U.S. West, Inc. v. Nelson

• Citation: 146 F.3d 718
• Decision Date: 16 June 1998
• Docket Number: No. 97-35551,97-35551
• Parties: 98 Cal. Daily Op. Serv. 4593, 98 Daily Journal D.A.R. 6539 US WEST, INC., a Delaware Corporation; US West Communications Group, Inc., a Colorado Corporation; and US West Dex, Inc., a Colorado Corporation, Plaintiffs/Appellants, v. Sharon L. NELSON, in her official capacity as chairman of the Washington Utilities and Transportation Commission; Richard Hemstad, in his official capacity as commissioner of the Washington Utilities and Transportation Commission; and William R. Gillis, in his official capacity as commissioner of the Washington Utilities and Transportation Commission, Defendants/Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 718

146 F.3d 718

98 Cal. Daily Op. Serv. 4593, 98 Daily Journal

D.A.R. 6539

US WEST, INC., a Delaware Corporation; US West

Communications Group, Inc., a Colorado

Corporation; and US West Dex, Inc., a Colorado Corporation, Plaintiffs/Appellants, v. Sharon L. NELSON, in her official capacity as chairman of

the Washington Utilities and Transportation Commission;

Richard Hemstad, in his official capacity as commissioner of

the Washington Utilities and Transportation Commission; and

William R. Gillis, in his official capacity as commissioner

of the Washington Utilities and Transportation Commission,

Defendants/Appellees.

No. 97-35551.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted June 5, 1998.

Decided June 16, 1998.

David J. Burman, Perkins Coie, Seattle, WA, for plaintiffs/appellants.

Sally G. Johnston, Assistant Attorney General, Olympia, WA, for defendants/appellees.

Appeal from the United States District Court for the Western District of Washington; Franklin D. Burgess, District Judge, Presiding. D.C. No. CV-96-06025-FDB.

Before: LAY, Senior Circuit Judge, ^* and PREGERSON and GRABER, Circuit Judges.

PREGERSON, Circuit Judge:

FACTUAL AND PROCEDURAL BACKGROUND

In 1982, the mammoth telecommunications corporation known as American Telephone and Telegraph Company was splintered in an antitrust consent decree. See United States v. American Tel. and Tel. Co., 552 F.Supp. 131 (D.D.C.1982), aff'd mem., 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). Appellant US West, Inc. was one of several Regional Bell Operating Companies formed pursuant to that decree. US West, Inc. is a holding company for many subsidiaries, including appellants US West Dex, Inc. ("West Dex") and US West Communications Group, Inc. ("West Communications"). West Dex publishes and distributes telephone directories free to Washington residents, although it solicits advertisements from and sells those directories to a small number of people outside the state. West Communications provides local exchange telecommunications services in fourteen western and midwestern states, including Washington.

The Washington Utilities and Transportation Commission (the "Commission") regulates the rates of public utilities, including appellants' telecommunications services. Because public utilities are monopolies, the Commission must calibrate rates to simulate competition and to ensure that the utilities receive a fair return-no more, no less-on their investment. Generally, the higher a utility company's profits are in one year, the lower its rates can be in the following year.

Confronted with these objectives, the utility companies may be tempted by accounting practices that make their net profits appear as small as possible. For example, a company like US West owns many small affiliates. Some of those affiliates, like West Communications, are regulated by the Commission; others, such as West Dex, operate free of Commission regulation. This regulatory loophole might encourage US West to attribute its costs to the regulated West Communications, while shifting its profits to the unregulated West Dex. To correct for this and other similar incentives, the Commission has developed several accounting practices of its own. One of these practices, imputation, involves adjusting the revenue requirement of the regulated affiliate to realize portions of the cost savings, gains on sale, lower capital costs, profits, and revenues that the affiliated family-regulated or not-has experienced as a whole.

In 1996, the Commission set the rates that West Communications could charge for intrastate telephone rates by imputing income earned by West Dex. See Washington Util. and Transp. Comm'n v. U.S. West Communications, Inc., 1996 WL 350826 (Wash.U.T.C.). West Communications appealed that rate order to the King County Superior Court, which affirmed the order. West Communications appealed that decision to the Washington Supreme Court, which also affirmed. US West Comm., Inc. v. Washington Util. and Transp. Comm'n, 134 Wash.2d 48, 949 P.2d 1321 (1997).

On December 17, 1996, before the Washington Supreme Court handed down its decision, the US West companies ¹ brought this action against the Commission defendants in federal district court, seeking declaratory and injunctive relief. In their complaint, the US West companies attacked the practice of imputation, something that they had not done before the Commission or in the Washington proceeding. Specifically, the US West companies alleged that the Commission's imputation of West Dex's profits from its yellow pages directories to West Communications violated their rights under the First and Fourteenth Amendments to the United States Constitution and under 42 U.S.C. § 1983. On March 17, 1997, the Commission defendants moved to dismiss the complaint for lack of subject matter jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(1) and the Johnson Act, 28 U.S.C. § 1342. On May 2, 1997, the district court granted the Commission defendants' motion, holding that the Johnson Act deprived it of jurisdiction.

The US West companies timely appeal.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. §§ 1291 and 1294(1). We review questions of law, including the existence or lack of subject matter jurisdiction, de novo. Ma v. Reno, 114 F.3d 128, 130 (9th Cir.1997). Likewise, we review de novo the district court's dismissal for lack of subject matter jurisdiction. Evans v. Chater, 110 F.3d 1480, 1481 (9th Cir.1997). "[D]ismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment." Chang v. Chen, 80 F.3d 1293, 1296 (9th Cir.1996) (citation omitted).

ANALYSIS

I. Jurisdiction Under the Johnson Act

The Johnson Act withdraws state utility rate cases from federal jurisdiction when certain conditions are met. That statute provides:

The district courts shall not enjoin, suspend or restrain the operation of, or compliance with, any order affecting rates chargeable by a public utility and made by a State administrative agency or a rate-making body of a State political subdivision, where:

(1) Jurisdiction is based solely on diversity of citizenship or repugnance of the order to the Federal Constitution; and,

(2) The order does not interfere with interstate commerce; and,

(3) The order has been made after reasonable notice and hearing; and,

(4) A plain, speedy and efficient remedy may be had in the courts of such State.

28 U.S.C. § 1342 (1988). Unless each of those four conditions is present, the Johnson Act does not deprive federal courts of jurisdiction. Brooks v. Sulphur Springs Valley Elec. Co-op., 951 F.2d 1050, 1054 (9th Cir.1991) (citation omitted). The burden of showing that the conditions have been met is on the party invoking the Johnson Act. See Nucor Corp. v. Nebraska Pub. Power Dist., 891 F.2d 1343, 1346 (8th Cir.1989) (stating that "[i]t is well-settled that the plaintiff bears the burden of establishing subject matter jurisdiction."). Additionally, we have held that the Johnson Act precludes federal court jurisdiction in actions seeking both injunctive and declaratory relief. See Brooks, 951 F.2d at 1054.

1. Any Order Affecting Rates

Appellants maintain that the Johnson Act is inapplicable because they are not challenging the 1996 rate order; instead, appellants contend that they contest the constitutionality of the Commission's policy of imputation. To that end, their complaint characterizes the $81.4 million imputation of income from West Dex to West Communications as "illustrative" of the policy they attack. But the way that the US West companies have chosen to describe their grievance does not control whether the Johnson Act bars this action. The threshold inquiry is whether the complaint challenges any Commission "order affecting rates." It does not do so if the US West companies can state a federal claim-and be entitled to relief-without encroaching on the Commission's orders and rate-setting authority. See Hanna Mining Co. v. Minnesota Power and Light Co., 573 F.Supp. 1395, 1401 (D.Minn.1983) (holding that "any ruling that ... would obviously undercut the agency's authority" would challenge an order affecting rates within the meaning of the Johnson Act). ² For several reasons, we agree with the district court that the US West companies here challenge an "order affecting rates."

First, we emphasize that the US West companies are not challenging a procedure that exists apart from the rate-making system. Where, as here, a party challenges the rate-making system, including any particular procedure that that system employs, the Johnson Act bars federal jurisdiction. See Minnesota Gas Co. v. Public Serv. Comm'n, 523 F.2d 581, 582 n. 1 (8th Cir.1975) (stating that the Johnson Act operated as a jurisdictional bar when the plaintiff directed its challenge "to the procedural and substantive fairness of an administrative order"). Moreover, even if imputation accurately is conceived as a Commission practice, a federal district court may not entertain an attack on that practice if it is part of the rate-making structure. By appellants' own allegations, imputation is an accounting practice that the Commission uses to derive intrastate telecommunications rates. As such, it is "an integral part of the rate structures" that may not be attacked in federal court under the Johnson Act. Tennyson v. Gas Serv. Co., 506 F.2d 1135, 1140 (10th Cir.1974). See also J & A Realty v. City of Asbury Park, 763 F.Supp. 85, 88-89 (D.N.J.1991) (holding that the Johnson Act barred federal jurisdiction even where the property owners argued that they challenged only the components and application of the rate rather than the rate order itself) (internal quotation marks omitted); National Teleinformation Network, Inc. v. Michigan Pub. Serv. Comm'n, 687 F.Supp. 330, 334-35 (W.D.Mich.1988) (stating that the Johnson Act prohibits...