbitration by the state utilities commission, the commission “shall . . . establish any rates for . . . network elements according to subsection (d) of this section.” 47 U.S.C. § 252(c)(2). Subsection (d) requires in relevant part that “[d]eterminations by a State commission of . . . the just and reasonable rate for network elements . . . shall be . . . based on the cost . . . of providing the . . . network element . . . and . . . may include a reasonable profit.” 47 U.S.C. § 252(d) (emphasis added). The FCC, in turn, promulgated regulations interpreting this subsection: The 1996 Act requires the states to set prices for interconnection and unbundled elements that are cost-based, nondiscriminatory, and may include a reasonable profit. To help the states accomplish this, the Commission concludes that the state commis- sions should set arbitrated rates for interconnection and access to unbundled elements pursuant [to] a forward-looking economic cost pricing methodology. The Commission concludes that the prices that new entrants pay for interconnection and unbundled in the intrastate telecommunications markets. Competition does not typically demand that firms subsidize their competitors, which, according to Verizon, is precisely what has happened here. Nor does the Act suggest otherwise. I hasten to add, however, that I express no opinion as to whether Verizon has proven or, on remand, will be able to prove its allegations that the interim rates here are unlawfully low. VERIZON v. PEEVEY 7853 elements should be based on the local telephone companies Total Service Long Run Incremental Cost of a particular network element, which the Commission calls “Total Element Long-Run Incremental Cost” (TELRIC), plus a reasonable share of forward-looking joint and common costs. 11 F.C.C.R. 15,499, at ¶ 29 (1996) (emphases added), as amended by 11 F.C.C.R. 22,301 (1996); see also 47 C.F.R. § 51.505.4 There is, in short, no provision either in the Act or in the FCC’s regulations for rates to be based so as to compensate ILECs for past damages of the sort alleged here. The CPUC and the intervenors argue, however, that any such alleged harm is temporary or speculative or is otherwise not cognizable under the ripeness doctrine either because the interim rates do not require Verizon to alter its “conduct” or because the harm is mere financial loss. I address each of these arguments in turn. 4 The Supreme Court has explained the TELRIC methodology as follows: “The TELRIC of an element has three components, the operating expenses, the depreciation cost, and the appropriate risk-adjusted cost of capital.” A concrete example may help. Assume that it would cost $1 a year to operate a most efficient loop element; that it would take $10 for interest payments on the capital a carrier would have to invest to build the lowest cost loop centered upon an incumbent carrier’s existing wire centers (say $100, at 10 percent per annum); and that $9 would be reasonable for depreciation on that loop (an 11-year useful life); then the annual TELRIC for the loop element would be $20. The actual TELRIC rate charged to an entrant leasing the element would be a fraction of the TELRIC figure, based on a “reasonable projection” of the entrant’s use of the element (whether on a flat or per-usage basis) as divided by aggregate total use of the element by the entrant, the incumbent, and any other competitor that leases it. Verizon Communications Inc., 535 U.S. at 496 & n.16 (citations omitted). 7854 VERIZON v. PEEVEY First, the CPUC and the intervenors argue that Verizon’s harm is only temporary or speculative because any retail customers that Verizon may lose while the interim rates are in effect may return once the permanent rates are set, and because the true-up will compensate Verizon for any difference in the rates it charges CLECs under the interim rate order and what it will be able to charge CLECs under the permanent rate order. As for the loss of retail customers, even assuming that every customer who allegedly left Verizon under the interim rates returns under the permanent rates,5 Verizon will not be compensated for the loss of revenue from the loss of such retail customers while the interim rates were in effect. The true-up adjustment will be based on the cost of the UNEs, and not on the basis of what the competitors’ retail customers might have paid Verizon had they not changed service providers. As for the adjusted rates that Verizon may charge pursuant to the true-up for the interim period, the credit risk that Verizon has been forced to bear exists independently of whether the intervenors and other CLECs ultimately pay the true-up. If an investor is forced to accept junk bonds, of equal amount and maturity, in place of Treasury bonds, he may buy credit insurance; but the insurance premium will reduce his return. Similarly here, were Verizon to buy credit insurance on the intervenors’ payments pursuant to the true-up, the cost of such credit insurance is not an element of TELRIC.6 Thus, nothing about Verizon’s alleged present uncompensable harm is con- 5 Nor is there reason to so assume. In the parlance of economists, given the transaction costs that customers bear when they switch service providers and given the price differentials among service providers under the interim rates relative to those under the permanent rates, it may not be efficient for customers to return to Verizon even if was efficient for them to leave in the first place. 6 Of course, Verizon — like the junk-bond holder — could choose to run the risk of nonpayment, with the predictable effect on its financial statements and own creditworthiness, but that is an option some might not think prudent in these days of vigilance over corporations. VERIZON v. PEEVEY 7855 tingent upon future events and, thus, as alleged, is either temporary or speculative. Cases in which this court and others have found claims to be unripe for judicial review on the basis of the alleged harm being temporary or speculative are therefore inapposite. Second, the CPUC and the intervenors argue that Verizon’s alleged harm is not cognizable under the hardship prong of the ripeness analysis because the interim rate order does not require Verizon to alter its “conduct” but only its rates. Here, the CPUC and the intervenors rely on language in cases stating that claims are ripe for review only when the challenged agency action requires a change in “conduct.” E.g., Abbot Laboratories, 387 U.S. at 153 (holding that “where a regulation requires an immediate and significant change in the plaintiffs’ conduct of their affairs with serious penalties attached to noncompliance, access to the courts . . . must be permitted”); Association of American Medical Colleges v. United States, 217 F.3d 770, 783 (9th Cir. 2000) (“Courts typically read the Abbott Laboratories rule to apply where regulations require changes in present conduct on threat of future sanctions.”). I can discern no reason why setting rates should not be considered “conduct,” nor do the cases support such a position. Indeed, even the cases on which the CPUC and the intervenors rely make clear that the references to changes in “conduct” are meant to distinguish situations where the agency action has “direct and immediate” impact on plaintiffs from situations in which the impact may be indirect or speculative. Abbott Laboratories, 387 U.S. at 152-53; Association of American Medical Colleges, 217 F.3d at 783-84 (distinguishing Abbott Laboratories from its companion case, Toilet Goods Association, Inc. v. Gardner, 387 U.S. 158, 163-65 (1967), wherein the Supreme Court found the challenged action not ripe for judicial review, on the grounds that “the impact of the regulation was [there] not ‘felt immediately by those subject to it in conducting their day-to-day affairs’ ”). Here, there is no question that the interim rate order had a direct and immediate effect upon Verizon. 7856 VERIZON v. PEEVEY Third, the CPUC and the intervenors correctly note that we have often stated that mere financial loss is not a cognizable harm for purposes of the hardship analysis under the ripeness doctrine. E.g., Principal Life Insurance Co., 394 F.3d at 670; US West, 193 F.3d at 1118; Village of Gambell v. Babbitt, 999 F.2d 403, 408 (9th Cir. 1993); Municipality of Anchorage v. United States, 980 F.2d 1320, 1325-26 (9th Cir. 1992); Dietary Supplemental Coalition, Inc. v. Sullivan, 978 F.2d 560, 562, 564 (9th Cir. 1992); Western Oil & Gas Association, 905 F.2d at 1291; Winter, 900 F.2d at 1325. However, Verizon has alleged the loss of customers, which is not mere financial loss. See Midcoast Interstate Transmission, Inc. v. Federal Energy Regulatory Commission, 198 F.3d 960, 96970 (D.C. Cir. 2000) (holding that the petitioners for review of agency orders were sufficiently aggrieved from the resulting loss of customers that their claims were ripe for judicial review). Further, to the extent Verizon’s alleged harm can be characterized as mere financial loss, although we have often repeated the refrain that mere financial loss is insufficient to establish hardship, none of the cases cited above turn on the fact that the loss was merely financial. Indeed, I have found only two cases in which we held that claims were unripe for judicial review at least in part because the harm was mere financial loss, both of which are readily distinguishable from the case here, either because there was no suggestion that the financial loss was uncompensable or because the challenged action was otherwise not ripe for judicial review. State of California, Department of Education v. Bennett, 833 F.2d 827, 833-34 (9th Cir. 1987) (holding unripe for judicial review the California Department of Education’s claim that Bennett was without authority to charge prejudgment interest on misapplied Title I funds because “the harm that is presaged is limited to financial expense,” but there, in the event that the California Department of Education ultimately prevailed, it would suffer no harm because it would not be required to pay the prejudgment interest); Hawaiian Electric Co. v. United VERIZON v. PEEVEY 7857 States Environmental Protection Agency, 723 F.2d 1440, 1445 (9th Cir. 1984) (“HECO’s alleged financial hardship . . . is insufficient to outweigh the inappropriateness of the issues for judicial resolution.”). Moreover, we have held that agency action that delayed indefinitely “recover[y] in tort” and “reimbursement for . . . compensation payments” “creat[ed] a practical hardship” sufficient to render a claim ripe for judicial review. Chavez v. Director, Office of Workers Compensation Programs, 961 F.2d 1409, 1415-16 (9th Cir. 1992). Finally, that the alleged harm here is uncompensable by means of the true-up is significant. The refrain regarding financial loss repeated in each of these cases was first uttered by the Supreme Court in Abbott Laboratories. There, the Supreme Court agreed with an argument advanced by the government that “ ‘mere financial expense’ is not a justification for pre-enforcement judicial review,” holding that “possible financial loss is not by itself a sufficient interest to sustain a judicial challenge to governmental action.” Abbott Laboratories, 387 U.S. at 153 (emphasis added). That mere financial loss would not typically justify pre-enforcement judicial review is not at all surprising because typically “adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation.” See Los Angeles Memorial Coliseum Commission v. National Football League, 634 F.2d 1197, 1202 (9th Cir. 1980) (quoting Sampson v. Murray, 415 U.S. 61, 90 (1974)); cf. Toilet Goods Association, 387 U.S. at 164-65 (holding that the challenge to administrative action was not ripe for judicial review in part because “no irremediable adverse consequences [would] flow from requiring a later challenge to this regulation”). There is no reason to conclude that is the case here.7 7 In so concluding, I do not assume that the statutory provisions providing for federal review of “determination[s]” by state utilities preclude relief in the form of damages. See Verizon Maryland Inc. v. Public Service Commission of Maryland, 535 U.S. 635, 643-44, 647-48 (2002) (holding that the provision for federal review of “determination[s]” by state utilities 7858 VERIZON v. PEEVEY