178 F. Supp.2d 81 (2001) | Cited 0 times | D. Rhode Island | November 8, 2001


This action arises pursuant to 47 U.S.C. § 252(e)(6) which grantsthis Court the power to review certain state public utility commissionactions authorized by the Telecommunications Act of 1996. In the instantcase, Verizon-Rhode Island ("Verizon") is appealing a decision of theRhode Island Public Utilities Commission ("PUC") relating to aninterconnection agreement ("Agreement") between Verizon and ConversentCommunications ofRhode Island ("Conversent").1 The PUC order,articulated on June 29, 1999 and issued on July 21, 1999, determined thatInternet traffic was local traffic under the Agreement and, therefore,was subject to reciprocal compensation. Appellant Verizon contends thatthe PUC decision was in error, was arbitrary and capricious, and, thatthe PUC violated its due process rights. Stripped down to basics, Verizondoes not want to compensate Conversent for telephone calls that Verizoncustomers make to Internet providers whose telephone service is providedby Conversent. If the PUC order stands, Verizon will be liable to makepayments to Conversent under the Agreement. To understand this simpleproblem, however, this Court must explain the peculiar background of theAct, this dispute and the role that this Court has to play in thematter. Because this Court concludes that Verizon's procedural rightswere violated, the PUC's decision is reversed and the case is remanded tothat body. Thus, the Court does not reach the substantive portion ofVerizon's challenge.


In an effort to increase competition, expand services and promoteinnovation in the American telecommunications industry, Congress passedthe Telecommunications Act of 1996 ("the Act"). Pub.L. No. 104-104,§ 101(a), 110 Stat. 61, 66 (1996). One of the focuses of the Act, andthe central concern in this case, is the restructuring of local telephonemarkets. Congress recognized that technological advances renderedobsolete the view that local telephone providers were monopolies.Congress, therefore, sought to encourage competition in the localtelephone market by reducing barriers to market entry. See AT&T Corp. v.Iowa Util. Bd., 525 U.S. 366, 371 (1999).

To achieve this goal, the Act also imposed new regulatory governance onthe local telephone industry. 47 U.S.C. § 251, 252 (Supp. II 1996).Formerly, local telephone providers had been entirely regulated by stateutility commissions. See AT&T Corp., 525 U.S. at 371. Under the Act,Congress replaced this state regulatory regime with an unique sharedscheme in which private companies, state utility commissions and theFederal Communications Commission ("FCC") have important, but not alwaysclear-cut, roles to play. See id. at 385 n. 10. This approach has beentermed "cooperative federalism" by some. Puerto Rico Tel. Co. v.Telecomm. Reg. Bd., 189 F.3d 1, 14 (1999).

To create a competitive local telephone market, Congress required alllocal telephone carriers to connect their networks so that service couldbe completed between the customers of two different service providers.47 U.S.C. § 251(a)(1). For existing providers (also know as incumbentlocal exchange carriers), the Act imposes additional duties to mitigatethe advantages of possessing an established infrastructure to deliverservices. These additional duties are designed to prevent new entrantsfrom being shut out of the market. 47 U.S.C. § 251(c). For example,when a new entrant seeks access to a localtelephone carrier's network,the incumbent local exchange carrier has a duty to negotiate terms forinterconnection and provide interconnection to the prospective entrant ona non-discriminatory basis. 47 U.S.C. § 251(c)(1),(2).

Once the parties have negotiated an interconnection agreement, it mustbe submitted to the state utility commission for approval or rejection.47 U.S.C. § 252(a)(1). If there is a dispute in the negotiations,either party may ask the state commission to mediate.47 U.S.C. § 252(a)(2). Furthermore, if voluntary negotiations fail,the new entrant may request that the state commission arbitrate any openissues. 47 U.S.C. § 252(b)(1). Before the interconnection agreementis effective, the state commission, after determining that the agreementcomplies with §§ 251, 252 and any pertinent FCC regulation, mustapprove the agreement. If the state commission declines to act, the FCCassumes the state commission's responsibilities. 47 U.S.C. § 252(e)(5).

Within this model, Congress preserved the traditional state role inlocal telephone regulation, although state authority, particularly in thearea of market entry, is rendered subservient to the federal government.See 47 U.S.C. § 251(d)(3) (preserving state regulation so long as itdoes not frustrate the purposes of the Act). Essentially, the scope ofstate commission discretion is established at the pleasure of the FCCsince the FCC can issue regulations that a state commission is requiredto follow when executing its duties under the Act. See AT&T Corp., 525U.S. at 378 n. 6. Furthermore, Congress has employed private actors, thelocal telephone carriers, to do much of the `regulatory' leg-work. Thelocal carriers have a very active role to play in draftinginterconnection agreements. See 47 U.S.C. § 251(a)-(c) (establishingthe duties and obligations of exchange carriers). The interconnectionagreements are in some ways regulations arrived at through consensualnegotiations as opposed to regulations delivered in the form of commandand control edicts.

With an overview of the regulatory framework laid out, some backgroundon the specific nature of interconnection agreements and FCC action inthe area is needed. Interconnection agreements set the terms by which newmarket entrants can use existing local networks and vice versa.47 U.S.C. § 251(a),(b). The interconnection agreements includereciprocal compensation arrangements, the means by which one carrier iscompensated for completing a local call from another carrier.47 U.S.C. § 251(b)(5). The assumption behind reciprocal compensationis that the call volume between the interconnected networks would bebalanced and, similarly, the compensation would be balanced. The presentdispute is about the definition of `local traffic' and, specifically,whether it includes Internet traffic. The definition of `local traffic'determines for what services compensation is paid and, thus, how muchmoney the parties will pay to each other.

The definition of local traffic has been in dispute since the Actpassed in 1996. The FCC has tried to clarify these muddy waters severaltimes, but its attempts have largely churned up more confusion. In 1996,the FCC issued a rule and order stating that reciprocal compensationapplies only to "traffic that originates and terminates within a localarea." In Re: Implementation of the Local Competition Provisions in theTelecommunications Act of 1996, 11 F.C.C.R. 15499, 16013 (1996) ("1996FCC Ruling"). Thus, intrastate traffic is subject to reciprocalcompensation and interstate traffic is not. This seemingly clear-cutdistinction is actually not very clear, especially when the Internet isinvolved.

To communicate on the Internet, a person uses his or her computer andtelephone line to dial into an Internet service provider ("ISP"). The ISPthen connects the computer user with the party that the computer userseeks. If the computer user uses one local telephone carrier and the ISPuses a different local telephone carrier, then one must determine if thecall is subject to reciprocal compensation. If the call is consideredfrom the computer user to the ISP (i.e., originating and terminating inthe local area), then the call would be local and could be subject toreciprocal compensation. If the call is considered on an end to end basis(i.e., an e-mail from the computer user, via the ISP, to a friend acrossthe country) then the call would not terminate in the local area andwould not be subject to reciprocal compensation. To further complicatematters, a call could be from a computer user, via the ISP, to a neighbordown the street. This traffic obviously originates and terminates in thelocal area. See, e.g., In Re Implementation of the Local CompetitionProvisions in the Telecommunications Act of 1996, 14 F.C.C.R. 3689, 3694(1999), vacated, Bell Atlantic Tel. Co. v. FCC, 206 F.3d 1, 3 (D.C. Cir.2000) (describing interstate and intrastate traffic).

The characterization of ISP-bound traffic determines how much moneysome carriers receive and how much other carriers pay. Internet callstend to be longer than average local calls and ISPs do not "call back" atthe same volume, if at all. The difference in the calling pattern ofregular telephone users and Internet telephone users creates an imbalancethat disrupts a basic assumption behind reciprocal compensation: that thecarriers' interconnection use will be roughly balanced. In other words,if ISP-bound traffic is local, some incumbent local exchange carriers areforced to compensate competing carriers with ISP clients, without verymuch likelihood that a similar payment will inure to the incumbent'sbenefit. See, e.g., Southwestern Bell Tel. Co. v. Connect Comm. Corp.,225 F.3d 942, 945 (8th Cir. 2000) (describing the economics at play)."Internet usage has distorted the traditional assumptions [aboutinterconnection] because traffic to an ISP flows exclusively in onedirection, creating an opportunity for regulatory arbitrage and leadingto uneconomical results." In re Implementaitno of the Local CompetitionProvisions in the Telecommunications Act of 1996, F.C.C. 01-131, at 12(April 18, 2001) (hereinafter "2001 FCC Ruling").

In response to the confusion over the nature of traffic involvingISPs, the FCC issued a declaratory ruling in 1999. 14 F.C.C.R. 3689. TheFCC concluded that, for jurisdictional purposes, whether a call made toan ISP was interstate should be determined by looking at the starting andending points of the transmission, and not at the location of the ISP.This view renders most ISP-bound traffic interstate. Id. at 3697. TheFCC, however, declined to issue any rule governing compensation for ISPtraffic. Id. at 3703. In lieu of issuing a rule in this area, the FCCdecided to let state commissions continue to determine if ISP traffic issubject to reciprocal compensation. Id. at 3703-706; see also BellAtlantic Tel. Co., 206 F.3d at 3 (noting that the FCC ruling leftincumbent carriers at the mercy of state commissions until the FCC issueda definitive rule).

As a result of the discretion that the FCC granted to statecommissions, most state commissions, including the Rhode Island PUC,ruled that ISP-bound traffic was subject to reciprocal compensation. See2001 FCC Ruling at 32 n. 127. The1999 FCC ruling, however, was vacatedby the Circuit Court of Appeals for the District of Columbia. BellAtlantic Tel. Co., 206 F.3d at 8. The D.C. Circuit faulted the FCC fornot adequately explaining its reasoning for finding that ISP-boundtraffic was not local traffic and therefore not subject to reciprocalcompensation. Id. That Court acknowledged that, without an FCC ruling,incumbent carriers were still subject to regulation by statecommissions. Id. at 9. Therefore, state commissions maintained authorityto act in this area.

After the Bell Atlantic decision, the FCC adopted a third rulinggoverning ISP-bound traffic and issued an accompanying order on remand.The FCC ruled definitively that ISP-bound traffic was not subject toreciprocal compensation arrangements. 47 C.F.R. § 51.701 (2001); 2001FCC Ruling at 13. The FCC also ruled that it maintained jurisdiction toissue regulations regarding ISP-bound traffic. 2001 FCC Ruling at 31.

The FCC, in a prospective rule, prohibited state commissions frommaking decisions regarding inter-carrier compensation for ISP-boundtraffic. Id. at 39. The FCC required that all new compensation agreementsfor ISP-bound traffic be subject to the `bill and keep' method of costrecovery, whereby each carrier recovers costs from its own end users.Id. at 38-39.

This ruling does not resolve the controversy before the Court becausethe FCC declined to overturn state commission decisions that had ruledthat ISP-bound traffic was subject to reciprocal compensation. The FCCalso did not invalidate any previously negotiated agreements grantingreciprocal compensation for ISP-bound traffic. Instead, for thoseagreements already in existence, the FCC adopted an interim inter-carriercompensation regime. 47 C.F.R. § 51.715; 2001 FCC Ruling at 36-37.Under the 2001 FCC ruling, some interconnection agreements imposingreciprocal compensation on ISP-bound traffic are subject to rate caps andan overall phase out. 2001 FCC Ruling at 37-38.


In September 1998, Conversent opted into an existing interconnectionagreement between Brooks Fiber and Bell Atlantic-RI (now Verizon-RI)assuming Brooks Fiber's role. The `Interconnection Agreement underSections 251 and 252 of the Telecommunications Act of 1996' was enteredinto on May 22, 1997. The Agreement does not reference ISP-bound trafficdirectly, but does define the term "reciprocal compensation," as"described in the Act." "As Described in the Act" is also a defined termin the Agreement, meaning "as described in or required by the Act and asfrom time to time interpreted in the duly authorized rules andregulations of the FCC or the PUC."

In May, 1999, Conversent petitioned the PUC for a declaratory judgementthat ISP-bound traffic be treated as local traffic subject to reciprocalcompensation. Verizon subsequently moved to dismiss the petition fordeclaratory judgement on procedural grounds. Verizon claimed thatConversent's petition violated the PUC's own rules and the Rhode IslandAdministrative Procedures Act. Verizon also contended that federal lawdoes not require the payment of reciprocal compensation on ISP-boundtraffic and that Conversent was aware that Verizon never intended thatISP-bound traffic would be subject to reciprocal compensation. On June23, 1999, Conversent filed its opposition to the motion to dismiss.Conversent, of course, disputed Verizon's claims.

Two days after Conversent's second motion was filed, on June 25, 1999,the PUC apparently issued an Open Meetings Agenda for June 29, 1999. Theagenda includeda notice that Conversent's petition for declaratoryrelief would be discussed at the meeting. The agenda also indicated thatVerizon had filed a motion to dismiss the petition. At the June 29, 1999PUC meeting, the PUC rejected Verizon's motion to dismiss. The PUC alsomoved to accept Conversent's petition for declaratory judgement thatISP-bound traffic be considered local traffic and subject to reciprocalcompensation. As a final related item, the PUC voted to open a separate,generic docket to discuss its powers to establish reciprocal compensationpolicies in light of the FCC's Internet traffic order. It requested thatthe parties brief the PUC on this issue. PUC, Minutes of June 29, 1999Open Meeting.

On July 7, 1999, Verizon filed a motion to reopen the proceedingsarguing that the PUC had violated its procedural rights under the RhodeIsland General Laws and the PUC's internal rules. Conversent filed anopposition motion on July 12, 1999 and Verizon filed a reply on July 16,1999.

On July 21, 1999, the PUC issued its written order for the rulingadopted on June 29, 1999. The written order declared that ISP-boundtraffic should be treated as local traffic subject to reciprocalcompensation for the purposes of the interconnection agreement. On thesame date, the PUC denied Verizon's motion to reopen the proceedings. InJune, 2000, Verizon filed suit in this Court, against the PUC, seeking areversal of the PUC's decision on substantive and procedural grounds.Verizon argues that the PUC erred in its interpretation of theAgreement. Appellant also argues that the PUC rendered an arbitrary andcapricious decision and did not provide sufficient procedural protectionbefore it deprived Verizon of its property, a classic procedural dueprocess argument.


In the Act, Congress created an unusual role for federal districtcourts. Under § 252(e)(6), this Court is an appellate court forcertain state commission decisions.2 The Act explicitly createsfederal district court jurisdiction over state commission approvals orrejections of interconnection agreements. The Act is ambiguous, however,regarding federal district court jurisdiction over other state commissiondeterminations relating to interconnection agreements. This thornyjurisdictional question is made even more complicated because statecourts are precluded from hearing appeals from state commissions.47 U.S.C. § 252(e)(4). Potentially, there could be a jurisdictionalgap, where the parties would not have an opportunity for appellate reviewof state commission action.

Although neither party has contested the jurisdiction of this Court,the Court has a duty to explain its basis for subject matterjurisdiction, especially where, as in § 252(e)(6) litigation, thescope of jurisdiction is disputed and will determine what issues can beresolved by this Court. Fed.R.Civ.P. 12(h)(3) ("Whenever it appears . . .that the court lacks jurisdiction of the subject matter, the courtshall dismiss the matter."); White v. Gittens, 121 F.3d 803, 806 (1stCir. 1997) ("It is too elementary to warrant citation of authority that acourt has an obligation to inquire sua sponte into its subject matterjurisdiction, and to proceed no further if such jurisdiction is wanting."[citations omitted]). The partieshave asserted no other basis for thisCourt's jurisdiction, such as general federal question jurisdiction under28 U.S.C. § 1331.

The exact boundaries of a federal district court's subject matterjurisdiction under § 252(e)(6) are, to say the least, unclear.Although the statute establishes jurisdiction to review approvals andrejections of interconnection agreements, it does not state if this Courthas jurisdiction to review matters arising after an interconnectionagreement has been approved. Section 252(e)(6) refers to a federaldistrict court's ability to review a state commission `determination',but that term is not defined. The Circuit Courts have divided on theproper approach to federal jurisdiction under this statute. In March,2001, the Supreme Court granted certiorari to decide the exact scope offederal subject matter jurisdiction under § 252(e)(6). Mathias v.WorldCOM Tech, Inc., 121 S.Ct. 1224 (2001).

The First Circuit has addressed federal jurisdiction under this Act,but declined to decide the precise issue presently before the Court. TheFirst Circuit held that a utility commission's action was not adetermination under the Act and, therefore, not subject to review by thefederal district court. Puerto Rico Tel. Co., 189 F.3d at 13.Furthermore, the First Circuit held that 47 U.S.C. § 252(e)(6) doesnot authorize district court review of state commission actions forcompliance with state law. Id.

The First Circuit explicitly left unresolved whether interpretation ofexisting interconnection agreements is included within the meaning of`determination' for the purposes of federal subject matter jurisdiction.Id. at 10. The threshold question under the Puerto Rico Telephonedecision is whether a state commission's actions are a `determination'.The First Circuit assumed, without deciding, that an order is a`determination' if it has a sufficient nexus with the interconnectionagreement. Id. at 11, 13. The First Circuit rejected the district court'sstrict construction of jurisdiction, excluding any issue of state law,even where it conflicted with federal law. Id. at 15. Here, as in PuertoRico Telephone, there is no issue that the PUC rejected or failed toapprove the interconnection agreement. See id. at 10. The sole question iswhether the PUC action is a `determination' that would fall under §252(e)(6)'s jurisdictional reach.

In this case, unlike the scenario the First Circuit was addressing inPuerto Rico Telephone, the PUC was purporting to interpret theinterconnection agreement itself. In Puerto Rico Telephone, the party wasessentially trying to get federal appellate review of a Puerto Ricanconsumer protection requirement that might have had an indirect effect onthe agreement. See id. at 12-13. In the present case, the PUC has decidedthe meaning of a key term of the Agreement. Therefore, this Courtconcludes that the PUC's decision has a sufficient nexus to the Agreementto be a `determination' under § 252 and that, under Puerto RicoTelephone, the Court has jurisdiction to review the PUC decision. Seeid. at 11, 13.

Deciding that this Court has jurisdiction over this matter does notresolve the scope of this Court's review. Several Circuit Courts haveheld that, at a minimum, federal district courts have the authority toreview state commission determinations for compliance with federal law.See, e.g., MCI Telecomm. Corp. v. U.S. West Comm., 204 F.3d 1262, 1266(9th Cir. 2000) (holding that federal jurisdiction extends only todetermining compliance with federal law); Illinois Bell Tel. Co. v.WorldCOM Tech. Inc., 179 F.3d 566, 571 (7th Cir. 1999) (reviewing statecommission order for violations of federal law, not state law); but seeBell Atlantic Md. Inc. v. MCI Worldcom Inc., 240 F.3d 279, 307 (4th Cir.2001), cert. granted, 121 S.Ct. 2548 (June 25, 2001) (holding that thereis no federal jurisdiction over state commission orders administering andenforcing interconnection agreements). Other Circuit Courts haveconcluded that § 252(e)(6) confers broader jurisdiction. The TenthCircuit held that federal jurisdiction extended to any state commissioninterpretations made pursuant to authority granted to it by the Act.Southwestern Bell Tel. Co. v. Brooks Fiber Comm., Inc., 235 F.3d 493, 497(10th Cir. 2000); see also Southwestern Bell Tel. Co. v. Connect Comm.Corp., 225 F.3d at 948 (holding that federal jurisdiction extended tostate commission actions made pursuant to federal law). Those CircuitCourts have reasoned that federal courts must be able to review exercisesof federal power made by state commissions enforcing § 252 and notjust compliance with federal law. See, e.g., Southwestern Bell Tel. Co.v. Brooks Fiber Comm., 235 F.3d at 497; Southwestern Bell Tel. Co. v.Connect Comm. Corp., 225 F.3d at 948; see also Southwestern Bell Tel.Co. v. Pub. Util. Comm'n, 208 F.3d 475, 481-82 (5th Cir. 2000) (holdingthat federal jurisdiction extends to review of state commission rulingson complaints pertaining to interconnection agreements).

This Court generally agrees with those Circuit Courts that have heldthat § 252(e)(6) confers broad federal jurisdiction to federaldistrict courts reviewing state commission actions. Congress intendedfederal law to govern issues of market access, gave the FCC the power topreempt state action, and made federal jurisdiction, at least with respectto the approval and rejection of interconnection agreements, exclusive.For § 252 jurisdiction to be read narrowly would be to create anunprecedented complicated scheme with extremely unclear roles for federaland state courts. Until the Supreme Court of the United States determinesotherwise, this Court will assume that it has subject matter jurisdictionin this kind of case. Thus, this Court is not limited to determining ifstate commission rulings comply with federal law. Based on the FirstCircuit's Puerto Rico Telephone decision, however, the Court cannot hearclaims based purely on state law. See 189 F.3d at 13.

Any decision of this Court must stem from its jurisdiction under §252. Although a due process claim raises a federal question, without§ 252 federal jurisdiction, the proper procedure for the parties isfurther appeal in the state courts. It is a basic principle of subjectmatter jurisdiction that federal district courts should not serve asappellate courts for state court decisions, or for that matter, stateadministrative agencies acting in an adjudicatory manner. See, e.g.,Wilson v. Shumway, 264 F.3d 120 (1st Cir. 2001) (discussing theRooker-Feldman Doctrine). State courts are equally competent to decidequestions of federal law. Section 252 is a narrow exception to thisprinciple, whereby Congress has specifically delegated appellate review tothe federal district courts while at the same time removing state courtjurisdiction. 47 U.S.C. § 252(e)(4),(6). Therefore, this Court mayonly hear the federal due process claim if it also has jurisdiction under§ 252.

This Court, however, does not have subject matter jurisdiction over thestate procedural claims, based on the Rhode Island AdministrativeProcedures Act and the PUC's own procedural rules. Under § 252, theCourt does not have jurisdiction to address matters of state law and anyappeal of state law issues should be made to state court. See Puerto RicoTel. Co., 189 F.3d at 13. A state procedural violation is clearly not a`determination' under § 252(e)(6).

Furthermore, this Court cannot address claims based on state proceduralviolations as a matter of supplemental jurisdiction. This Court'sjurisdiction is based solely on § 252(e)(6), which confers on thisCourt appellate, not original jurisdiction. The statute creatingsupplemental jurisdiction for this Court applies only to "civil action ofwhich the district courts have original jurisdiction." 28 U.S.C. § 1367(1994). Here, the parties are invoking the narrow federal appellatejurisdiction of this Court, and the Court cannot exercise supplementaljurisdiction over a state law issue pursuant to 28 U.S.C. § 1367.

For the foregoing reasons, this Court will review the procedural claimsfor constitutional and federal law violations, but not for non-compliancewith state law.


Appellant Verizon presents two arguments that the PUC committedprocedural error when it issued the July 21, 1999 order. First, Verizonargues that the PUC, by violating its procedural rules, rendered anarbitrary and capricious decision and, thus, its decision should bevacated. Second, Verizon claims that the PUC deprived Verizon of propertywithout due process of law.

A. Arbitrary and Capricious

Alleged Violations of State Procedural Rules

Verizon argues that because the PUC failed to conform to requiredprocedures, its decision is arbitrary and capricious and, thus, should bevacated. One type of arbitrary and capricious claim stems from anagency's deviation from required procedures. This Court, as previouslydiscussed, does not have jurisdiction to review state proceduralviolations. In addition, this Court has serious doubts as to whether thePUC is bound by state procedural rules at all when acting pursuant tofederal authority under § 251 and § 252.

Congress has the authority to mandate that state actors follow federalprocedural requirements in any field where it can preempt stateauthority. See FERC v. Mississippi, 456 U.S. 742, 771 (1982). Under theAct, Congress mandated certain procedural rules for state commissionswhen they approve or reject interconnection agreements.47 U.S.C. § 252(b)(4). Congress also precluded state courts fromreviewing the actions of state commissions when approving or rejectingagreements. 47 U.S.C. § 252(e)(4). Thus, Congress has demonstrated anintention to federalize the procedure, at least, in the approval andrejection of interconnection agreements. The Act, however, does notinclude procedural requirements for state commission `determinations'under § 251 and § 252. As such, whether the state commissionsmust abide by state procedures when rendering determinations, but notwhen approving or rejecting agreements reflects the same ambiguity as theexact scope of federal jurisdiction.

Whether state procedural rules apply to this situation, however, is anissue that this Court need not resolve. The lack of jurisdiction overstate procedural law leads to the same result in this case. The Courtwill not review the PUC order for violations of state procedures.

Errors in the PUC's Fact-Finding Process

The Court can review the PUC's fact-finding actions for compliance withfederallaw. Essentially, by claiming that the PUC violated its ownprocedural rules, Verizon argues that the PUC was arbitrary and capriciousin making its findings of fact. Here, the PUC selected allegations(contested by the parties) from the pleadings, made factual findings fromthose allegations (without an evidentiary hearing), and decided theparties' intent regarding an Agreement as a matter of law.

The Act does not specify the standard of review that this Court mustuse in reviewing state commission decisions, and there is no directprecedent binding this Court to a particular standard. Furthermore, theAdministrative Procedure Act does not apply because the PUC is not an`agency' under that Act. See 5 U.S.C. § 701(b)(1) (1994) (definingagency as an "authority of the Government of the United States").

For issues other than interpretation of federal law, including findingsof fact, most Circuit Courts have concluded that the norm for review isan arbitrary and capricious standard. See, e.g., Southwestern Bell Tel.Co. v. Brooks Fiber Comm., 235 F.3d at 498; Southwestern Bell Tel. Co.v. Pub. Util. Comm'n, 208 F.3d at 482; U.S. West Comm. v. MFS Intelenet,Inc., 193 F.3d 1112, 1117 (9th Cir. 1999), cert. denied, 530 U.S. 1284(2000); but see GTE South, Inc. v. Morrison, 199 F.3d 733, 745-46 (4thCir. 1999) (applying the substantial evidence standard to statecommission factual determinations, but noting that there is no meaningfuldifference from arbitrary and capricious review); MCI Telecomm. Corp.,204 F.3d at 1266-267 (same). Given the general consensus regarding thecorrect standard to use when reviewing state commission orders madepursuant to 47 U.S.C. § 252(e)(6), this Court will use the arbitraryand capricious standard to review the PUC's factual findings andconclusions drawn from them.

Under federal law, if an agency's actions, findings and conclusions arearbitrary, capricious, an abuse of discretion or not in accordance withlaw, the Court must vacate the agency's decision. See Sierra Club v.Marsh, 976 F.2d 763, 769 (1st Cir. 1992). This Court must review thePUC's action to ensure that PUC considered all the relevant factors,articulated a reasonable connection between the facts and the conclusiondrawn, and did not make a clear error in judgement. Penobscot Air Serv.Ltd. v. FAA, 164 F.3d 713, 719-20 (1st Cir. 1999). "Normally, an agencyrule would be arbitrary and capricious if the agency has relied onfactors which Congress has not intended it to consider, entirely failedto consider an important aspect of the problem, offered an explanationfor its decision that runs counter to the evidence before the agency, oris so implausible that it could not be ascribed to a difference in viewor the product of agency expertise." Motor Vehicle Manfrs. Assoc. v.State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The focus of thearbitrary and capricious standard is on the rationality of the agency'sdecision-making process, not the rationality of its decision. Olenhousev. Commodity Credit Corp., 42 F.3d 1560, 1575 (10th Cir. 1994). Arbitraryand capricious is a deferential standard of review, but it is not arubber stamp. Airport Impact Relief, Inc. v. Wykle, 192 F.3d 197, 203(1st Cir. 1999). The reviewing court must conduct a "thorough, probing,in-depth review" and a "searching and careful" inquiry into the record.Id. (citing Citizens to Preserve Overton Park, Inc., v. Volpe,401 U.S. 402, 415-16 (1971)).

The standard may be applied to mixed questions of law and fact, such asreviewing an agency's summary judgement order. Puerto Rico Aqueduct &Sewer Auth. v. EPA, 35 F.3d 600, 604 (1st Cir. 1994). In addition torequiring a reasoned basis for agency action, the arbitrary andcapricious standard requires an agency's action to be supported by thefacts in the record. Olenhouse, 42 F.3d at 1575; Kelly v. United States,34 F. Supp.2d 8, 12 (D.D.C. 1998) (concluding an agency's decision wasarbitrary and capricious because "internal tensions, a paucity of factualfindings, and incoherent reasoning plague the . . . decision").

To understand the nature of the PUC's actions, this writer will brieflyreview the strange travail of this claim. Conversent petitioned the PUCfor an interpretation of its agreement with Verizon. Conversent styledits petition as a motion for declaratory relief. Verizon filed an answerwith the PUC, arguing that the petition should be dismissed.3 Verizonclaimed, in part, that Conversent's petition did not meet therequirements under the PUC rules and Rhode Island General Laws for adeclaratory judgement because it failed to name a rule or statute to beinterpreted. Although, as already discussed, this Court cannot review PUCactions for compliance with state procedural rules, this Court agreesthat the PUC was not issuing a declaratory judgement on July 29, 1999.

A declaratory judgement is an equitable tool used by courts to definethe legal rights and obligations of parties. In a declaratory judgementaction, there may be questions of law and fact for the trial court todecide. Here, the PUC, acting in many ways as a trial court, failed tohold a hearing on the legal or factual issues at stake. The PUC did putthe issue on its regular meeting agenda, and this Court assumes that theparties had notice of the proceedings. There is nothing, however, from thescant record below to show that the parties themselves received specificnotice of the hearing. Furthermore, the notice only indicated that theissues would be discussed, and did not state that the parties would havea chance to be heard or that the PUC was in a procedural posture todecide the basic dispute or any of the motions before the commission.

At the June 29, 1999 commission meeting, the PUC then made anadjudicatory decision, without taking evidence. In essence, the PUCissued a summary judgement ruling, not a declaratory judgement. The PUCdecided the dispute as a matter of law.

No party, however, at any time petitioned the PUC for anything thatwould resemble summary judgement on the merits. Verizon filed a motionfor dismissal, but on procedural, not substantive grounds. In response,Conversent argued that the PUC should find that the parties intended toinclude Internet traffic as local traffic under the interconnectionagreement or that the PUC should issue ageneral rule that Internettraffic is local traffic under interconnection agreements. In aconcluding sentence, Conversent stated that the PUC need not hold anadjudicatory hearing or take additional evidence to reach its decision.That one sentence can hardly be considered a motion for summary judgementthat would put the other party on adequate notice that the PUC wouldissue a ruling prior to taking evidence or even hearing arguments. Inaddition, Conversent's reply brief was filed on July 23, 1999, a mere sixdays prior to the June 29, 1999 meeting where a final decision wasrendered. If that one sentence was a summary judgement motion, Verizonwas entitled to have time to respond.

Before issuing summary judgement, a court must look to the record anddetermine that there is no genuine issue of material fact and that themoving party is entitled to judgement as a matter of law. E.g.,Fed.R.Civ.P. 56(c). It is common practice for an agency to issueadministrative summary judgement, whereby the agency dispenses with anevidentiary hearing. See Puerto Rico Aqueduct, 35 F.3d at 607 (notingthat "administrative summary judgement has maintained a closerelationship with Rule 56"). Due process does not require an agency tohold an evidentiary hearing if "it appears conclusively from the papersthat on the available evidence, the case can only be decided one way."Id. at 606. At the summary judgement stage, the tribunal views the factsin the light most favorable to the non-moving party. Because a court mustknow what facts are material to the case, some discovery often precedessummary judgement or undisputed facts are presented to the court. A courtreviewing an agency's summary decision must examine the agency's findingsagainst the record for accuracy and determine if the findings warrantdenial of a hearing. Id. at 609.

Here, there were contested facts and those facts might well be materialto the outcome of the case. In this case, the de facto non-moving partywas Verizon. The PUC, however, disregarded Verizon's claim as to disputedfacts to rule in favor of Conversent. The PUC selectively picked throughthe pleadings for certain allegations, and from them, made a factualfinding on the intent of the parties. See NEVD of R.I. Petition forDeclaratory Judgement that Internet Traffic Be Treated as Local TrafficSubject to Reciprocal Compensation, PUC Order No. 15915, 18 (July 21,1999).

This Court does not agree with the PUC that, on the pleadings,examining the facts in a light most favorable to the non-moving party todetermine the intent of the parties, an evidentiary hearing was notwarranted. This Court can cite a list of conclusory statements made bythe PUC that were disputed in the pleadings. For example, the PUCconcluded that because the Agreement did not include a specific exclusionof ISP-bound traffic from local traffic, the Agreement unambiguouslyreflects the party's intent that ISP-bound traffic would be subject toreciprocal compensation. The PUC also found support for its reading ofVerizon's intention from the fact that Verizon allowed customers to callISPs as local calls, and because Verizon had been paying reciprocalcompensation to Brooks Fiber, Conversent's predecessor to the Agreement.The PUC ignored Verizon's contention that Conversent knew that Verizondid not intend to pay reciprocal compensation for ISP-bound traffic. ThePUC apparently did not consider Verizon's contention that, although itpaid carriers for some ISP-bound traffic, it notified providers promptlythat it did not consider suchtraffic eligible for reciprocalcompensation. Since the Agreement's definition of reciprocal compensationtracked federal law, the PUC should have examined how the parties meantto incorporate the ambiguous legal rulings such as the 1999 FCC Rulingregarding Internet traffic. Additionally, the PUC relied on the fact thatVerizon allowed customers to call ISPs as local calls, but ignored thatit did so pursuant to an FCC mandate. See id. at 17-19.

This Court also notes that the PUC knew that reciprocal compensationfor ISP-bound traffic was not required by law, because it opened up adocket to review the matter in its legislative rule-making capacity. SeePUC, Minutes of June 29, 1999 Open Meeting. The motion, in part, askedthe parties to brief the PUC on "the effect of the FCC's Internet TrafficOrder on the power of the states to establish reciprocal compensationpolicies." Id. Therefore, the PUC was determining the meaning of thecontract as intended by these two parties, and not establishing a generaldefinition of reciprocal compensation in Rhode Island.

This Court understands that the PUC is not a trial court and, as astate administrative agency, may during its regular course of businessfollow different procedural practices. Similarly, this Court does notusually find itself in the role of an appellate court of state agencyaction. Nevertheless, this Court must attempt to fulfill the unusual rolecreated by § 252(e)(6).

Verizon did not get an even-handed hearing before the PUC. Because thePUC issued its order when there appeared to be numerous genuine issues ofmaterial fact and failed to hold an evidentiary hearing to determinewhether there were genuine issues of material fact, the PUC committedclear error. See Puerto Rico Aqueduct, 35 F.3d at 606. This Court canfind no rational connection between the decision made and the allegationspresented to the PUC. See Penobscot Air Serv., 164 F.3d at 719-20. The PUCtook a list of factors, picked through the pleadings for allegationssupporting those factors, and determined those allegations to be factualfindings even though they were contested and no evidence was presented tosupport them.

From those `findings', the PUC made a determination of the parties'intent, a power it presumed because, at the time, the FCC had stated thatthe PUC could interpret interconnection agreements. See 14 F.C.C.R. at3703-706. Interpreting the meaning of a provision, to the PUC, seems tobe synonymous with imposing a meaning on a provision without consideringdisputed facts. It is not. One is adjudication and the other islegislation. This Court finds that the PUC should have held anevidentiary hearing because there were disputed factual issues. SeePuerto Rico Aqueduct, 35 F.3d at 606, 609. Because the record here is sopoor, this Court concludes that the PUC did not consider all the relevantfactors and did not articulate a reasonable connection between the factsand conclusion drawn. See Penobscot Air Serv., 163 F.3d at 719-20.Furthermore, because the PUC decided this issue in a summary manner, eventhough there was no specific motion for summary judgement, neither partyhad proper notice of the action to be taken at the regular meeting ofJuly 29, 1999. For the preceding reasons, the action of the PUC wasarbitrary and capricious.

Property Depravation without Due Process of Law

Verizon also argues that it was deprived of its property without dueprocess of law in violation of the United States Constitution. Under theFourteenth Amendment,state actors, such as the PUC, are required tofollow the Constitution, and specifically the requirements of proceduraldue process.

Due process requires a meaningful hearing at a meaningful time before adeprivation of property can occur. Mathews v. Eldridge, 424 U.S. 319, 333(1976). Verizon recites the familiar three factor weighting testannunciated by the United States Supreme Court in Mathews to determine ifthe procedures accorded to a party are adequate. The reviewing court mustweight the private interest at stake, the risk of erroneous deprivationbecause of the procedures used as well as the probable value of moreprocedural safeguards, and the burden on the government of more proceduralsafeguards. Id. at 335.

Here, of course we are not dealing with the grave depravation of anindividual's only source of sustenance, a welfare check, or a disabledperson's means of income. Indeed, the amount of money at stake is not thetouchstone for determining the harm to the private interest, rather it isthe degree of potential depravation that is important. Id. at 341.Verizon stands to lose a significant amount of money under an adverse PUCdetermination. Verizon has an agreement, that is overseen by the PUC,setting forth Verizon's rights and obligations. The PUC redefined a keyterm in the Agreement without giving Verizon a meaningful opportunity tobe heard, perhaps erroneously depriving Verizon of a substantial propertyinterest in that contract. Furthermore, without more proceduralprotections, a potentially wrongful depravation will be permanent, nottemporary. See id. at 340. Therefore, the private interest at stake isgreat.

The second Mathews factor, risk of erroneous depravation, is extremelyapposite to this Court's concerns. See id. at 343. Here, more procedureswould greatly decrease the risk of error in judgement. Given theconfusion over the vague federal statute, the unclear FCC ruling (thatwas later overturned by the D.C. Circuit) and the mixed questions ofregulatory law and contract interpretation, the parties, the PUC, andthis Court would have greatly benefited from a clear record beingdeveloped as to the facts in dispute in this case. A hearing,specifically dedicated to the presentation of arguments would havesimilarly clarified what legal issues were in dispute, and perhaps evensuggested that this was a matter of contract law better left to the statecourts to sort out. Due process rights serve to ensure that individualsare treated with fairness when they appear before an adjudicatory body.See Hermanowski v. Farquharson, 39 F. Supp.2d 148, 156 (D.R.I. 1999). TheCourt has already recounted the unfair deficiencies in the quality ofnotice and hearing given to Verizon. They need not be repeated here.

As to the burden to government in giving more procedural protection, inthe spirit of the `cooperative federalism' underlying § 252, thisCourt looks to both the burdens on the PUC and the federal districtcourt. The additional work of having a hearing and a more developedfactual record would greatly reduce subsequent difficulties and serve thepublic interest. Mathews, at 347-48. Finally, although the PUC has otherimportant work to conduct, the burden facing the government in Mathewswas the burden of holding thousands of hearing for welfare or disabilityrecipients. See id. There are only a few telephone companies in RhodeIsland seeking review of their interconnection agreements. A more formalhearing before the PUC, with proper notice to the parties and theopportunity to present evidenceon any disputed facts, would not undulyburden the PUC. In any event, if the PUC felt burdened, it could declineto act and defer its responsibilities to the FCC. See47 U.S.C. § 252(e)(5).

For these reasons, the Court concludes that Verizon was deprived of itsproperty without due process of law.


For the foregoing reasons, the PUC decision is vacated and the matteris remanded to the PUC for further determinations not inconsistent withthis ruling and federal law. Since the factual record from the PUC isinadequate, this Court declines to reach the substantive arguments ofappellant Verizon.

Additionally, this Court notes that in light of the 2001 FCC ruling, aPUC determination that the interconnection agreement, when entered,required reciprocal compensation for ISP-bound traffic may only entitlethe parties to compensation under the interim inter-carrier compensationregime. See 2001 FCC Ruling.

The long and short of it here is that the PUC must treat this matter asa contested case, not as a rule-making matter, give the parties anopportunity to present evidence and make arguments and in the end makefindings of fact and conclusions of law so that this Court can exerciseits appellate jurisdiction in a meaningful way on an adequately developedrecord.

It is so ordered

1. The parties in this case have changed names multiple times. At thetime of the PUC order, appellant was New England Telephone and TelegraphCompany. When the instant lawsuit was filed, Appellant had become BellAtlantic-Rhode Island. Today, Appellant is Verizon-Rhode Island. AlthoughVerizon has not moved to amend the complaint to reflect the name change,for simplicity this Court will use Verizon throughout this opinion.Similarly, Appellee Conversent was known as New England Voice and Data,L.L.C. at the time of the PUC order. In an effort to avoid confusion, theparties will be referred to by their current monikers throughout thisdecision.

2. "In any case in which a State commission makes a determinationunder this section, any party aggrieved by such determination may bringan action in an appropriate Federal district court to determine whetherthe agreement or statement meets the requirements of section 251 of thistitle and this section." 47 U.S.C. § 252(e)(6).

3. Although Verizon was allowed to file an answer, there is nothing inthe record to indicate that Verizon was ever joined in the litigation. Itis a basic premise of procedure that all interested parties should bejoined in a declaratory judgement action, so that they may properlyappear before the Court. There can be no more necessary and indispensableparty in this case than Verizon, the other party to the Agreement. WhenConversent seeks to have its rights determined, it is also, obviously,seeking a determination of Verizon's rights and obligations. Because thePUC did not make clear that Verizon was joined in this litigation, itcompromised Verizon's ability to pursue all of its rights to appeal. Thiswas the first strange procedural decision of the PUC.

However, in accepting Verizon's reply brief, the PUC obviously treatedVerizon as an indispensable party, and, therefore, Verizon has been defacto joined and may appear before this Court to seek review of the PUC'sdeclaratory judgement.

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