US West Communications v. ARIZONA CORP. COM'N

• Decision Date: 18 May 1999
• Docket Number: No. 1 CA-CV 97-0517.,1 CA-CV 97-0517.
• Citation: 197 Ariz. 16,3 P.3d 936
• Parties: U S WEST COMMUNICATIONS, INC., a Colorado corporation, Plaintiff-Appellant, v. ARIZONA CORPORATION COMMISSION, an agency of the State of Arizona; Renz D. Jennings, Marcia Weeks and Carl J. Kunasek, as members of the Arizona Corporation Commission, Defendants-Appellees, Sprint Communications, Inc.; AT&T Communications of the Mountain States, Inc.; MCI Telecommunications, Inc.; TCG Phoenix; Arizona Payphone Association, Intervenors-Appellees.
• Court: Arizona Court of Appeals

3 P.3d 936

197 Ariz. 16

U S WEST COMMUNICATIONS, INC., a Colorado corporation, Plaintiff-Appellant, v. ARIZONA CORPORATION COMMISSION, an agency of the State of Arizona; Renz D. Jennings, Marcia Weeks and Carl J. Kunasek, as members of the Arizona Corporation Commission, Defendants-Appellees, Sprint Communications, Inc.; AT&T Communications of the Mountain States, Inc.; MCI Telecommunications, Inc.; TCG Phoenix; Arizona Payphone Association, Intervenors-Appellees.

No. -0517.

Court of Appeals of Arizona, Division 1, Department B.

May 18, 1999.

Review Denied April 18, 2000.¹

U S West Law Department by Norton Cutler, William M. Ojile, Jr., Denver, Colorado, and Wilmer, Cutler & Pickering by Louis R. Cohen, Jonathan R. Frankel, Washington, D.C., and Fennemore Craig, P.C. by Timothy Berg, Theresa Dwyer, Phoenix, for Plaintiff-Appellant.

Arizona Corporation Commission by Janet F. Wagner, Janice M. Alward, Phoenix, for Defendants-Appellees.

Osborn Maledon, P.A. by Andrew D. Hurwitz, Joan S. Burke, Phoenix, for Intervenors-Appellees TCG Phoenix, AT&T Communications of the Mountain States, Inc.

AT&T Communications of the Mountain States, Inc. by Maria Arias-Chapleau, Mary Tribby, Denver, Colorado, for Intervenor-Appellee AT&T Communications of the Mountain States, Inc.

Lewis and Roca LLP by Patricia K. Norris, Thomas H. Campbell, W. Todd Coleman, Phoenix, for Intervenor-Appellee MCI Telecommunications, Inc.

Ridge & Issacson, P.C. by Steven J. Duffy, Phoenix, for Intervenor-Appellee Sprint Communications, Inc.

OPINION

RYAN, Judge.

¶ 1 For more than eighty years, U S WEST Communications, Inc. ("U S WEST") and its predecessor have had a monopoly in providing local telephone service in Arizona. Recently, the process to change this situation in the local telecommunications field was begun. This appeal presents questions arising out of these first steps to introduce competition in the local telecommunications field.

¶ 2 U S WEST challenges the Arizona Corporation Commission's ("Commission") rules setting the structure to allow other telecommunications companies to compete for customers. U S WEST argues that the promulgation of those rules constituted a breach of contract. It also asserts that the rules were improperly adopted because the Commission failed to obtain approval of the attorney general. The trial court agreed with the Commission on both issues. We hold that the rules do not establish a breach of contract. We also hold that some of the rules were not properly adopted under the Arizona Administrative Procedure Act. Thus, we affirm in part, reverse in part, and remand with directions.

I.

¶ 3 U S WEST and its predecessor have provided telephone service in Arizona since statehood. In 1912, the Commission created a monopoly for providing telephone service in favor of U S West's predecessor. The companies subsequently invested billions of dollars in establishing and maintaining the infrastructure necessary to provide that service, including local and intraLATA long distance service.² The monopoly appears to be nearing its end, however, with the advent of competition in the field.

¶ 4 On June 23, 1995, the Commission issued Decision No. 59124, in which it adopted the Competitive Telecommunications Rules ("competitive rules"), Arizona Administrative Code R14-2-1101 to -1115. (The rules are attached as an appendix to this opinion.) In general, the competitive rules allow telecommunications providers to apply for certificates of convenience and necessity ("CC&Ns") to enter into competition with U S WEST in providing local and intraLATA long distance service.³ Several companies Sprint Communications, Inc. ("Sprint"); AT&T Communications of the Mountain States, Inc. ("AT & T"); MCI Telecommunications, Inc. ("MCI"); TCG Phoenix; and Arizona Payphone Association applied for and were granted CC&Ns to compete with U S WEST in various areas.

¶ 5 U S WEST intervened in the CC&N application proceedings filed by AT&T, MCI, and Sprint. In none of the cases did U S West either introduce evidence or file information that would meet the filing requirements for rate cases, universal service fund cases, or competitive services classifications.

¶ 6 Later, U S West sued the Commission alleging, among other things, that the Commission breached U S West's contract with the State and that the enactment of the competitive rules violated the Arizona Administrative Procedure Act. MCI, TCG Phoenix, and Arizona Payphone Association intervened in the suit. U S West also filed separate lawsuits against AT&T and the Commission, MCI and the Commission, and Sprint and the Commission. These lawsuits challenged the Commission's grant of competitive CC&Ns to AT&T, MCI, and Sprint. These latter cases were consolidated with U S West's original action against the Commission.

¶ 7 U S WEST filed a motion for summary judgment arguing in part that the Commission's rules breached its "contract" with the State and that the competitive rules were invalid because they were not approved by the attorney general, as required by the Arizona Administrative Procedure Act, before filing with the Secretary of State. The Commission filed a response and cross-motion for summary judgment. TCG Phoenix joined in the Commission's response and cross-motion. AT&T filed a separate response and a motion to dismiss. MCI filed a motion to dismiss and also joined in AT&T's motion to dismiss and in the Commission's and AT&T's response.

¶ 8 The superior court denied U S WEST's motion for partial summary judgment and granted the Commission's cross-motion for summary judgment and the motions to dismiss filed by AT&T and MCI. U S WEST appeals. U S WEST does not appeal from the dismissal of its claims against AT&T and MCI.

II.

A.

¶ 9 Before we reach U S West's substantive claims, we must address the Commission's argument that U S WEST's complaints are not ripe for review because U S WEST has not requested rate relief. If a party has not exhausted its administrative remedies, the controversy is not ripe for review and the court will not intervene in the dispute. See Arizona Downs v. Turf Paradise, Inc., 140 Ariz. 438, 445, 682 P.2d 443, 450 (App.1984)

. Here, we believe that whether this matter is ripe for review is predominately a legal question. Cf. Abbott Laboratories v. Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967) (holding that an agency's determination of whether a statute was properly construed was a purely legal issue, and therefore ripe for review), abrogated on other grounds by Califano v. Mister Sanders, 430 U.S. 99, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977). We review legal issues de novo. See Libra Group, Inc. v. State, 167 Ariz. 176, 179, 805 P.2d 409, 412 (App.1991).

¶ 10 Part of U S WEST's breach of contract argument is that the Commission's action allows competitors to capture its most lucrative customers, which will result in substantial loss to the corporation. The Commission responds that there are mechanisms in place, both within the competitive rules and in U S WEST's ability to request rate relief, that will avoid any unfair reduction in U S WEST's income. The Commission contends that if U S WEST would request such relief, the Commission could respond with appropriate measures to ensure that U S WEST receives a fair rate of return. Because U S WEST has not requested such rate relief, the Commission argues that U S WEST has not exhausted its administrative remedies and this dispute is not ripe for judicial review. We disagree.

¶ 11 U S WEST asserts that its relationship with the State is contractual and focuses on two principal terms of this purported contract. First, the State promised U S WEST a monopoly. Second, in exchange for U S WEST's promise to serve all Arizona customers, both profitable and unprofitable, the Commission would set rates that, in the aggregate, would allow U S West to make a profit.

¶ 12 The monopoly requires U S West to serve customers for whom the cost of service is so high that the Commission has elected not to allow U S WEST to recover the entire cost of service from those customers. Instead, the cost of these customers' service is subsidized by other customers, for whom the Commission has set higher rates. It is the lower-cost, higher-rate customers for whom the competitors will naturally compete. As U S WEST loses some of these customers, its mix of customers will swing from the profitable to the non-profitable, reducing its per-customer income at the same time its per-customer costs increase. It will thus not be able to recover a fair rate of return on its property devoted to public service.

¶ 13 U S WEST argues that the Commission's action allowing other telecommunications companies to compete for its more lucrative customers breaches a material term of the contract. It points to the negative effects of competition on its profits to demonstrate that the promise of a monopoly is a material term. It argues that one party's breach of a material term excuses the other party from its obligation to perform under the contract. See Zancanaro v. Cross, 85 Ariz. 394, 400, 339 P.2d 746, 750 (1959)

.

¶ 14 The Commission argues that U S WEST can file a rate case to adjust the rates it can charge its remaining customers. An adjustment would allow U S West to rebalance the mix to allow a fair rate of return. This adjustment would permit it to compete with the new competitors in the competitive markets and thereby increase profits. Until U S WEST requests such rate relief, the Commission contends, this dispute is not ripe for review because U S WEST has not exhausted its administrative remedies.

¶ 15 U S WEST's argument, however, requires us to make the legal determination of whether a contract exists between U S WEST and the State and whether the State breached a material term of that contract when the Commission eliminated the protection against competition afforded U S West in its service territory. It does not...