MCI WorldCom, Inc. v. Pennsylvania PUC

844 A.2d 1239

577 Pa. 294

MCI WORLDCOM, INC., Appellant v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Appellee.

Supreme Court of Pennsylvania.

Argued October 21, 2002.

Decided March 22, 2004.

Jeffrey A. Rackow, Maureen Frances Del Duca, Carlisle, Thomas E. Groshens, Philadelphia, for Worldcom, Inc.

Kathryn Grace Sophy, Kimberly A. Hafner, Maryanne Reynolds Martin, David E. Screven, Bohdan R. Pankiw, Harrisburg, for PA Public Utility Com'n.

Zsuzsanna E. Benedek, for Sprint Communications Co.

Renardo Lee Hicks, Wyomissing, James Hughes Cawley, Harrisburg, for NEXTLINK Pennsylvania, Inc. Regina Louise Matz, David Mark Thomas, Patricia Lee Armstrong, Harrisburg, for Alltel Pennsylvania, Inc.

Renee Levine Cohn, Harrisburg, for ATX Telecommunications Services, Ltd.

David Michael DeSalle, John Francis Povilaitis, Harrisburg, for Covad Communications Co.

James Hughes Cawley, Harrisburg, for Senator Roger A. Madigan, Mary Jo White.

Christopher B. Craig, Harrisburg, Richard A. Sprague, Philadelphia, for Senator Vincent J. Fumo.

Barrett C. Sheridan, Edward G. Lanza, Philip F. McClelland, Harrisburg, for Consumer Advocate.

Derrick Price Williamson, Pamela Catherine Polacek, Chris Mincavage Burak, Harrisburg, for PA Cable & Telecommunications Ass'n.

Robert Charles Barber, Daniel Clearfield, Alan Kohler, Harrisburg, for AT&T Communication of Pennsylvania, Inc.

Norman James Kennard, Harrisburg, for Commonwealth Telephone Co.

Melissa H. Maxman, Michael A. Adler, Michael M. Baylson, Philadelphia, for GTE North, Inc.

John David Filipowicz, Princeton, NJ, for RCN Telecom Services, Inc.

Angela T. Jones, Harrisburg, Bernard A. Ryan, for Small Business Advocate.

Joseph A. Dworetzsky, Philadelphia, for City of Philadelphia.

Claire M. Diemer, Stephen Wen-Wei Ching, Paul Steven Diamond, Thomas A. Leonard, Julia Ann Conover, Philadelphia, for Verizon Pennsylvania, Inc. (Bell Atlantic-PA, Inc.)

Before: ZAPPALA, C.J., and CAPPY, CASTILLE, NIGRO, NEWMAN, SAYLOR and EAKIN, JJ.

OPINION

Justice CASTILLE.

This is an appeal from an en banc decision of the Commonwealth Court that affirmed the order of the Pennsylvania Public Utility Commission ("PUC") setting rates for access to Verizon Pennsylvania Inc.'s network for local telephone service. Appellant, MCI WorldCom, Inc. ("WorldCom"), presents issues regarding the propriety of the rates set by the PUC. Before we may reach those substantive issues, however, the threshold issue of whether federal courts have exclusive jurisdiction over such disputes must be addressed. As we find that jurisdiction over state commission decisions under the Telecommunications Act of 1996 lies exclusively in federal courts, we vacate the Commonwealth Court's decision for lack of jurisdiction.

The United States Congress enacted the Telecommunications Act of 1996 ("the 1996 Act") to end the "longstanding regime of state-sanctioned monopolies" that existed in the nation's local telephone service markets and to replace that regime with competitive markets. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). In creating the 1996 Act, Congress realized that it would require sweeping changes in the governing law and economic structure of the long-standing local telecommunication market. Prior to the passage of the 1996 Act, the Communications Act of 1934 divided responsibility for regulating telecommunications into (1) federally-regulated long distance services and (2) state-regulated intrastate services. States generally granted incumbent local exchange carriers (ILEC's), such as Verizon, exclusive monopoly franchises to provide local services with an infrastructure that connects virtually every home and business in a local service area.

The effect of the 1996 Act was to implement a uniform national policy of market competition in local telephone services. The 1996 Act preempted all state laws and regulations that "prohibit, or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." 47 U.S.C. § 253(a). Recognizing that more intrusive federal regulation was necessary in order to make local telecommunication markets competitive, Congress authorized new entrants into the local telephone service market to make use of existing local networks in order to expedite competition.

Section 251 of the 1996 Act establishes three routes through which new telecommunication competitors can enter and compete in local markets: (1) by constructing new competing networks; (2) by reselling to consumers retail services that they have purchased from ILECs at wholesale prices and have repackaged under their own brand names; or (3) by obtaining nondiscriminatory access to ILEC network elements on an unbundled ("separately priced") basis. In order to achieve market efficiency, Congress required that the network element price rates be "just, reasonable and nondiscriminatory" and "based on the cost ... of providing" the element or interconnection. 47 U.S.C. § 251(c)(3); 47 U.S.C. § 252. Congress specifically prohibited the traditional rate-of-return approach to pricing. 47 U.S.C. § 252(d)(1).

Congress empowered new telecommunication entrants to request from ILECs interconnection, resale or access to unbundled network elements ("UNEs") and required incumbents to negotiate with new entrants over the particular terms of such arrangements. Congress authorized state public utility commissions, such as the PUC, to adjudicate under federal law all disputed issues in a process termed "arbitration," the result of which is an "interconnection agreement" incorporating the final terms of the relationship between the subject ILEC and the new entrant. See 47 U.S.C. § 252(b)(1). Although it made state utility commissions responsible for the arbitration process, Congress also directed the Federal Communications Commission ("FCC") to establish regulations to implement the requirements of Section 251 so that uniform federal standards would be in place to guide the Section 252 negotiation and arbitration processes at the state level.

Pursuant to Congress' mandate, the FCC issued pricing regulations governing UNE rates. Section 51.503 of the FCC's regulations requires state utility commissions to set prices for UNEs "pursuant to forward-looking economic cost-based pricing methodology set forth in section 51.505." 47 C.F.R. § 51.503(b)(1). Section 51.505 describes the "Total element long-run incremental cost" methodology or "TELRIC." Therefore, under the FCC's regulations, the Pennsylvania PUC must set prices for network elements based on forward-looking costs as determined by a particular methodology: TELRIC.

On July 31, 1996, the PUC opened the docket known as the "MFS III"¹ proceeding to set permanent rates for the leasing of UNEs in Pennsylvania. The rates set in MFS III were to be incorporated into Verizon's interconnection agreements with WorldCom and other new entrants into Pennsylvania's local communications market. On April 10, 1997, the PUC issued an interim order indicating that it did not plan to base UNE rates strictly on cost, but instead intended to balance the cost-based mandate of the 1996 Act with the PUC's competing desire to ensure that Verizon earn profits in an amount sufficient to cover the expense of deploying new high frequency broadband technology across the Commonwealth. In order to achieve this goal, the PUC adopted Verizon's cost model, which did not employ the TELRIC methodology but which allowed Verizon to attempt to recoup its substantial capital investment in the proposed broadband technology network. On August 7, 1997, the PUC issued its Final Opinion and Order in which it reaffirmed, with one exception not relevant here, the findings set forth in the MFS III Interim Order. Two commissioners dissented.

The rates established in the MFS III proceeding were incorporated into World-Com's interconnection agreement with Verizon. On December 8, 1997, WorldCom filed a complaint in the United States District Court for the Middle District of Pennsylvania, pursuant to Section 252 of the 1996 Act, for review of the parties' interconnection agreement. Verizon, AT&T and the PUC all participated as parties to the lawsuit. On September 16, 1999, the Magistrate Judge issued a Report and Recommendation in which he concluded that the UNE rates set in the MFS III proceeding, based as they were upon Verizon's non-TELRIC cost model, were inconsistent with the FCC's binding regulations and, therefore, were unlawful. In a memorandum opinion, the Honorable Sylvia H. Rambo of the Middle District adopted the Magistrate Judge's report with respect to the issue of UNE rates and remanded the matter to the PUC to reconsider its UNE pricing decisions in light of the FCC's binding pricing regulations. See Bell Atl.-Pa., Inc. v. The Pennsylvania Pub. Util. Comm'n, 273 F.3d 337 (3d Cir.2001).

In July 1998, the PUC initiated a comprehensive review of Verizon's UNE rates and terms for providing access to its network. In addition to the issue of UNE pricing, the PUC had before it several other unresolved issues concerning local telephone competition. The PUC attempted to resolve all of these matters through a global settlement conference. WorldCom participated in settlement proceedings conducted by the PUC along with Verizon. On March 18, 1999, two sets of parties, one group including Verizon and the other including WorldCom, submitted competing joint settlement petitions to the PUC proposing resolutions of the issues in the petitions and in the stayed PUC dockets. Those petitions were offered as non-negotiable settlement propositions, intended to either be accepted or rejected in their entirety by the PUC. WorldCom proposed in part, as did Verizon, to establish a compromise, non-TELRIC-based statewide average UNE loop rate of $14.01. The TELRIC-based average loop rate was asserted to be $10.09. WorldCom alleges that it made clear to...