Calaveras Telephone Co. v. Public Utilities Commission ( 2023 )

Filed 12/20/22; Modified and Certified for Partial Pub. 1/18/23 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
CALAVERAS TELEPHONE COMPANY et al.,
F083339
Petitioners,
(Dec. Nos. 21-04-005 & 21-08-042)
v.
PUBLIC UTILITIES COMMISSION,
Respondent;
PUBLIC ADVOCATES OFFICE OF THE
PUBLIC UTILITIES COMMISSION et al.,
Real Parties in Interest.
ORIGINAL PROCEEDINGS; petition for writ of review.
BRB Law, Patrick M. Rosvall and Sarah J. Banola for Petitioners.
Arocles Aguilar, Mary McKenzie and Tovah Trimming for Respondent.
Lozeau Drury, Michael R. Lozeau; The Utility Reform Network and Ashley L.
Salas for Real Party in Interest The Utility Reform Network.
No appearance for Real Parties in Interest Public Advocates Office of the Public
Utilities Commission and Stephen Kalish
-ooOoo-
The Public Utilities Commission (the Commission or PUC) oversees the
California High Cost Fund A program (CHCF-A), which provides subsidies to small,
rural, independent telephone companies that provide local telephone service in rural and
remote areas of California. The subsidies defray the high cost of providing service in
such areas. More recently, the subsidies have helped the telephone companies invest in
infrastructure capable of providing both regulated voice telephone service and
unregulated broadband Internet access service. The fact a broadband-capable network
can provide both types of service created a concern that the telephone companies could
sell wholesale broadband service to affiliated companies at artificially low rates and the
affiliated companies could profit by selling Internet access service at the retail level. In
other words, subsidized infrastructure could be used to generate private, unregulated
profits.
The Legislature addressed this concern by amending Public Utilities Code section
275.6,1 the statute that governs the CHCF-A, to authorize the Commission to obtain
information from the telephone companies about “revenues derived from the provision of
unregulated internet access service by that [company] or its affiliate.” (§ 275.6, subd.
(e)). Also, the Commission must ensure the CHCF-A subsidies are “not excessive.”
(§ 275.6, subd. (c)(7).) Relying on section 275.6, the Commission ordered the imputation
of net positive retail broadband Internet access service revenues of the telephone
companies and their affiliates (broadband imputation) in the calculation of the CHCF-A
subsidies.
Ten small rural telephone companies that participate in CHCF-A subsidies filed
this writ proceeding to nullify the Commission’s broadband imputation order. They
contend broadband imputation (1) is not authorized by section 275.6, (2) exceeds the
1 Undesignated statutory references are to the Public Utilities Code.
2.
authority granted to the Commission by other statutes and the California Constitution, (3)
is preempted by federal law, and (4) is an unconstitutional taking of private property. As
explained below, we reject these arguments.
Therefore, the telephone companies’ request for a writ directing the Commission
to nullify its broadband imputation order is denied.
FACTS AND PROCEEDINGS
The Parties
This original proceeding was brought on behalf of 10 small independent telephone
companies and eight small Internet service providers (ISP) affiliated with those telephone
companies. The telephone companies are Calaveras Telephone Company; Cal-Ore
Telephone Co.; Ducor Telephone Company; Foresthill Telephone Co.; Kerman
Telephone Co.; Pinnacles Telephone Co.; The Ponderosa Telephone Co.; Sierra
Telephone Company, Inc.; The Siskiyou Telephone Company; and Volcano Telephone
Company. They are referred to collectively in this opinion as the “telephone
companies.”2 The telephone companies are carriers of last resort that must fulfill all
reasonable requests for telephone service within their service areas. (§ 275.6, subd.
(b)(1).) As carriers of last resort, the telephone companies qualify for CHCF-A subsidies.
(§ 275.6, subds. (a), (d).) The CHCF-A program is funded by surcharges assessed
against all California telephone customers.
The telephone companies’ affiliates that provide Internet access service are CalTel
Connections; Cal-Ore Communications; Varcomm Broadband, Inc.; Audeamus LLC;
Ponderosa Cablevision; Sierra Tel Internet; Golden Bear Broadband LLC; and Volcano
2 Small independent telephone corporations are rural incumbent local exchange
carriers (i.e., a company that provides local telephone service) regulated by the
Commission. (§ 275.6, subd. (b)(6).) The telephone companies are sometimes referred
to as “small incumbent local exchange carriers or small ILECs.” (Calaveras Telephone
Co. v. Public Utilities Com. (2019) 39 Cal.App.5th 972, 976.)
3.
Vision, Inc. The ISP affiliates do not participate in the CHCF-A program and the
Commission does not regulate the rates they charge for Internet services.
The Commission is the respondent in this proceeding. The only real party in
interest that answered the petition is The Utility Reform Network (TURN).
Universal Service Goal
A fundamental principle of our nation’s telecommunications policy is ensuring the
availability of high quality, affordable telephone service for all Americans. (Sen. Energy,
Utilities and Communications Com., Analysis of Sen. Bill No. 379 (2011-2012 Reg.
Sess.) as amended Aug. 20, 2012, p. 1 (Senate Utilities Analysis).) Achieving this goal
in rural, remote and sparsely populated areas is difficult because building and
maintaining the necessary infrastructure is expensive and economies of scale are limited.
(Blanca Telephone Company v. Federal Communications Commission (10th Cir. 2021)
991 F.3d 1097, 1104–1105 (Blanca).) As a result, it is more expensive on a per customer
basis to serve such areas. (Ibid.) To address these difficulties, federal and state subsidy
programs have been developed to defray some of the cost of providing service.
Federal Program
In 1934, Congress adopted the Communications Act of 1934 (47 U.S.C. § 151 et
seq.) and created the Federal Communications Commission (FCC). The FCC’s purpose
was to regulate interstate and foreign commerce in communication by wire and radio and
make available, insofar as possible, communication services with adequate facilities at
reasonable charges. (47 U.S.C. § 151.)
In 1996, Congress updated that legislation by passing the Telecommunications Act
(Pub. L. No. 104-104 (Feb. 8, 1996) 110 Stat. 56). The new act explicitly stated the
policy that “[c]onsumers in all regions of the Nation, including low-income consumers
and those in rural, insular, and high cost areas, should have access to telecommunications
and information services ... reasonably comparable to those services provided in urban
areas and that are available at rates that are reasonably comparable to rates charged for
4.
similar services in urban areas.” (47 U.S.C. § 254, subd. (b)(3); see Blanca, supra, 991
F.3d at p. 1105.) Congress directed the FCC to make policies “for the preservation and
advancement of universal service” and provided principles to guide that policy making.
(47 U.S.C. § 254, subd. (b).)
Pursuant to Congress’s directive, the FCC established a Universal Service Fund
(USF), from which subsidies were disbursed for services provided and infrastructure built
in rural, high-cost areas. (Tri-County Telephone Association, Inc. v. Federal
Communications Commission (D.C. Cir. 2021) 999 F.3d 714, 717; see 47 C.F.R. Part 54
[universal service].) The rules for distributing the funds were established by the FCC.
(47 U.S.C. § 254, subd. (k).) The USF and its successor are financed by mandatory
contributions from telecommunications carriers. (47 U.S.C. § 254, subd. (d); 47 C.F.R.
§ 54.706 [contributions from entities that provide interstate telecommunications to the
public].)
Another aspect of the 1996 Telecommunications Act is its distinction between
telecommunication services, which are subject to Title II of the act, and information
services, which are addressed in Title I of the act. (Mozilla Corporation v. Federal
Communications Comm. (D.C. Cir. 2019) 940 F.3d 1, 17 (Mozilla).) Telecommunication
services are given common carriage status, which subjects them to an array of statutory
restrictions and requirements. (Ibid.) In contrast, information services are exempted
from common carriage status and regulation. (Ibid.) In 2018, after a change of
administrations, the FCC changed the classification of broadband Internet access service
to an “information service” and, thus, exempted such service from utility-style regulation
under Title II of the1996 Telecommunications Act. (Mozilla, supra, at p. 17.) This
change in classification was upheld by District of Columbia Circuit in Mozilla. The court
stated that the FCC “permissibly classified broadband Internet access as an ‘information
service’ by virtue of the functionalities afforded by [domain name service] and caching.”
5.
(Mozilla, supra, at p. 35.) This classification is relevant to the telephone companies’
contention that broadband imputation is preempted by federal law. (See pt. IV., post.)
California Program
The California subsidy program relevant to this case is the CHCF-A. (See
Calaveras Telephone Co. v. Public Utilities Com., supra, 39 Cal.App.5th at p. 976
[“CHCF-A is one of the state’s universal service programs”].) The CHCF-A program
was first established in 1987. At that time, federal and state laws and regulations
promoted universal service by supporting access to landline voice telephone service.
(Stats. 2011, ch. 695, § 1, subd. (a).)
As enacted in 2008, section 275.6 directed the Commission to “develop,
implement, and maintain a suitable program to establish a fair and equitable local rate
structure aided by universal service rate support to small independent telephone
corporations that serve rural areas and are subject to rate-of-return regulation by the
commission. The purpose of the program shall be to promote the goals of universal
telephone service and to reduce any disparity in the rates charged by those companies.”
(Stats. 2008, ch. 342, § 2.) The 2008 version of the statute had a sunset date of January 1,
2013. (Stats. 2008, ch. 342, § 2; former § 275.6, subd. (d).) In 2011, the Legislature
extended the sunset date to January 1, 2015. (Stats. 2011, ch. 695, § 3 [former § 275.6,
subd. (d)].) Its current sunset date is January 1, 2028. (§ 275.6, subd. (g).)
In late 2011, the FCC issued a major decision expanding the concept of universal
service to include broadband (not just voice service) and revamping the USF into the
Connection America Fund (CAF) to grant subsidies for facilities providing broadband
and voice service. (Senate Utilities Analysis, supra, p. 2 [Federal Program Now
Supports Broadband Service].) Under the CAF, carriers were eligible for funding only if
they met “broadband buildout requirements and demonstrate[d] that their networks
provide[d] minimum broadband speeds of 4 megabits per section (MBPS) downstream
and 1 MBPS upstream.” (Ibid.) It was estimated that, if the FCC’s new network upgrade
6.
requirements were not met, California carriers could lose $25 million in federal funding
annually. (Ibid.)
The FCC’s shift to support broadband and the possibility that federal subsidies
would be reduced and, as a result, the subsidies from the CHCF-A would be increased
caused the Commission to issue Order Instituting Rulemaking Regarding California High
Cost Fund-A Program (Nov. 18, 2011) Rulemaking 11-11-007, to begin a detailed
review of the CHCF-A to develop a more efficient, prudent and forward-looking plan that
reflected the realities of the market place and technological advancements. (Senate
Utilities Analysis, supra, p. 2 [CPUC Proceedings].)
In 2012, while the rulemaking proceeding was pending before the Commission,
the Legislature amended section 275.6. (Stats. 2012, ch. 729, §§ 1–3, pp. 5989–5991.)
Whether the amended section 275.6 granted the Commission the authority to adopt
broadband imputation is a question of statutory interpretation addressed in part II. of this
opinion.
Commission Decisions
In December 2014, the Commission concluded phase I of the rulemaking
proceeding and issued Decision Adopting Rules and Regulations in Phase 1 of the
Rulemaking for the California High Cost Fund-A Program (Dec. 18, 2014) Decision No.
14-12-084. The Commission determined that it had the authority to order broadband
imputation but that it was premature to adopt broadband imputation at that time.
Accordingly, the Commission deferred its decision on whether to impose broadband
imputation to phase II of the rulemaking proceeding, when certain studies relevant to the
issue would be completed.
In January 2018, the FCC advanced a policy of deregulating the provision of
broadband Internet access service by releasing In the Matter of Restoring Internet
Freedom (2018) 33 F.C.C. Rcd. 311 [2018 WL 305638] (Restoring Internet Freedom
Order). That decision changed the classification of broadband Internet access service
7.
from a “telecommunication service” to an “information service” and, thus, exempted
such service from utility-style regulation under Title II of the1996 Telecommunications
Act. Paragraphs 194 through 204 of the decision set forth the FCC’s conclusions about
the preemption of inconsistent state and local regulations addressing broadband Internet
access service. (Restoring Internet Freedom Order, supra, 33 F.C.C. Rcd. at pp. 426–432
[2018 WL 305638, at pp. 70–73*].)
In September 2018, a California study on broadband Internet and wireline voice
competition was released. In March 2019, the Commission issued a scoping memo that
invited the parties to comment on various issues, including (1) whether the Commission
should impute broadband revenues towards the telephone companies’ intrastate revenue
requirement and (2) what impact the FCC’s reclassification of broadband as an
information service had on the Commission’s authority to impose broadband imputation.
Evidentiary hearings on these and other issues were held from January 27, 2020, through
February 5, 2020.
In April 2021, the Commission issued Decision Adopting Broadband Imputation
in the General Rate Cases of the Small Independent Local Exchange Carriers (Apr. 15,
2021) Decision No. 21-04-005. The decision ordered that, in the general rate cases of
each telephone company, “[a]ll reasonable positive retail broadband-related revenues of
the [telephone company] and its [ISP] affiliate (if such affiliate exists) (but excluding
revenues derived from areas outside of the [telephone company’s] telephone service
territory and revenues resulting from alternative service platforms that are not based upon
the [telephone company’s] local exchange facilities) net of all reasonable broadband-
related expenses of the [telephone company] and its ISP affiliate (if such affiliate exists)
for the calendar year immediately preceding the filing of the [general rate case]
application shall be imputed in the determination of rate design and [CHCF-A subsidy].”
The decision also ordered telephone companies to submit financial information about
broadband revenues and expenses with their general rate case applications. The decision
8.
described the effect of broadband imputation by stating that “each dollar increase in the
broadband imputation amount will result in a corresponding dollar decrease in CHCF-A
support.”
Rehearing Decision
The telephone companies filed an application for rehearing of Decision No. 21-04-
005. They asserted the decision was unlawful because it (1) violated sections 275.6 and
1757.1; (2) exceeded the Commissions jurisdictional authority; (3) impermissibly
departed from Commission precedent and was the equivalent of retroactive ratemaking;
(4) was preempted by federal law; and (5) constituted an unconstitutional taking of
private property. TURN filed a response to the rehearing application, recommending that
it be denied in its entirety.
In August 2021, the Commission issued Order Denying Rehearing of Decision 21-
04-005 (Aug. 19, 2021) Decision No. 21-08-042, which stated no legal error had been
shown. Consequently, the Commission’s broadband imputation order remained in effect.
Writ Petition
In September 2021, the telephone companies initiated this original proceeding by
filing a petition for writ review of Decision No. 21-04-005 and Decision No. 21-08-042.
The petition asked this court to annul both decisions.
In November 2021, the Commission and TURN each filed an answer to the
petition for writ review. In January 2022, this court issued an order stating it would
review the Commission’s decisions pursuant to section 1756.
DISCUSSION
I. BASIC LEGAL PRINCIPLES
A. The Commission’s Authority
The Commission is a state agency of constitutional origin with far-reaching
powers, duties, and functions. (San Diego Gas & Electric Co. v. Superior Court (1996)
9.
13 Cal.4th 893, 914 (San Diego Gas).) The California Constitution grants the
Commission broad authority to regulate utilities, which includes fixing rates, establishing
rules, holding various types of hearings, awarding reparation, and adopting its own
procedures. (Id. at p. 915; see Cal. Const., art. XII, §§ 2, 4, 6.) It is significant to this
writ proceeding that the Commission’s powers are not limited to those expressly set forth
in the Constitution. “The Legislature has plenary power, unlimited by the other
provisions of this constitution but consistent with this article, to confer additional
authority and jurisdiction upon the commission .…” (Cal. Const., art. XII, § 5.)
The Legislature exercised this plenary power by enacting the Public Utilities Act
(§ 201 et seq.), which vests the Commission with broad authority. (San Diego Gas,
supra, 13 Cal.4th at p. 915.) Under section 701, “[t]he commission may supervise and
regulate every public utility in the State and may do all things, whether specifically
designated in this part or in addition thereto, which are necessary and convenient in the
exercise of such power and jurisdiction.” Based on the statutory phrases “do all things,”
“in addition thereto,” and “necessary and convenient” (§ 701), our Supreme Court has
stated that the Commission’s administrative, legislative and judicial powers are to be
liberally construed. (San Diego Gas, supra, at p. 915.)
One limit placed on the principle of liberal construction provides that “[a]dditional
powers and jurisdiction that the commission exercises, however, ‘must be cognate and
germane to the regulation of public utilities.’ ” (Consumers Lobby Against Monopolies v.
Public Utilities Com. (1979) 25 Cal.3d 891, 905–906.) Another limit is that section 701
does not authorize the Commission to disregard express legislative directions or
restrictions upon its powers found in other statutes. (Assembly v. Public Utilities Com.
(1995) 12 Cal.4th 87, 103.)
10.
In accordance with these principles, our analysis of the arguments that the
Commission exceeded its jurisdiction3 will begin with whether the Commission acted
within the scope of the authority granted by the Legislature. If the Commission acted
within the scope of its statutory authority, we then will address whether the Legislature’s
grant of authority violated the limitations imposed by the California Constitution. After
the state law issues have been resolved, we will analyze the federal issues of preemption
and an unconstitutional taking.
B. Judicial Review
The administrative actions underlying this original proceeding resulted in a
Commission decision after a hearing (Dec. No. 21-04-005) and its subsequent decision
after a rehearing (Dec. No. 21-08-042). Hearings are conducted by the Commission
pursuant to sections 1701 through 1711. Rehearings are conducted in accordance with
sections 1731 through 1736.
Any aggrieved party may obtain judicial review of the lawfulness of an original
decision by the Commission and its subsequent decision on rehearing by filing a petition
for writ of review in the Court of Appeal or the Supreme Court. (§ 1756, subd. (a).) A
writ petition is the only means for obtaining judicial review of the Commission’s
decisions. (Pacific Bell Wireless, LLC v. Public Utilities Com. (2006) 140 Cal.App.4th
718, 728.) As a result, appellate courts should address the merits of a writ petition when
the writ (1) complies with applicable procedures and (2) might have merit. (Id. at pp.
728–729.)
3 The word “jurisdiction” means “[a] government’s general power to exercise
authority over all persons and things within its territory.” (Black’s Law Dict. (11th ed.
2019) p. 1017.) The term “agency jurisdiction” is defined as “[t]he regulatory or
adjudicative power of a government administrative agency over a subject matter or
matters.” (Ibid.) These basic definitions are provided because many of the telephone
companies’ arguments refer to jurisdiction. (See § 1757, subd. (a)(1) [reviewing court
may consider whether Commission acted “in excess of[] its powers or jurisdiction”].)
11.
Applicable procedures require an aggrieved party seeking judicial review to have
filed an application for rehearing with the Commission that raises each issue the party
intends to pursue in court. (§§ 1732, 1756, subd. (a).) Stated another way, the party must
exhaust its administrative remedies as to each ground that renders the decision unlawful.
(San Pablo Bay Pipeline Co. LLC v. Public Utilities Com. (2013) 221 Cal.App.4th 1436,
1443 [exhaustion of administrative remedies].) The practical impact of the rehearing
requirement is that matters presented to appellate courts will involve the Commission’s
original decision and its subsequent decision on the application for rehearing. Appellate
courts must not address issues omitted from the application for rehearing.
Furthermore, the issues that may be presented for judicial review are limited to
whether the Commission (1) acted without, or in excess of, its powers or jurisdiction; (2)
proceeded in the manner required by law; (3) issued a decision not supported by the
findings; (4) made findings not supported by substantial evidence in light of the whole
record; (5) abused its discretion; or (6) violated a constitutional right. (§ 1757, subd. (a).)
C. Standards of Review
The parties do not completely agree on the applicable standards of review.
Accordingly, we address the standards applied to constitutional issues, factual findings,
and determinations of questions of law—particularly, statutory interpretations.
Where a Commission decision is challenged on the ground it violates a
constitutional right, the reviewing court must exercise independent judgment on the law
and facts, and the Commission’s findings or conclusions material to the constitutional
question are not final. (§ 1760.) However, “we may not substitute our own judgment ‘as
to the weight to be accorded evidence before the Commission or the purely factual
findings made by it.’ ” (SFPP, L.P. v. Public Utilities Com. (2013) 217 Cal.App.4th 784,
794.)
12.
When no constitutional issue is raised, the Commission’s decision is treated like a
superior court judgment—that is, it is presumed correct and the aggrieved party has the
burden of demonstrating prejudicial error. (BullsEye Telecom, Inc. v. Public Utilities
Com. (2021) 66 Cal.App.5th 301, 309 (BullsEye); see generally, Denham v. Superior
Court (1970) 2 Cal.3d 557, 564 [presumption that a superior court’s judgment is correct
and appellant’s burden to demonstrate reversible error].) In such cases, the
Commission’s findings based on conflicting evidence, or undisputed evidence from
which conflicting inferences reasonably may be drawn, are final and not subject to
review. (City and County of San Francisco v. Public Utilities Com. (1985) 39 Cal.3d
523, 530–531.) “The only exception is those findings or conclusions ‘drawn from
undisputed evidence ... from which conflicting inferences may not reasonably be drawn
[and therefore] present questions of law.’ ” (Pacific Gas & Electric Co. v. Public
Utilities Com. (2015) 237 Cal.App.4th 812, 839.)
Questions of statutory interpretation are, of course, questions of law subject to our
independent review. (BullsEye, supra, 66 Cal.App.5th at p. 309.) However, as a general
rule, courts give deference to the Commission’s interpretation of the Public Utilities Code
and will not disturb that interpretation if it bears a reasonable relation to statutory purpose
and language. (Ibid.) This deference is based on the Commission expertise and
familiarity with the legal and regulatory issues related to that interpretation. (Ibid.) The
general rule of deference does not apply when the issue is the scope of the Commission’s
powers and jurisdiction. (Ibid.)
II. INTERPRETATION OF SECTION 275.6
A. Contentions of the Parties
A fundamental dispute between the parties is whether section 275.6 authorizes
broadband imputation. The telephone companies contend the plain language of section
275.6 is straightforward and does not authorize broadband imputation. They also contend
13.
the legislative history supports this interpretation and contradicts the Commission’s and
TURN’s reading of the statute.
In contrast, the Commission argues that interpreting section 275.6 to allow
broadband imputation is consistent with the legislative intent and language of the statute,
reads the statute as a whole, and harmonizes its provisions. Similarly, TURN argues the
statutory language that addresses ratemaking concepts (which includes rate design and
the revenue requirement) is sufficiently broad to allow the Commission to consider ISP
affiliate net income when administering the rate-of-return framework and determining a
telephone company’s subsidy.
B. Legislative History
Most of the statutory text addressed by the parties’ arguments became a part of
section 275.6 when the Legislature passed Senate Bill No. 379 (2011-2012 Reg. Sess.)
(Senate Bill 379) in 2012. To establish the context for the statutory text, we consider
Senate Bill 379’s legislative history to identify the bill’s goals and how it was revised
prior to enactment to balance various interests and concerns.
1. June 12, 2012 Version of Senate Bill 379
In March 2010, the FCC proposed expanding the concept of universal service in
high-cost areas from providing just voice telephone service to include broadband
services. (Assem. Com. on Utilities & Commerce, Rep. on Sen. Bill No. 379 (2011-2012
Reg. Sess.) as amended June 12, 2012, p. 2 [FCC activities and orders] (Assembly
Utilities Analysis).) In November 2011, the FCC adopted this proposal and directed the
$4.5 billion in the USF into the new CAF to subsidize providers in high-cost areas that
accepted obligations to build out high-speed broadband networks. (Ibid.) The FCC’s
decision to require companies seeking subsidies to be capable of providing broadband
service created the possibility that California’s small rural telephone companies would
14.
lose annually approximately $25 million in federal subsidies if they did not upgrade their
networks to meet the federal requirements. (Id. at pp. 2–3.)4
The author of Senate Bill 379 asserted that the bill “ ‘will help preserve federal
funding coming into California and enhance the availability of advanced broadband
services in rural areas of the state.’ ” (Assembly Utilities Analysis, supra, p. 1.) To
achieve these objectives, Senate Bill 379 would “codify the PUC’s current practice of
administering the CHCF-A program, while adding an explicit requirement for the PUC to
promote reasonable access to advanced services and broadband-capable facilities.”
(Assembly Utilities Analysis, supra, p. 3.) In supporting Senate Bill 379, the telephone
companies argued these statutory changes were needed because “the PUC may not allow
cost support from the CHCF-A program for network improvements because they benefit
the provision of broadband service, even though the improvement benefit the provision of
telephone service as well.” (Id. at p. 2.) They also argued that the cost of the CHCF-A
would increase significantly if the federal subsidies were lost because the CHCF-A would
need to cover the loss in funding. (Id. at pp. 3–4.) The Commission’s staff argued
Senate Bill 379 and less federal funding could double the subsidies requested from the
CHCF-A, which would significantly increase the surcharge on intrastate
telecommunication billings added to each ratepayers monthly bill. (Id. at p. 3.) Thus, the
fundamental question Senate Bill 379 presented to the Legislature was whether California
should follow the FCC’s example and modify the CHCF-A to explicitly allow it to
subsidize investments in broadband capable infrastructure. (Id. at p. 2)
The analysis prepared for the Assembly Committee on Utilities and Commerce
discussed the arguments about cost and included the following:
4 Such an upgrade would include replacing copper facilities with fiber optic
facilities capable of providing broadband service. (Assembly Utilities Analysis, supra, p.
4.)
15.
“The compromise: However to address the cost concerns raised by
stakeholders, the author has agreed to add subparagraph (c) [of section
276.5], which directs the PUC’s administration of the CHCF-A program,
the following requirement: (7) Ensure that support is not excessive so that
the burden on all contributors to the CHCF-A program is limited.”
(Assembly Utilities Analysis, supra, p. 4.)
Supporters of Senate Bill 379 included the California Independent
Telecommunications Companies (CITC), which sponsored the bill, and the California
State Association of Counties, the Regional Council of Rural Counties, and the California
Association of Competitive Telecommunications Companies (which had withdrawn its
opposition to a prior version after a particular provision was removed). (Assembly
Utilities Analysis, supra, p. 4.) TURN stated it supported carrier efforts to deploy
broadband-capable facilities but opposed a mandate to provide subsidy money to promote
broadband capable facilities through an all end user surcharge. (Ibid.)
2. June 25, 2012 Version of Senate Bill 379
An analysis of Senate Bill 379 prepared for the Assembly Committee on
Appropriations discussed concerns raised by the telephone companies and the
Commission. (Assem. Com. on Appropriations, Rep. on Sen. Bill No. 379 (2011-2012
Reg. Sess.) as amended June 25, 2012, p. 2 (Assembly Appropriations Analysis).) The
telephone companies argued the legislative update was needed because “the PUC may
not allow cost support from the CHCF-A program for network improvements because
[the companies] benefit from the provision of broadband service, even though the
improvements benefit the provision of telephone service as well.” (Ibid.) An analysis by
Commission staff raised the concern that is at the root of this litigation: “ ‘SB 379 would
require ratepayers to subsidize the rate-of-return carriers’ deployment of broadband-
capable facilities even though California has limited jurisdiction over broadband services
and cannot take into account revenues from these unregulated services when determining
local rates for the rate of return carriers.’ ” (Ibid.)
16.
The analysis also referred to the concern about a reduction in federal subsidies to
California’s small telephone companies: “Hypothetically, if these companies lost the $25
million in federal funding because they could not meet the FCC’s broadband speed,
capacity, and other reliability requirements, the CHCF-A program could increase
significantly.” (Assembly Appropriations Analysis, supra, at p. 1.)
3. August 20, 2012 Version of Senate Bill 379
An analysis of Senate Bill 379 prepared for the Senate Energy, Utilities and
Communications Committee also discussed the concerns at the root of this litigation:
“Improper Subsidy of Broadband? The []PUC, TURN, and DRA oppose
this bill, claiming that the issues it addresses are under consideration in the
[]PUC rulemaking on the CHCF-A. They also claim that the bill could as
much as double the size of the [CHCF-]A Fund, thereby impacting all
customers, although the bill’s sponsor disputes this claim. In addition, they
object to providing ratepayer-funded subsidies for broadband facilities
without giving the []PUC authority to consider the revenue a rural company
earns from unregulated services delivered with the same broadband
facilities that the CHCF-A would subsidize.
“Recent amendments seek to address these concerns. An Assembly
Utilities and Commerce Committee amendment requires the []PUC to
ensure that support to companies is ‘not excessive’ so that customer impact
is limited. An Assembly Appropriations Committee amendment requires
companies to provide the []PUC information about revenues from
unregulated broadband revenues, which they could otherwise assert they
are not required to provide given FCC jurisdiction over these services.”
(Senate Utilities Analysis, supra, p. 3.)
The analysis also addressed how the bill’s provisions would be implemented,
noting Senate Bill 379 requires the PUC to determine the amount of a company’s subsidy
as part of a general rate case and, as a result, the Senate Bill 379’s provisions would not
be triggered until a general rate case is filed. (Senate Utilities Analysis, supra, p. 3.) The
analysis also stated (1) the Commission was considering staying new general rate cases
until it completed the rulemaking proceeding on the CHCF-A and (2) “even after a
[general rate case] is filed, the bill preserves the []PUC’s discretion to determine, based
17.
on the facts in each case, what is a ‘reasonable investment’ necessary for providing voice
and broadband service. This question will presumably be debated by all parties in the
[general rate case.]” (Ibid.)
The Legislature passed Senate Bill 379 and, on September 28, 2012, the Governor
approved it and the Secretary of State filed it. (Stats. 2012, ch. 729.) The Legislature
expressly declared its intent to preserve (1) federal universal service funding for
telephone companies participating in the CHCF-A, which would reduce cost pressures on
the program and minimize the surcharges needed to fund the CHCF-A; (2) application of
the FCC’s cost allocation and separation rules to the expenses and investments of
telephone companies participating in the CHCF-A program; and (3) the PUC’s discretion
in open Rulemaking 11-11-07 to establish the regulatory requirements for the CHCF-A
program within the policy framework provided by the act. (Stats. 2012, ch. 729, § 1, p.
5990.)
C. Statutory Text
Section 275.6 does not explicitly authorize or prohibit the imputation of an
affiliate’s broadband income to the telephone company when determining its rates and its
subsidy amount. Consequently, the question of statutory interpretation presented is
whether the general grants of authority in section 275.6 encompass the specific authority
to impute an affiliate’s broadband income. Under the rules of statutory construction, the
analysis of the statute’s meaning begins with the words of the statute itself and gives
those words their usual and ordinary meaning. (Cavey v. Tualla (2021) 69 Cal.App.5th
310, 336.) Accordingly, we start by examining the text of the provisions granting
authority to the Commission.
Subdivision (a) of section 275.6 sets forth the Commission’s responsibilities in
maintaining the CHCF-A program in broad terms:
“The commission shall exercise its regulatory authority to maintain the
[CHCF-A program] to provide universal service rate support to small
18.
independent telephone corporations in amounts sufficient to meet the
revenue requirements established by the commission through rate-of-return
regulation in furtherance of the state’s universal service commitment to the
continued affordability and widespread availability of safe, reliable, high-
quality communications services in rural areas of the state.”
Subdivision (b) of section 275.6 defines certain terms, including rate design, rate-
of-return regulation, and revenue requirement. “ ‘Rate-of-return regulation’ means a
regulatory structure whereby the commission establishes a telephone corporation’s
revenue requirement, and then fashions a rate design to provide the company a fair
opportunity to meet the revenue requirement.” (§ 275.6, subd. (b)(4), italics added.)
“ ‘Revenue requirement’ means the amount that is necessary for a telephone corporation
to recover its reasonable expenses and tax liabilities and earn a reasonable rate of return
on its rate base.” (§ 275.6, subd. (b)(5), italics added.) “ ‘Rate base’ means the value of
a telephone corporation’s plant and equipment that is reasonably necessary to provide
regulated voice services and access to advanced services, and upon which the telephone
corporation is entitled to a fair opportunity to earn a reasonable rate of return.” (§ 275.6,
subd. (b)(2).) “ ‘Rate design’ means the mix of end user rates, high-cost support, and
other revenue sources that are targeted to provide a fair opportunity to meet the revenue
requirement of the telephone corporation.” (§ 275.6, subd. (b)(3), italics added.)5
Subdivision (c) of section 275.6 sets forth the Commission’s responsibilities by
identifying things the Commission “shall do”6 in administering the CHCF-A program:
“(1) Continue to set rates to be charged by the small independent telephone
corporations in accordance with Sections 451, 454, 455, and 728.
“(2) Employ rate-of-return regulation to determine a small independent
telephone corporation’s revenue requirement in a manner that provides
revenues and earnings sufficient to allow the telephone corporation to
5 The italicized terms, except “other revenue sources,” are defined by section 275.6,
subdivision (b). The term “other revenue sources” is italicized because the Commission
and TURN contend encompasses an affiliate’s broadband revenue.
6 “ ‘Shall’ is mandatory.” (§ 15.)
19.
deliver safe, reliable, high-quality voice communication service and fulfill
its obligations as a carrier of last resort in its service territory, and to afford
the telephone corporation a fair opportunity to earn a reasonable return on
its investments, attract capital for investment on reasonable terms, and
ensure the financial integrity of the telephone corporation.
“(3) Ensure that rates charged to customers of small independent telephone
corporations are just and reasonable and are reasonably comparable to rates
charged to customers of urban telephone corporations.
“(4) Provide universal service rate support from the CHCF-A Program to
small independent telephone corporations in an amount sufficient to supply
the portion of the revenue requirement that cannot reasonably be provided
by the customers of each small independent telephone corporation after
receipt of federal universal service rate support.
“(5) Promote customer access to advanced services and deployment of
broadband-capable facilities in rural areas that is reasonably comparable to
that in urban areas, consistent with national communications policy.
“(6) Include all reasonable investments necessary to provide for the
delivery of high-quality voice communication services and the deployment
of broadband-capable facilities in the rate base of small independent
telephone corporations.
“(7) Ensure that support is not excessive so that the burden on all
contributors to the CHCF-A program is limited.” (§ 275.6, subd. (c), italics
added.)
The foregoing directives are general in nature, which is consistent with Legislature
explicit declaration of its intent to preserve the Commission’s discretion “in open
Rulemaking 11-11-007 to establish the regulatory requirements for the [CHCF-A]
Program within the policy framework provided by this act.” (Stats. 2012, ch. 729, § 1,
subd. (c), p. 5990.)
Subdivision (e) of section 275.6—the only provision in section 275.6 that uses the
word “affiliate”—states:
“Upon request from the commission, a small independent telephone
corporation that receives support from the CHCF-A program shall provide
information regarding revenues derived from the provision of unregulated
internet access service by that corporation or its affiliate within that
20.
corporation’s telephone service territory. The commission shall treat as
confidential any information provided pursuant to this subdivision.”
(Italics added.)
1. The Text is Ambiguous
The threshold legal question is whether the foregoing statutory language is
ambiguous—that is, reasonably susceptible to more than one interpretation (Cavey v.
Tualla, supra, 69 Cal.App.5th at p. 336)—on the issue of whether the general grants of
authority in section 275.6 encompass the specific authority to impute an affiliate’s
broadband income when determining a telephone company’s rates and subsidy. Because
section 275.6 does not explicitly authorize or prohibit broadband imputation and the
parties have drawn conflicting, reasonable inferences from its wording, we conclude the
statute is ambiguous on that particular issue.
2. Resolving the Ambiguity
We also conclude the issue of statutory interpretation considered here involves the
scope of the Commission’s jurisdiction—that is, its power or authority—and, therefore,
the general rule of deference to its statutory interpretation does not apply. (See BullsEye,
supra, 66 Cal.App.5th at p. 309.) Consequently, we apply the usual rules for construing
an ambiguous statute. Under those rules, a court’s primary goal is to adopt the
interpretation that best effectuates the legislative intent or purpose. (Cavey v. Tualla,
supra, 69 Cal.App.5th at p. 337; see Smith v. LoanMe, Inc. (2021) 11 Cal.5th 183, 190
[interpretation of a statute presents a question of law subject to de novo review on
appeal].) To identify a statute’s purpose and the underlying legislative intent, courts may
consider a variety of extrinsic aids, including the legislative history. (Gutierrez v.
Carmax Auto Superstores California (2018) 19 Cal.App.5th 1234, 1250, 1251–1252.)
Here, the legislative history shows that the Legislature was aware of the
Commission’s concerns about subsidizing broadband facilities that could be used to
generate revenue from unregulated services and its lack of authority to consider those
revenues in determining the amount of a CHCF-A subsidy. (Senate Utilities Analysis,
21.
supra, at p. 3.) The legislative history also shows that Senate Bill 379 was amended to
address this concern and the provisions added were subdivisions (c)(7) and (e) of section
275.6. (Senate Utilities Analysis, supra, at p. 3.) Subdivision (c)(7) of section 275.6
directs the Commission to ensure that CHCF-A subsidies are “not excessive.”
Subdivision (e) of section 275.6 requires telephone companies, upon request from the
Commission, to “provide information regarding revenues derived from the provision of
unregulated internet access service by that corporation or its affiliate within that
corporation’s telephone service territory.”
Based on the legislative history and statutory text, we conclude the Legislature
gave the Commission the authority to address the issue of whether subsidizing
infrastructure that is used to generate both regulated and unregulated revenue could
generate subsidies that were too large—that is, “excessive.” (§ 275.6, subd. (c)(7).)
Furthermore, the Legislature did not specify a particular formula, model, or method for
determining whether a subsidy was excessive, but committed those details to the
Commission’s discretion. (Stats. 2012, ch. 729, § 1, subd. (c), p. 5990.) The fact the
Legislature gave the Commission the authority to obtain “information regarding revenues
derived from the provision of unregulated Internet access service by that corporation or
its affiliate within that corporation’s telephone service territory” creates a strong
inference that the Commission would be able to use that information in determining
whether a subsidy was excessive.
In addition, the rate design adopted by the Commission for a telephone company
must consider rates, subsidies and “other revenue sources” and give the telephone
company a fair opportunity to meet its revenue requirement. (§ 275.6, subd. (b)(3).) The
term “other revenue sources” is sufficiently broad to include the broadband revenues
imputed from an ISP affiliate.
Accordingly, we interpret the general authority granted to the Commission by
section 275.6 to include the specific authority to impute broadband revenues of an
22.
affiliate in determining a telephone company’s rate design and its subsidy from the
CHCF-A. Whether this interpretation violates other statutory provisions or the California
Constitution is addressed next.
III. SCOPE OF COMMISSION’S JURISDICTION
The telephone companies contend that broadband imputation exceeds the
Commission’s jurisdiction under state law, which is restricted to public utilities. In
particular, they argue their affiliates are not public utilities because Internet access is not
a telephone service and the ISP affiliates do not own, control, operate, or manage
telephone lines. They contend that broadband imputation is, in effect, a regulation of the
ISP affiliates which are outside the Commission’s public utility authority. The telephone
companies support this argument with cites to subdivision (b) of section 314, which
addresses the Commission’s inspection authority relating to affiliates; the definitions in
sections 216, subdivision (a)(1) (public utility), 233 (telephone line), and 234 (telephone
corporation); and City and County of San Francisco v. Western Air Lines, Inc. (1962) 204
Cal.App.2d 105, which states: “Unless the enterprise or activity in question is a public
utility as defined in the Constitution or Public Utilities Code, it is not subject to the
jurisdiction of such commission.” (Id. at p. 131.)
A. Statutory Authority and Alleged Conflict
We first consider whether our interpretation of the authority granted to the
Commission by section 275.6 (pt. II, ante) must be rejected because it contradicts other
provisions of the Public Utilities Code that (1) define the Commission’s powers or
jurisdiction and (2) are controlling in the event of a conflict. In conducting this inquiry,
we assume for purposes of this proceeding that the authority granted by section 275.6
irreconcilably conflicts with the statutes cited by the telephone companies. (See State
Dept. of Public Health v. Superior Court (2015) 60 Cal.4th 940, 960 [rules applied “when
faced with two irreconcilable statutes”].) In situations where conflicting statutes cannot
23.
be reconciled, (1) the more specific provision takes precedence over the more general
provisions and (2) later enactments supersede earlier ones. (Id. at pp. 960–961; Code
Civ. Proc., § 1859 [“when a general and particular provision are inconsistent, the latter is
paramount to the former”].)
First, we conclude section 275.6 is more specific than the provisions relied upon
by the telephone companies. Section 275.6 governs a specific program, the CHCF-A. It
does not govern utilities in general or all companies that provide telephone service.
Furthermore, subdivisions (c)(7) and (e) were added to section 275.6 to address a specific
issue that arises when determining the amount of a subsidy—namely, how to ensure
subsidies were not excessive as a result of an affiliate providing broadband services using
subsidized infrastructure of the telephone company. Thus, under established principles of
statutory construction, we conclude the Legislatures’ grant of authority to consider an
affiliate’s broadband revenues when determining the amount of a telephone company’s
subsidy takes precedence over other provisions of the Public Utilities Code. One way to
conceptualize this conclusion is that the more specific provisions in section 275.6 operate
as an exception to the more general statutory provisions. (See State Dept. of Public
Health v. Superior Court, supra, 60 Cal.4th at p. 961.)
Second, the relevant provisions in section 275.6 were enacted in 2012 with the
adoption of Senate Bill 379. (Stats. 2012, ch. 729, § 2, pp. 5990–5991.) The telephone
companies have not shown that the statutory language upon which they rely was enacted
more recently than Senate Bill 379. (See generally, Directors Guild of America v.
Harmony Pictures, Inc. (C.D.Cal. 1998) 32 F.Supp.2d 1184 [effect given to later-enacted
Cal. U. Comm. Code, § 3311 after court concluded it could not be reconciled with
earlier-enacted Civ. Code, § 1526].) Therefore, the principle that the later-enacted
provision supersedes earlier ones also supports our conclusion that the Commission’s
authority to impute an affiliate’s broadband revenues supersedes the statutory provisions
relied upon by the telephone companies.
24.
Based on the foregoing, we conclude the Commission did not act in excess of its
statutory powers or jurisdiction for purposes of section 1757, subdivision (a)(1) when it
concluded that “[a]ll reasonable net positive retail broadband-related revenues of the
[telephone companies] and their ISP affiliates (but excluding revenues derived from areas
outside of the[ir] telephone service territories and revenues resulting from alternative
service platforms that are not based upon the[ir] local exchange facilities) should be
imputed in the determination of rate design and CHCF-A [subsidy] in the [telephone
companies’ general rate cases].”
B. Constitutional Analysis
We next consider whether our interpretation of the authority granted to the
Commission by section 275.6 must be rejected because it violates provisions in the
California Constitution. The telephone companies’ writ petition cites section 19 of article
I and sections 3 and 6 of article XII of the California Constitution.
Section 19 of article I of the California Constitution provides that private property
may not be taken without just compensation. The unconstitutional taking argument is
addressed in part V. of this opinion.
Section 3 of article XII of the California Constitution states in part:
“Private corporations and persons that own, operate, control, or manage a
line, plant, or system for … the transmission of telephone and telegraph
messages … directly or indirectly to or for the public, and common carriers,
are public utilities subject to control by the Legislature. The Legislature
may prescribe that additional classes of private corporations or other
persons are public utilities.” (Italics added.)
Section 6 of article XII of the California Constitution authorizes the Commission
to “fix rates, establish rules, examine records, issue subpoenas, administer oaths, take
testimony, punish for contempt, and prescribe a uniform system of accounts for all public
utilities subject to its jurisdiction.” (Italics added.)
25.
The telephone companies argue these sections in article XII authorize the
Commission to regulate only public utilities and this limitation is violated by broadband
imputation because imputation has the effect of subjecting unregulated ISP affiliates to
public utility regulation. The telephone companies contend that “imputation is beyond
the Commission’s jurisdiction under state law, which is limited to public utilities.”
This argument, insofar as it is based on the California Constitution, is not
developed. The telephone companies have not referred to any principles of law that
provide a test or standard for determining when a regulation is deemed to subject an
entity that is not a public utility subject to a public utility regulation for purposes of the
California Constitution. Consequently, they have not carried their burden of showing
that the Commission erred in determining broadband imputation did not subject the IPS
affiliates to a public utility regulation, which determination was based on the
Commission’s factual findings that imputation (1) does not apply a rate regulation to the
prices charged by ISP affiliates and (2) does not impose any requirements or limitations
on the services or operations of the affiliates.
Consequently, we conclude the telephone companies have not demonstrated
broadband imputation violates provisions in article XII of the California Constitution by
subjecting ISP affiliates to a public utility regulation.
IV. FEDERAL PREEMPTION
A. General Principles of Preemption
The laws of the United States “shall be the supreme Law of the Land,”
notwithstanding anything to the contrary in the constitution or laws of any state. (U.S.
Const., art. VI, cl. 2.) Under the supremacy clause, Congress has the power to preempt
state law. (Crosby v. National Foreign Trade Council (2000) 530 U.S. 363, 372–374.)
Some decisions identify four species of federal preemption—namely, express,
conflict, obstacle, and field. (Viva! Internat. Voice for Animals v. Adidas Promotional
26.
Retail Operations, Inc. (2007) 41 Cal.4th 929, 935.) Express preemption, which is easy
for courts to apply, occurs when Congress explicitly defines the extent to which its
enactments preempt state law. (Id. at p. 936.) Conflict preemption occurs when it is
impossible to simultaneously comply with both state and federal law. (Ibid.)7 Obstacle
preemption arises when, in a particular case, the challenged state law is an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress. (Ibid.)
Field preemption is Congress’s intent to preempt all state law in a particular area and
occurs where the scheme of federal regulation is sufficiently comprehensive to
reasonably infer that Congress left no room for supplementary state regulation. (Ibid.)
The burden of proving preemption is on the party claiming it applies, and courts are
reluctant to infer preemption. (Ibid.)
Other decisions categorize the types of preemption differently. They treat state
laws that make it impossible for private parties to comply with both state and federal law
and state laws that prevent or frustrate the accomplishment of a federal objective as types
of conflicting state laws that are nullified by the supremacy clause. (Geier v. American
Honda Motor Co., Inc. (2000) 529 U.S. 861, 873 (Geier).) In Geier, the United States
Supreme Court concluded the plaintiff’s state law negligence claim based on car’s failure
to have a driver’s side airbag was preempted because such a tort claim conflicted with a
federal standard requiring some, but not all, 1987 cars to have airbags. (Geier, supra, at
p. 874.)
7 This court has observed that “[f]ederal conflict preemption is difficult to establish
because it requires showing that it is impossible to comply with the requirements of both
federal and state law.” (Kirby v. County of Fresno (2015) 242 Cal.App.4th 940, 962.)
27.
B. Federal Preemption of State Broadband Regulations8
In Mozilla, supra, 940 F.3d 1, the District of Columbia Circuit applied preemption
doctrine to the FCC’s conclusions about preemption set forth the Restoring Internet
Freedom Order. The parties do not contend the court erred in its analysis. Therefore, we
accept Mozilla’s analysis and conclusions about preemption.
In Mozilla, the District of Columbia Circuit initially addressed whether the FCC,
as part of its deregulatory approach to the Internet, acted within its statutory authority
when it reclassified broadband Internet access service to an “information service.”
(Mozilla, supra, 940 F.3d at pp. 18–35.) The court concluded the change in classification
was permissible. (Id. at p. 35.)
After upholding the FCC’s reclassification of broadband service, the District of
Columbia Circuit addressed the validity of the FCC’s preemption directive, which was
set forth in paragraphs 194 through 204 of the Restoring Internet Freedom Order.
(Mozilla, supra, 940 F.3d at pp. 74–86.) Paragraph 194 stated “that ‘regulation of
broadband Internet access service should be governed principally by a uniform set of
federal regulations,’ and not ‘by a patchwork that includes separate state and local
requirements.’ ” (Id. at p. 74.) To achieve this goal, paragraph 195 of the order stated it
“ ‘preempt[s] any state or local measures that would effectively impose rules or
8 How federal preemption affects a state’s authority over broadband services is a
subject addressed in several scholarly articles. (E.g., Witteman, Net Neutrality from the
Ground Up (2022) 55 Loy. L.A. L.Rev. 65, 68 [describing “net neutrality” as the
principle of nondiscrimination in the delivery of Internet traffic]; Deacon, Institutional
Considerations for the Regulation of Internet Service Providers (2022) 74 Fed. Comm.
L.J. 111, 113–121 [history of how the FCC reached its current posture regarding ISPs];
Narechania & Stallman, Internet Federalism (2021) 34 Harv. J.L. & Tech. 547, 550
[“there is little agreement over the scope of federal, state, and local regulatory power over
broadband carriage”]; Spiwak, The Preemption Predicament over Broadband Internet
Access Services (2020) 21 Federalist Soc’y Rev. 32 [“complex issues of federalism
routinely haunt the broadband debate”]; Lyons, State Net Neutrality (2019) 80 U. Pitt. L.
Rev. 905.)
28.
requirements that [the FCC has] repealed or decided to refrain from imposing in this
order or that would impose more stringent requirements for any aspect of broadband
service that we address in this order.’ ” (Ibid.) Thus, the order attempted to “invalidate[]
all state and local laws that the [FCC] deems to ‘interfere with federal regulatory
objectives’ or that involve ‘any aspect of broadband service * * * address[ed]’ in the
Order.” (Ibid.)
The District of Columbia Circuit concluded the preemption directive exceeded the
FCC’s express statutory authority and its ancillary authority. (Mozilla, supra, 940 F.3d at
p. 75.) The court stated:
“Not only is the [FCC] lacking in its own statutory authority to preempt,
but its effort to kick the States out of intrastate broadband regulation also
overlooks the Communications Act’s vision of dual federal-state authority
and cooperation in this area specifically.” (Mozilla, supra, at pp. 80–81.)
Noting that the power to preempt state law must be conferred by Congress, the
court rejected the FCC’s contention that the federal policy of nonregulation of
information services was a source of authority for its preemption directive. The court
reasoned that an agency could not confer preemption authority on itself by adopting a
policy. (Mozilla, supra, 940 F.3d at p. 78.)
The court also addressed the FCC’s argument that it “should leave the Preemption
Directive undisturbed because principles of conflict preemption would lead to the same
result.” (Mozilla, supra, 940 F.3d at pp. 81–86.) The court rejected this argument,
stating:
“Conflict preemption applies to ‘state law that under the circumstances of
the particular case stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress—whether that
“obstacle” goes by the name of conflicting; contrary to; repugnance;
difference; irreconcilability; inconsistency; violation; curtailment;
interference, or the like.’ Geier[, supra,] 529 U.S. 861, 873 …. We have
long recognized that ‘whether a state regulation unavoidably conflicts with
29.
national interests is an issue incapable of resolution in the abstract,’ let
alone in gross.” (Mozilla, supra, 940 F.3d at p. 81.)
Based on these principles, the court rejected the FCC’s categorical determination
that any form of state regulation of intrastate broadband would inevitably conflict with
the Restoring Internet Freedom Order. (Mozilla, supra, 940 F.3d at p. 82.) The court
concluded its discussion of preemption by stating:
“At bottom, the [FCC] lacked the legal authority to categorically abolish all
fifty States’ statutorily conferred authority to regulate intrastate
communications. For that reason, we vacate the Preemption Directive,
[Restoring Internet Freedom Order] ¶¶ 194–204. And because no particular
state law is at issue in this case and the [FCC] makes no provision-specific
arguments, it would be wholly premature to pass on the preemptive effect,
under conflict or other recognized preemption principles, of the remaining
portions of the [Restoring Internet Freedom Order].” (Mozilla, supra, 940
F.3d at p. 86.)
Here, section 275.6 and the Commission’s broadband imputation decision
constitutes a specific state law that was absent in Mozilla. Consequently, stated in
general terms, the preemption issue presented is whether, under the particular
circumstances of this case, the broadband imputation authorized by section 275.6, “
‘stands as an obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.’ ” (Geier, supra, 529 U.S. at p. 873.) As described below, we
conclude it does not.
C. Contentions of the Parties
The telephone companies recognize that the FCC’s Preemption Directive is not
good law and do not ask this court to categorically nullify all state regulations that may
touch upon Internet access services. Instead, the telephone companies challenge
broadband imputation as an impermissible public utility type regulation and economic
regulation that directly conflicts with the FCC’s deregulatory approach to Internet access
services.
30.
In response, the Commission asserts that broadband imputation does not amount to
a public utility style regulation or an economic regulation. In particular, the Commission
argues that “broadband imputation neither regulates the services or operations of the ISP
affiliates nor regulates their rates, leaving the ISP affiliates free to set retail broadband
prices.”
The telephone companies challenge the Commission’s contention that broadband
imputation leaves the ISP affiliates free from Commission regulation. They argue this
contention “rests on the fiction that imputation has ‘no impact on the rates, services, or
operations of the ISP affiliates.’ ” The telephone companies assert broadband imputation
will push more regulated cost responsibility to the unregulated operations of ISP affiliates
and will apply cost pressure to the common owners. In addition, the telephone
companies contend the requirement that they disclose detailed financial information and
subject their operations to a regulatory audit will force them to incur unrecoverable costs
caused by the disclosure and audit.9
D. Analysis
In paragraph 195 of the Restoring Internet Freedom Order, the FCC stated “we
thereby preempt any so-called ‘economic’ or ‘public utility-type’ regulations, .…”
9 In the Matter of National Association of Regulatory Utility Commissioners
Petition for Clarification or Declaratory Ruling that No FCC Order or Rule Limits State
Authority to Collect Broadband Data (2010) 25 F.C.C. Rcd. 5051, the FCC addressed
whether it had exercised its delegated authority to preclude the States from undertaking
mandatory broadband information collection efforts and conclude it had “not preempted
or otherwise precluded the States from mandating that broadband providers file data or
other information regarding broadband infrastructure or services with the States.” (Id. at
pp. 5053–5054 [paragraph 7]; see Lyons, State Net Neutrality, supra, 80 U. Pitt. L.Rev. at
pp. 938–939; see generally, New Cingular Wireless PCS LLC v. Picker (N.D. Cal. 2016)
216 F.Supp.3d 1060, 1071, fn 9.) The telephone companies have ignored this FCC
decision and have not demonstrated that the subsequent reclassification of Internet access
service was an exercise of authority that preempted the collection of information about
broadband revenues and expenses.
31.
(Restoring Internet Freedom Order, 33 F.C.C. Rcd. at pp. 427–428.) To explain the
scope of this statement, the FCC included the following definitions:
“The terms ‘economic regulation’ and ‘public utility-type regulation,’ as
used here, are terms of art that the Commission has used to include, among
other things, requirements that all rates and practices be just and
reasonable; prohibitions on unjust or unreasonable discrimination; tariffing
requirements; accounting requirements; entry and exit restrictions;
interconnection obligations; and unbundling or network-access
requirements.” (33 F.C.C. Rcd at p. 428, fn. 730.)
For purposes of this original proceeding, we accept this explanation of what
constitutes an economic regulation or public utility type regulation that would be
preempted by federal law. Therefore, the preemption question presented is whether
broadband imputation constitutes an economic or public utility type regulation of the ISP
affiliate.
First, we agree with the Commission that broadband imputation does not directly
impose economic or public utility type regulation on the ISP affiliates. It does not
directly impose any requirement on their rates and practices, prohibit discrimination,
impose tariffing requirements, impose accounting requirements, restrict entry or exist
from the ISP business, impose interconnection obligation, or require unbundling or
network access. Thus, the Commission correctly found that broadband imputation does
not impose price controls on ISP affiliates and does not impose any additional regulations
affecting their operations.
Second, we reject the telephone companies’ argument that the indirect effects of
broadband imputation result in an economic or public utility type regulation of the ISP
affiliates. The fundamental difficulty in this case is that the infrastructure used to provide
regulated telephone service also can be used to provide unregulated Internet access
service and, as a result of broadband’s dual capability, the identification of the
infrastructure costs of providing the telephone service cannot be completely separated
from the infrastructure cost of providing Internet access service. Stated another way, no
32.
matter what regulatory scheme is adopted to determine the rates and subsidies for
telephone service, that scheme, either explicitly or implicitly, must take a stance of what
infrastructure costs are attributable to each type of service. If the Commission is
completely barred from considering the cost and revenue associated with the unregulated
Internet access service, the common owner, telephone company, and its ISP affiliate
would be free to adopt whatever internal accounting they choose and thereby profit from
the infrastructure subsidized by California’s ratepayers. This approach, which forces the
Commission to ignore the marketplace realities of broadband’s dual capabilities, would
effectively erode the Commission’s authority to set reasonable rates and reasonable
subsidies under the CHCF-A, thus curtailing its authority to effectively regulate the
telephone companies and the provisions of telephone services. In addition, it would
allow the ISP affiliate to generate profits without bearing its fair share of the cost of the
infrastructure. As a result, we conclude that how the common owners and ISP affiliates
actually or might react to broadband imputation (these reactions are some of the indirect
effects of imputation) does not convert the Commission regulations of rates and subsidies
for telephone services into the regulation of Internet access services for purposes of
federal preemption analysis.
In other words, to the extent that the ISP affiliates experience the indirect effects
from broadband imputation, those effects are not properly described as economic or
public utility type regulations of the ISP affiliates. Rather, broadband imputation is
appropriately characterized as a public utility type of regulation of the telephone
companies. We recognize the foregoing application of general principles about conflict
preemption to broadband imputation is not supported by cites to existing case law. The
absence of supporting authority comes from the unique aspects of the broadband
imputation adopted by the Commission and the fact that, before the FCC changed its
policy in 2018, broadband services were classified as telecommunications services
33.
subject to regulation under Title II of the 1996 Telecommunications Act. As a result, the
questions of law presented here have not been addressed previously.
V. UNCONSTITUTIONAL TAKING CLAIM IS UNRIPE
The telephone companies contend broadband imputation constitutes an
unconstitutional taking of private property. In Decision No. 21-08-042, the Commission
rejected this claim, reiterating its earlier conclusion that the evidence failed to establish
that broadband imputation would necessarily result in net losses for the telephone
companies. In addition, the Commission determined the unconstitutional takings claims
were premature. We agree that the taking claims are unripe.
Broadband imputation will affect the money received by the telephone companies
in two basic ways. If income is imputed, it will lower their subsidy under the CHCF-A
and it may lower the rates the Commission authorizes them to charge for intrastate
telephone service.
A. Lowering Subsidies Does Not Take Private Property
A subsidy is not private property and, therefore, the reduction of the subsidy does
not constitute the taking of private property of the telephone companies or the ISP
affiliates. (U.S. Const., 5th Amend. [“nor shall private property be taken for public use,
without just compensation”]; Cal. Const., art. I, § 19 [private property may be taken only
when just compensation has first been paid to the owner].) Consequently, to establish a
constitutional taking, the telephone companies must show the impact to their rates will be
confiscatory.
B. Ratemaking
1. Basic Principles
In Ponderosa Telephone Co. v. Public Utilities Com. (2019) 36 Cal.App.5th 999(Ponderosa), this court considered an argument by three of the telephone companies that
a Commission decision set their cost of capital—a component used in ratemaking—
34.
unreasonably low, resulting in a rate of return that was confiscatory (i.e., an
unconstitutional taking). (Id. at p. 1003.) We concluded the telephone companies failed
to demonstrate that the Commission cost of capital decision fell short of constitutional
standards requiring public utilities be allowed a reasonable rate of return. (Ibid.)
In Ponderosa, we summarized some of the principles and standards applied to
determine whether the rates set for a public utility result in an unconstitutional taking.
(Ponderosa, supra, 36 Cal.App.5th at pp. 1014–1016.) Broadly stated, “ ‘the
Constitution protects utilities from being limited to a charge for their property serving the
public which is so “unjust” as to be confiscatory.’ ” (Ponderosa, at p. 1015, quoting
Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 307.) A reasonableness standard is
applied. “ ‘Rates which are not sufficient to yield a reasonable return on the value of the
property used at the time it is being used to render the service are unjust, unreasonable
and confiscatory, and their enforcement deprives the public utility company of its
property in violation of the Fourteenth Amendment.’ ” (Ponderosa, at p. 1014–1015,
quoting Bluefield Co. v. Pub. Serv. Comm. (1923) 262 U.S. 679, 690.)
2. Ripeness
“One challenging a rate-fixing order on constitutional grounds of confiscation is
charged with the burden of showing that the evidence does not support the commission’s
findings and that the rate as finally fixed is unreasonable and will result in confiscation.
Such burden is coupled with a strong presumption of the correctness of the findings and
conclusions of the commission, which may choose its own criteria or method of arriving
at its decision, even if irregular, provided unreasonableness is not ‘clearly established.’ ”
(Pacific Tel. & Tel. Co. v. Public Utilities Com. (1965) 62 Cal.2d 634, 647; see
Ponderosa, supra, 36 Cal.App.5th 999, 1016.) When conducting a reasonableness
inquiry, it is the impact of the rate order that counts and, therefore, courts must consider
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the total effect of the rate order before determining whether it is unreasonable and unjust.
(Duquesne Light Co. v. Barasch, supra, 488 U.S. at p. 310.)
3. Analysis
This writ proceeding does not address a decision by the Commission that sets a
telephone company’s rates after applying broadband imputation. The implementing rules
for the CHCF-A require the telephone companies to “periodically file general rate case
applications with the Commission in order to receive CHCF-A support. (Order
Instituting Rulemaking into the Review of the California High Cost Fund-A Program
(June 25, 2015) Cal P.U.C. Dec. No. 15-06-048.)” (Calaveras Telephone Co. v. Public
Utilities Com., supra, 39 Cal.App.5th at p. 977.) Subsidies from the CHCF-A are a
source of funds that help a telephone company meet its revenue requirement and the
subsidies are part of the rate design of a telephone company. (Ibid.; see § 275.6, subds.
(b)(3), (c)(4).)
To implement broadband imputation in a general rate case, the Commission will
be required to conduct several reasonableness inquiries before reaching a decision about a
telephone company’s rates. For instance, paragraph 1 of the order in Decision No. 21-04-
005 states that, in a general rate case of each telephone company, “all reasonable positive
retail broadband-related revenues of the [telephone company] and its [ISP] affiliate (if
such affiliate exists) (but excluding revenues derived from areas outside of the [telephone
company’s] telephone service territory and revenues resulting from alternative service
platforms that are not based upon the [telephone company’s] local exchange facilities) net
of all reasonable broadband-related expenses of the [telephone company] and its [ISP]
affiliate (if such affiliate exists) for the calendar year immediately preceding the filing of
the [general rate case] application shall be imputed in the determination of rate design
and California High Cost Fund-A support.” Additional reasonableness standards apply.
Section 275.6, subdivision (c)(2) provides that in setting rates the Commission shall
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“afford the telephone corporation a fair opportunity to earn a reasonable return on its
investments, attract capital for investment on reasonable terms, and ensure the financial
integrity of the telephone corporation.” (Italics added.)
At this point, the “ ‘total effect’ ” (Duquesne Light Co. v. Barasch, supra, 488
U.S. at p. 310) of broadband imputation on the telephone companies’ rates cannot be
determined because the Commission has not made the foregoing reasonableness
determinations and established a telephone company’s rate design and CHCF-A subsidy.
Consequently, we cannot determine that the rates will be so unreasonably low as to be
confiscatory in violation of the telephone companies’ constitutional rights. (See
Ponderosa, supra, 36 Cal.App.5th at pp. 1016–1018 [rejecting contention that
Commission’s cost of capital determination was so unreasonably low that it was
confiscatory].) As a result, the taking claim is unripe.
DISPOSITION
The petition for a writ directing the Commission to nullify Decision No. 21-04-
005 and Decision No. 21-08-042 is denied. The Commission and TURN shall recover
their costs in this original proceeding. (Cal. Rules of Court, rule 8.493(a)(1)(A).)
FRANSON, J.
WE CONCUR:
LEVY, Acting P. J.
MEEHAN, J.
37.
Filed 1/18/23
CERTIFIED FOR PARTIAL PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
CALAVERAS TELEPHONE COMPANY et al.,
F083339
Petitioners,
(Dec. Nos. 21-04-005 & 21-08-042)
v.
PUBLIC UTILITIES COMMISSION, ORDER MODIFYING OPINION,
DENYING REHEARING AND
Respondent; GRANTING PARTIAL PUBLICATION
[NO CHANGE IN JUDGMENT]
PUBLIC ADVOCATES OFFICE OF THE
PUBLIC UTILITIES COMMISSION et al.,
Real Parties in Interest.
It appearing that part of the nonpublished opinion filed in the above entitled matter
on December 20, 2022, meets the standards for publication specified in California Rules
of Court, rule 8.1105(c), IT IS ORDERED that the opinion be certified for publication in
the Official Reports with the exception of with the exception of parts I., III., IV., and V.,
of the Discussion.
Additionally, IT IS ORDERED that the opinion filed herein on December 20,
2022, be modified as follows:
1. On page 2, the last two sentences of the first full paragraph are deleted and
replaced with the following sentence:
The fact a broadband-capable network can provide both types of service
created a concern that subsidized infrastructure could be used to generate
private, unregulated profits.
2. On page 3, the sentence, “As explained below, we reject these
arguments” is deleted and replaced with the following two sentences:
In the published portion of this opinion, we conclude the authority granted
by section 275.6 is broad enough to allow the Commission to adopt
broadband imputation. In the unpublished portions of this opinion, we
reject the telephone companies’ other arguments.
3. On page 9, the following unnumbered footnote is added after the
heading “I. BASIC LEGAL PRINCIPLES”
* See footnote, ante, page 1.
4. On page 13, the first sentence of the paragraph under heading II.A.
beginning “A fundamental dispute” is deleted and replaced with the following sentence:
A novel question of statutory interpretation presented in this appeal is
whether section 275.6 authorizes the Commission to adopt broadband
imputation.
5. On page 23, the sentence “Whether this interpretation violates other
statutory provisions or the California Constitution is addressed next” is deleted.
6. On page 23, the following unnumbered footnote is added after the heading
“III. SCOPE OF COMMISSION’S JURISDICTION”
* See footnote, ante, page 1.
7. On page 26, the last sentence of the second full paragraph is deleted and the
following sentence is inserted in its place:
Consequently, the telephone companies have not carried their burden of
demonstrating broadband imputation violates provisions in article XII of
the California Constitution.
2.
8. On page 26, the third full paragraph beginning with “Consequently,” is
deleted it its entirety.
9. On page 26, the following unnumbered footnote is added after the heading
“IV. FEDERAL PREEMPTION”
* See footnote, ante, page 1.
10. Starting at the end of page 32 the sentence beginning, “Stated another
way,” through the third full sentence on page 33 beginning, “In addition,” are deleted and
replaced with the following sentences:
“Stated another way, no matter what regulatory scheme is adopted to
determine the rates and subsidies for telephone service, that scheme, either
explicitly or implicitly, must take a stance on what infrastructure costs are
attributable to each type of service. If the Commission is completely barred
from considering the cost and revenue associated with the unregulated
Internet access service, the Commission would be forced to ignore the
marketplace realities of broadband’s dual capabilities, which would
effectively erode the Commission’s authority to set reasonable rates and
reasonable subsidies under the CHCF-A, thus curtailing its authority to
effectively regulate the telephone companies and the provision of telephone
services. In addition, it might allow the ISP affiliate to generate profits
without bearing its fair share of the cost of the infrastructure.
11. On page 34, the following unnumbered footnote is added after the heading
“V. UNCONSTITUTIONAL TAKING CLAIM IS UNRIPE”
* See footnote, ante, page 1.
12. On page 34 the second full paragraph beginning “Broadband imputation” is
deleted in its entirety.
13. On page 34, subheading “A. Lowering Subsidies Does Not Take Private
Property” along with the paragraph beginning, “A subsidy …” is deleted.
14. On page 34, just the subheadings “B. Ratemaking” and “1. Basic
Principles” are deleted (the paragraphs that follow remain intact).
3.
15. On page 35, just the subheading “2. Ripeness” is deleted (the paragraph that
follows remains intact).
16. On page 36, just the subheading “3. Analysis” is deleted (the paragraphs
that follow remain intact).
There is no change in the judgment. Petitioners’ petition for rehearing filed on
January 4, 2023, is denied.
FRANSON, J.
WE CONCUR:
LEVY, Acting P. J.
MEEHAN, J.
4.