IN RE QWEST'S WHOLESALE SERVICE

• Decision Date: 18 August 2005
• Docket Number: No. A03-1409.,A03-1409.
• Citation: 259 Minn. 2005,702 N.W.2d 246
• Parties: In the Matter of QWEST'S WHOLESALE SERVICE QUALITY STANDARDS.
• Court: Minnesota Supreme Court

702 N.W.2d 246

259 Minn. 2005

In the Matter of QWEST'S WHOLESALE SERVICE QUALITY STANDARDS.

No. A03-1409.

Supreme Court of Minnesota.

August 18, 2005.

Larry D. Espel, John M. Baker, Jeanette M. Bazis, Greene Espel, P.L.L.P., Jason D. Topp, Qwest Corporation, Minneapolis, MN, for Appellant Qwest Corporation.

Mike Hatch, Attorney General, St. Paul, MN, for Minnesota Public Utilities Commission and Minnesota Department of Commerce.

Steven H. Alpert, Cassandra O. O'Hern, Assistant Attorneys General, St. Paul, MN, for Minnesota Public Utilities Commission.

Gregory R. Merz, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, MN, Lesley J. Lehr, St. Paul, MN, for MCI, Inc., successor to WorldCom, Inc.

Mark J. Ayotte, Thomas Erik Bailey, Briggs and Morgan, P.A., Minneapolis, MN, for AT & T Communications of the Midwest, Inc.

Dan M. Lipschultz, Michael J. Bradley, Moss & Barnett, Minneapolis, MN, for Encore Communications, L.L.C., Global Crossing Local Services, Inc., McLeodUSA, Inc., New Edge Networks, Inc., NorthStar Access, L.L.C., Onvoy, Inc., Rythms Links, Inc., Time Warner Telecom of Minnesota L.L.C., and US Link, Inc.

Virgina K. Zeller, Assistant Attorney General, St. Paul, MN, for Minnesota Department of Commerce.

W. Patrick Judge, Briggs and Morgan, P.A., St. Paul, MN, for Covad Communications Co.

Karen L. Clauson, Eschelon Telecon of Minnesota, Inc., Minneapolis, MN, for Eschelon Telecom of Minnesota, Inc.

Todd G. Hartman, Robins, Kaplan, Miller & Ciresi, L.L.P., Minneapolis, MN, for Time Warner Telecom of Minnesota L.L.C.

Heard, considered, and decided by the court en banc.

OPINION

PAGE, Justice.

Petitioner Qwest Corporation (Qwest), an incumbent local exchange carrier (incumbent carrier), challenges a court of appeals decision affirming an order of the Minnesota Public Utilities Commission (MPUC) that established wholesale service quality standards, including self-executing payments for failure to meet the standards, for wholesale transactions between Qwest and so-called competitive local exchange carriers (CLECs).¹ In this appeal, Qwest raises two issues: (1) whether the MPUC's authority to establish wholesale service quality standards, including the use of fixed minimum performance standards, is preempted by the federal Telecommunications Act of 1996, 47 U.S.C. §§ 151-615(b) (2000) (the 1996 Act or the Act); and (2) whether the MPUC has authority under Minnesota law to impose self-executing payments for failure to meet these standards. We conclude that the MPUC's authority to establish wholesale service quality standards is not preempted. We also conclude that the MPUC lacks the authority under Minnesota law to impose self-executing payments for failure to meet those standards. Therefore, we affirm in part and reverse in part.

Congress passed the 1996 Act in an effort to foster competition in telecommunications markets, including local telephone markets. Until the 1996 Act was passed, states had the power to grant exclusive franchises to incumbent carriers, thereby creating a monopoly in each local telephone service area. The Act ended the long-standing state-sanctioned monopolies and fundamentally restructured local telecommunications markets. The Act's purpose is to "promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." Telecommunications Act of 1996, Pub.L. No. 104-104, purpose statement, 110 Stat. 56, 56 (1996). Because of the high cost of building a new telecommunications network infrastructure, the Act requires incumbent carriers, who own the existing infrastructure, to enter into agreements with CLECs that allow the CLECs to interconnect with the incumbents' existing networks and to purchase or lease telecommunications services and facilities at wholesale rates for resale to the CLECs' customers. 47 U.S.C. § 251(c)(2) (2000). The Act provides that if an incumbent carrier and a CLEC cannot reach an interconnection agreement, either party may seek arbitration before the state regulatory authority, here the MPUC. 47 U.S.C. § 252(b)(1) (2000).

In 1996, US West Communications, Inc. (US West), the predecessor to Qwest, arbitrated interconnection agreements with several CLECs before the MPUC. As a result of the arbitration, the MPUC imposed certain contract terms, including (1) a set of quality standards to be applied to the services and facilities that US West made available to the CLECs and (2) a system of "performance penalties" in the form of credits to the CLECs if US West failed to meet those quality standards. US West challenged the contract terms imposed by the MPUC in federal court, and the court upheld the validity of those terms. See US West Communications, Inc. v. Garvey, 55 F.Supp.2d 968, 1999 U.S. Dist. LEXIS 22042, at *34-41 (D.Minn. Mar. 30, 1999).

In 1999, US West entered into an Alternative Form of Regulation (AFOR) plan with the MPUC under Minnesota law. See Minn.Stat. §§ 237.76-.772 (2004). AFOR plans are intended to "provide a telephone company's customers with service of a quality consistent with [the MPUC] rules at affordable rates, to facilitate the development of telecommunication alternatives for customers, and to provide, where appropriate, a regulatory environment with greater flexibility than is available under traditional rate of return regulation * * *." Minn.Stat. § 237.76. Qwest's AFOR plan applies to its retail customers and specifically excludes issues related to wholesale service quality standards and corresponding remedies.

Also in 1999, US West and Qwest sought to merge. In exchange for the MPUC's approval of the merger, Qwest agreed to participate in an expedited proceeding to set permanent wholesale service quality standards applicable to the services Qwest would provide to CLECs and waived its right to a contested case proceeding in connection with the merger filing. On June 28, 2000, the MPUC approved the merger and started the process of establishing permanent wholesale service quality standards.

While the proceedings for establishing permanent wholesale service quality standards were pending, Qwest applied to the Federal Communications Commission (FCC) to enter the long-distance telephone market. As part of the application process, Qwest was required to demonstrate that it would keep its local telecommunications network open to competition in a nondiscriminatory manner. See 47 U.S.C. § 271 (2000). In evaluating petitions to enter the long-distance market, the FCC relied on so-called Post-Entry Performance Assurance Plans, which were developed collaboratively by the regional Bell operating companies, including Qwest, competitive carriers, and state regulatory bodies, like the MPUC, to ensure the nondiscriminatory provision of wholesale local exchange services. Therefore, in conjunction with Qwest's application, the MPUC, in July 2002, adopted the Minnesota Performance Assurance Plan (MPAP). The MPAP requires parity between Qwest's local telephone services to its competitors and its services to itself, its subsidiaries, and its retail customers after Qwest's entry into the long-distance market. To measure Qwest's compliance, the plan incorporates a long list of performance criteria. The MPAP also includes a remedy scheme that requires Qwest to pay its wholesale customers if the quality of its wholesale services falls below that provided to its retail customers.

In August 2002, the MPUC sought comments from Qwest and the CLECs with respect to the merits of adopting the MPAP as the permanent wholesale service quality standards. Concerned that Qwest could meet the MPAP parity criteria while manipulating the quality of the wholesale services in a way that would put the CLECs at a competitive disadvantage, the CLECs proposed modifying the MPAP in six quality-sensitive areas: installation, new service problems, jeopardy notice, service repairs, repeated service problems, and trunk blocking rate. Specifically, the CLECs proposed fixed minimum performance standards in those six areas. The CLECs also proposed the adoption of an enforcement mechanism consisting of self-executing payments to be made by Qwest to the CLECs for failure to meet the standards. Qwest was supportive of using the MPAP parity criteria as the wholesale service quality standards, but opposed the adoption of the fixed minimum performance standards and self-executing payments proposed by the CLECs.

In July 2003, the MPUC issued an order adopting the MPAP criteria as the permanent wholesale service quality standards, with modifications to include the fixed minimum performance standards in the six areas identified by the CLECs and the self-executing payments. After unsuccessfully seeking reconsideration and a stay of the July 2003 MPUC order, Qwest appealed. The court of appeals affirmed, holding that the MPUC did not violate federal or state law by imposing the wholesale service quality standards and that the imposition of the self-executing payments was within the MPUC's statutory authority, was supported by adequate evidence, and did not constitute an unlawful taking. In re Qwest's Wholesale Serv. Quality Standards, 678 N.W.2d 58, 67 (Minn.App.2004). We granted Qwest's petition for further review.

I.

Qwest first claims that the 1996 Act preempts states from regulating local telecommunications competition. Citing AT&T Corp. v. Iowa Utilities Board, Qwest asserts that by enacting the 1996 Act, "the Federal Government has taken the regulation of local telecommunications competition away from the States." 525 U.S. 366, 379 n. 6, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). Qwest contends that the Supreme Court in AT&T implied that the states were preempted because Congress so fully occupied the field that there was no room for any state regulation. In the alternative, Qwest argues that the MPUC order violates the...