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Public Utility District No. 2 of Pacific County v. Comcast of Washington IV, Inc.

Court of Appeals of Washington, Division 1

October 13, 2014

Public Utility District No. 2 of Pacific County, Respondent,
v.
Comcast of Washington IV, Inc., et al., Appellants

Oral Argument March 5, 2014.

As amended by order of the Court of Appeals February 10, 2015.

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Appeal from Pacific County Superior Court. Docket No: 07-2-00484-1. Judge signing: Honorable Michael J Sullivan. Judgment or order under review. Date filed: 12/12/2011.

Eric Stahl (of Davis Wright Tremaine LLP), and Timothy J. O'Connell (of Stoel Rives LLP ), for appellants.

Donald S. Cohen and Stephanie Bloomfield (of Gordon Thomas Honeywell LLP ), for respondent.

Authored by Stephen J. Dwyer. Concurring: James Verellen, Mary Kay Becker.

OPINION

Page 70

Stephen J. Dwyer, J.

[184 Wn.App. 34] ¶ 1 Pacific County Public Utility District No. 2 (hereinafter District) permitted Comcast of Washington IV, Inc., CenturyLink of

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Washington, Inc.,[1] and Falcon Community Ventures I, LP, d/b/a Charter Communications (collectively Companies), to attach their communications equipment to its utility poles pursuant to agreements with the Companies. However, at the beginning of 2007 the District revised its rates and instituted new nonrate terms and conditions, which resulted in significant cost increases to the Companies. After the Companies refused to pay the District at the new rates, declined to sign the proposed agreement, and refused to remove their equipment from its poles, the District initiated this lawsuit.

[¶2] In early 2008, the legislature amended the statute governing utility pole attachment rates, RCW 54.04.045, effective June 12, 2008. Prior to the amendment, rates calculated by Washington public utility districts (PUDs) needed only to be " just, reasonable, nondiscriminatory and sufficient." Former RCW 54.04.045(2) (1996).[2] The amendment, however, included a specific formula, the result of which would yield a " just and reasonable" rate. RCW 54.04.045(3)(a)-(c). Whether the District's revised rate complied with the amended statute became the central dispute in this case.

[¶3] In the trial court--and now on appeal--the District and the Companies maintained that each provision of the two-part formula written by the legislature reflected a certain preexisting formula. However, they disputed which [184 Wn.App. 35] were the apposite formulas. On appeal, we are presented with three principal issues: (1) whether the nonrate terms and conditions in the proposed agreement complied with RCW 54.04.045(2); (2) whether the trial court erred by concluding that the District's revised rates prior to June 12, 2008 complied with RCW 54.04.045(2); and (3) whether the trial court erred by concluding that the 2008 statutory amendment, codified at RCW 54.04.045(3)(a)-(c), reflects the preexisting formulas as proposed by the District's expert witness. We affirm the trial court with respect to the first two issues, subject only to the severance of a few nonrate terms. However, with respect to the third issue, we reverse and remand to the trial court for further proceedings consistent with this opinion.

I

[¶4] The District, which is organized as a municipal corporation pursuant to RCW 54.04.020, is a consumer-owned utility providing services in Pacific County, Washington.[3] The District owns and maintains poles that allow it to furnish electricity to customers in Pacific County. In all, it serves approximately 17,000 customers in predominantly rural areas.

[¶5] The Companies provide various communication services to customers in Washington, including in Pacific County. In order to provide these services, the Companies attach communications equipment to the District's utility poles. The Companies were initially licensed to attach their equipment to the District's poles under rental agreements assigned to them by previous communications providers in Pacific County. These assigned agreements dated back to the 1970s and 1980s with respect to Comcast and Charter, and to the 1950s and 1960s with respect to CenturyLink.

[184 Wn.App. 36] [¶6] Prior to 2007, the District's annual pole attachment rates of $8.00 per pole for telephone companies and $5.75 per pole for cable companies had remained fixed for 20 years. In February 2006, the District provided written notice to the Companies that it intended to terminate the agreements. The District advised the Companies that it would implement new pole attachment rates effective January 1, 2007 and that the District would provide copies of a new pole attachment agreement for the Companies to review.

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[¶7] Several years earlier, the District had retained EES Consulting, Inc., to perform a rate study. After analyzing the District's rates, EES recommended that the District increase its rate to no less than $20.65 but closer to $36.39 per pole. In making this recommendation, EES considered four different methodologies or formulas: the United States Federal Communications Commission (FCC) Cable formula,[4] the FCC Telecom formula,[5] the American Public Power Association (APPA) formula,[6] and the Washington [184 Wn.App. 37] PUD Association formula.[7] Gary Saleba, the president and chief executive officer of EES, described the method by which EES arrived at its recommendation.

The study that we performed in 2004/2005 is summarized in Exhibit 6, and what we did in Exhibit--in the study, which was dated April of 2005, was to take a look at what the expenses were for the PUD or the revenue requirement for a test period of 2004, and then went through--after determining what the revenue requirement for the '04 period was, we went through the four different methodologies I talked about earlier and calculated rates, pole attachment rates for the PUD, for the FCC cable, FCC telecom, APPA method, and the PUD Association method.

While the study performed by EES utilized all four methodologies, in proposing the range between $20.65 and $36.39, EES relied on the FCC Telecom formula and the APPA formula, respectively.

[¶8] Once the District received the results of the study and the recommendation from EES, the District's general manager, Douglas Miller, and finance manager, Mark Hatfield--after considering and discussing the results with the District's supervisors--concluded that an annual rate of $19.70 per pole was appropriate. However, in light of the significant rate increase, Miller recommended to the District's board of commissioners a transition rate of $13.25 per pole for 2007, with the $19.70 per pole rate to commence on January 1, 2008. Miller described the deliberative process of the District in his testimony:

[184 Wn.App. 38] Two times a month we have management staff meetings, and we talk about things that are happening, things we're working on. It's the--it's the supervisors at the PUD that work directly for me. And we meet and talk about issues. And we talked about the agreement and the rates and--or the study and the rates that were recommended. And out of that, we kicked around where we thought the numbers should be. And that's where we got the [$]13.25 and the [$]19.70.
We--at that time we were first starting to install fiber, our own fiber plant, which would change the number of contacts per pole, average number of contacts per pole,

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which would adjust the--those formulas. And we made our best guess of where that might go during the five-year period of what we were going to recommend these rates to be to the board.
And based on those assumptions, we came up with the [$]19.70. And then as we were debating the [$]19.70, we thought, you know, this is a pretty big jump from [$]5.75 or $8, you know, to get to the [$]19.70, so let's do a one-year interim rate that kind of steps to the [$]19.70. And if you take the [$]5.75 and you add that to the $8 and divide by two, it's a midpoint between those two rates. And you add that to [$]19.70 and then divide by two and round it off, it comes to [$]13.25. So that's how we got the [$]13.25.

[¶9] Miller made his rate recommendation to the board of commissioners at hearings held on December 5, 2006 and December 19, 2006, as well as at the commissioners' meeting held on January 2, 2007. Although the Companies were aware that the meetings were open to the public, no representatives of the Companies attended the public hearings or the public meeting. Furthermore, the Companies never requested agendas or minutes, which would have been available upon request.

[¶10] On January 2, 2007, the board of commissioners adopted Resolution No. 1256, which revised the District's annual pole attachment rate to $13.25 per pole, effective January 1, 2007, and $19.70 per pole, effective January 1, 2008.

[¶11] In addition to revising its rate, the District developed a new form of agreement for attaching entities, which [184 Wn.App. 39] included nonrate terms and conditions. The District began with a template agreement developed by the APPA and made revisions in an effort to make it more applicable to the District. District management, including operations, engineering, and financial personnel, were consulted in developing the new agreement.

[¶12] The District also communicated with the Companies regarding the proposed agreement. The District sent a version of the proposed agreement to the Companies for review and comment in early 2006. Over the next six months, the District received feedback from the Companies. It then incorporated some of the Companies' suggestions and rejected others before mailing out for signature the proposed agreement in November 2006. This version of the proposed agreement generated additional feedback, which led the District to further modify the agreement before sending a revised version to the Companies in August 2007. The transmittal letter attached to the revised version requested that the Companies return the signed agreement by October 31, 2007. The letter stated that, in the event that the Companies did not wish to remain on the District's poles under the terms of the new agreement, the Companies were to notify the District of their plans for removing their equipment. In early October, the District contacted the Companies to remind them of the impending October 31, 2007 deadline. However, the Companies refused to sign the agreement, declined to remove their equipment, and tendered payment only at the historic rates; the District did not accept the Companies' tender of payment. [8]

[184 Wn.App. 40] [¶13] Two other licensees attached their equipment to the District's poles. One executed the first draft of the new agreement, and both timely began paying at the revised rate.

[¶14] While the existing agreements between the District and the Companies permitted the District to remove the Companies' equipment from its poles if the Companies failed to do so, the District did not exercise its right. Instead, on December 28, 2007, the District filed complaints against all three of the Companies, alleging claims of breach of contract, trespass, and unjust enrichment,

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and requesting relief in the form of a declaratory judgment, injunctive relief, and damages. The Companies counterclaimed and sought to enjoin the District from imposing terms in violation of RCW 54.04.045. The lawsuits were then consolidated by agreement.

[¶15] In March 2008, the legislature amended RCW 54.04.045, with an effective date of June 12, 2008. Laws of 2008, ch. 197, § 1. Prior to the amendment, pole attachment rates charged by Washington PUDs were required only to be " just, reasonable, nondiscriminatory and sufficient." Former RCW 54.04.045(2). In amending the statute, however, the legislature instituted a specific formula, the result of which would constitute a " just and reasonable rate." RCW 54.04.045(3).

(3) A just and reasonable rate must be calculated as follows:
(a) One component of the rate shall consist of the additional costs of procuring and maintaining pole attachments, but may not exceed the actual capital and operating expenses of the locally regulated utility attributable to that portion of the pole, duct, or conduit used for the pole attachment, including a share of the required support and clearance space, in proportion to the space used for the pole attachment, as compared to all other uses made of the subject facilities and uses that remain available to the owner or owners of the subject facilities;
(b) The other component of the rate shall consist of the additional costs of procuring and maintaining pole attachments [184 Wn.App. 41], but may not exceed the actual capital and operating expenses of the locally regulated utility attributable to the share, expressed in feet, of the required support and clearance space, divided equally among the locally regulated utility and all attaching licensees, in addition to the space used for the pole attachment, which sum is divided by the height of the pole; and
(c) The just and reasonable rate shall be computed by adding one-half of the rate component resulting from (a) of this subsection to one-half of the rate component resulting from (b) of this subsection.

RCW 54.04.045. With respect to subsection (3)(a), the legislature included the following provision:

For the purpose of establishing a rate under subsection (3)(a) of this section, the locally regulated utility may establish a rate according to the calculation set forth in subsection (3)(a) of this section or it may establish a rate according to the cable formula set forth by the federal communications commission by rule as it existed on June 12, 2008, or such subsequent date as may be provided by the federal communications commission by rule, consistent with the purposes of this section.

RCW 54.04.045(4).

[¶16] Included with the amendment was a statement of legislative intent, which is as follows:

It is the policy of the state to encourage the joint use of utility poles, to promote competition for the provision of telecommunications and information services, and to recognize the value of the infrastructure of locally regulated utilities. To achieve these objectives, the legislature intends to establish a consistent cost-based formula for calculating pole attachment rates, which will ensure greater predictability and consistency in pole attachment rates statewide, as well as ensure that locally regulated utility customers do not subsidize licensees. The legislature further intends to continue working through issues related to pole attachments with interested parties in an open and collaborative process in order to minimize the potential for disputes going forward.

[184 Wn.App. 42] Laws of 2008, ch. 197, § 1. Whether the revised rate instituted by the District in Resolution No. 1256[9] was in compliance with the amended statute became the central dispute in this case.

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[¶17] After extensive discovery was conducted, the Companies filed a joint motion for partial summary judgment in December 2009, in which they requested that the trial court determine as a matter of law that RCW 54.04.045(3)(a) reflects the FCC Cable formula and that RCW 54.04.045(3)(b) reflects the FCC Telecom formula. The trial court denied the Companies' joint motion.[10]

[¶18] Thereafter, in October 2010, this case was tried before the Honorable Michael J. Sullivan. Ample testimony was presented by the parties, including testimony from three expert witnesses, two of whom--Gary Saleba on behalf of the District and Patricia Kravtin on behalf of Comcast and Charter--opined that subsections (3)(a) and (3)(b) reflected preexisting formulas; however, Saleba and Kravtin disagreed as to which formulas were reflected by each subsection.[11]

[¶19] On March 15, 2011, the trial court issued a memorandum decision in which it ruled in favor of the District and against the Companies. In its decision, the trial court stated that it would entertain proposed findings of fact and conclusions of law. Thereafter, the District submitted proposed findings of fact and conclusions of law, as well as a proposed judgment, to which the Companies filed extensive objections and proposed revisions. The District also submitted a motion, proposed findings of fact and conclusions of law, and a proposed order, all of which related to its request for attorney fees and costs; the Companies objected and [184 Wn.App. 43] provided responses. The trial court heard oral argument on the proposed findings of fact and conclusions of law on September 16, 2011. On December 12, the trial court entered the findings of fact, conclusions of law, order, and judgment proposed by the District--both as to the substantive issues and as to the request for attorney fees and expenses. The trial court also awarded damages, as well as fees and costs, in favor of the District, totaling $1,856,155.02.

[¶20] Of particular significance to the marrow of this appeal, the trial court concluded that " Section 3(a) of RCW 54.04.045 (2008) reflects the FCC Telecom method and Section 3(b) reflects the APPA method as of the date of trial." Conclusion of Law 10. Additionally, the trial court concluded that the District " did not act arbitrarily or capriciously, in interpreting Section 3(a) of RCW 54.04.045 as the FCC Telecom formula and Section 3(b) as the APPA formula for PUD pole attachment rates as of the date of trial." Conclusion of Law 11. The trial court further concluded that the District's revised rates " were just, reasonable, non-discriminatory, and sufficient, those rates being $13.25 prior to January 1, 2008, and $19.70 after January 1, 2008." Conclusion of Law 12.

[¶21] In rejecting the Companies' interpretation of subsections (3)(a) and (3)(b) of RCW 54.04.045, the trial court found, among other things, that the rate derived by one of the Companies' expert witnesses--Patricia Kravtin--was " unreasonable and impractical as it relates to this case." Finding of Fact 34. In addition, the trial court found that " [t]he opinions of Defendants' rate expert, Patricia Kravtin, were based primarily on theoretical analysis of economics and public policy, rather than actual local information regarding Pacific County and Pacific PUD. She had never visited Pacific County prior to trial." Finding of Fact 35. Moreover, the trial court found that " Defendants' rate expert Patricia Kravtin's opinion on the PUD's maximum [184 Wn.App. 44] legal rate was lower than what Defendants had been voluntarily paying for over twenty years." Finding of Fact 36.

[¶22] After the Companies filed an untimely notice of appeal, Division Two entered an order permitting the Companies to appeal. On April 23, 2012, the Companies filed a separate appeal of the trial court's award of $27,690.14 for fees and costs the District incurred on the Companies' posttrial motion to vacate the judgment. That appeal was consolidated with the Companies' other appeal.

[¶23] The District then filed in the Supreme Court a motion for discretionary review of the decision permitting the Companies to

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appeal. A subsequent motion to stay proceedings in Division Two, pending the Supreme Court's action, was granted on March 27, 2012. On June 5, 2012, the Supreme Court denied the District's motion for discretionary review.[12],[13] The Companies' appeal was then transferred to Division One.

II

[¶24] The Companies contend that the trial court erred in its treatment of the nonrate terms and conditions in the District's proposed pole attachment agreement. Specifically, they aver that the trial court improperly applied a deferential standard of review, which, in turn, led to an erroneous conclusion that the terms and conditions were just, reasonable, nondiscriminatory, and sufficient. We disagree.

[184 Wn.App. 45] A

[¶25] The Companies assert first that the trial court erred by limiting its review of the imposition of the District's nonrate terms and conditions to determining whether they were arbitrary and capricious. Their assertion is unavailing.

[¶26] Where " municipal utility actions come within the purpose and object of the enabling statute and no express limitations apply," it is proper to leave " the choice of means used in operating the utility to the discretion of municipal authorities." City of Tacoma v. Taxpayers of Tacoma, 108 Wn.2d 679, 695, 743 P.2d 793 (1987). Accordingly, " judicial review of municipal utility choices" is limited " to whether the particular contract or action was arbitrary or capricious, or unreasonable." City of Tacoma, 108 Wn.2d at 695 (citation omitted).

Arbitrary and capricious refers to " willful and unreasoning action, taken without regard to or consideration of the facts and circumstances surrounding the action. Where there is room for two opinions, an action taken after due consideration is not arbitrary and capricious even though a reviewing court may believe it to be erroneous."

Lane v. Port of Seattle, 178 Wn.App. 110, 126, 316 P.3d 1070 (2013) (quoting Abbenhaus v. City of Yakima, 89 Wn.2d 855, 858-59, 576 P.2d 888 (1978)), review denied, 180 Wn.2d 1004 (2014).

[¶27] Consistent with its holding in City of Tacoma, our Supreme Court has shown deference to an implementing entity where the governing statute delineated general boundaries for proper rates. See People's Org. for Wash. Energy Res. v. Utils. & Transp. Comm'n, 104 Wn.2d 798, 808, 823, 711 P.2d 319 (1985) (where the rates to be set were required to be " fair, reasonable, and sufficient," the Supreme [184 Wn.App. 46] Court concluded that " the WUTC[14] did not exceed its statutory authority and was not arbitrary or capricious" ).

[¶28] While RCW 54.04.045(3)(a)-(c) sets forth specific instructions regarding the method of calculating just and reasonable rates, it does not provide similar guidance with respect to nonrate terms and conditions, requiring only that they " be just, reasonable, nondiscriminatory,[15] and sufficient." RCW 54.04.045(2).

[¶29] Given the similarity between the general boundaries of the statute in People's Organization for Washington Energy Resources and the general boundaries in RCW 54.04.045(2),[16] we conclude

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that it was proper for the trial court to limit its review of the District's nonrate terms and conditions to determining whether they were arbitrary and capricious.

B

[¶30] The Companies next take issue with the procedure by which the District considered and decided on the nonrate terms and conditions. More specifically, the Companies assert that the District's refusal to negotiate the nonrate terms and conditions of the agreement with the Companies was procedurally unconscionable. This assertion is unavailing.

[¶31] Procedural unconscionability involves " blatant unfairness in the bargaining process and a lack of meaningful choice." Torgerson v. One Lincoln Tower, LLC, 166 Wn.2d 510, 518, 210 P.3d 318 (2009).

[184 Wn.App. 47] Procedural unconscionability is determined in light of the totality of the circumstances, including (1) the manner in which the parties entered into the contract, (2) whether the parties had a reasonable opportunity to understand the terms, and (3) whether the terms were " hidden in a maze of fine print."

Torgerson, 166 Wn.2d at 518-19 (internal quotation marks omitted) (quoting Yakima County (W. Valley) Fire Prot. Dist. No. 12 v. City of Yakima, 122 Wn.2d 371, 391, 858 P.2d 245 (1993)).

[¶32] While the Companies maintain that the District was obligated to negotiate the nonrate terms and conditions, they cite no authority to that effect. Governmental entities such as the District are held to standards of transparency, including the Open Public Meetings Act of 1971,[17] which was complied with by the District herein; [18] however, we are directed to no authority obligating the District to negotiate individually regarding nonrate terms and conditions.

[¶33] The record establishes that proper public proceedings were held, that the Companies were given notice of these proceedings, and that they failed to participate. To the extent that the District did discuss the terms of the proposed agreement with the Companies, it did so for reasons that were not tethered to any legal obligation.

C

[¶34] The Companies finally take issue with the substance of many of the nonrate terms and conditions, asserting that they violate RCW 54.04.045(2) or, alternatively, that they are substantively unconscionable. From this, the [184 Wn.App. 48] Companies assert that the entire proposed agreement is invalid, arguing that " [s]evering so many unlawful provisions would render the 2007 Agreement unintelligible and unworkable." While several of the District's nonrate terms are untenable, they are severable from the proposed agreement. This is so because they do not materially alter the essence of the agreement, which is the severability standard set forth in the proposed agreement.[19] Ultimately, we decline to hold that these unsupported nonrate terms render the entire proposed agreement unenforceable, whether because of RCW 54.04.045(2) or the common law prohibition of substantively unconscionable terms.

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[¶35] " We review the trial court's decision following a bench trial to determine whether the findings of fact are supported by substantial evidence and whether those findings support the conclusions of law." 224 Westlake, LLC v. Engstrom Props., LLC, 169 Wn.App. 700, 720, 281 P.3d 693 (2012). " 'Substantial evidence' is a quantum of evidence sufficient to persuade a rational, fair-minded person that the premise is true." Newport Yacht Basin Ass'n of Condo. Owners v. Supreme Nw., Inc., 168 Wn.App. 56, 63-64, 277 P.3d 18 (2012). " If that standard is satisfied, we will not substitute our judgment for that of the trial court even though we might have resolved disputed facts differently." Green v. Normandy Park Riviera Section Cmty. Club, Inc., 137 Wn.App. 665, 689, 151 P.3d 1038 (2007); accord 224 Westlake, LLC, 169 Wn.App. at 720 (" Evidence may be substantial even if there are other reasonable interpretations of the evidence." ). Indeed, " [r]eview is deferential, requiring the appellate court to view the evidence and its reasonable inferences in the light most favorable to the [184 Wn.App. 49] prevailing party in the highest forum that exercised fact-finding authority." Johnson v. Dep't of Health, 133 Wn.App. 403, 411, 136 P.3d 760 (2006). On the other hand, " [w]e review questions of law and conclusions of law de novo." Newport Yacht Basin Ass'n, 168 Wn.App. at 64.

[¶36] " Substantive unconscionability involves those cases where a clause or term in the contract is one-sided or overly harsh." Townsend v. Quadrant Corp., 153 Wn.App. 870, 882, 224 P.3d 818 (2009), aff'd on other grounds, 173 Wn.2d 451, 268 P.3d 917 (2012). Terms used to define substantive unconscionability include " '[s]hocking to the conscience,'" " 'monstrously harsh,'" and " 'exceedingly calloused.'" Zuver v. Airtouch Commc'ns, Inc., 153 Wn.2d 293, 303, 103 P.3d 753 (2004) (internal quotation marks omitted) (quoting Nelson v. McGoldrick, 127 Wn.2d 124, 131, 896 P.2d 1258 (1995)).

[¶37] The trial court made the following findings of fact with regard to the nonrate terms and conditions:

30. There are credible reasons relating to safety, reliability, financial stability, cost, and other district considerations for the terms and conditions of the proposed Agreement Defendants challenged.
31. There are credible reasons for provisions in the proposed Agreement Defendants challenge, including but not limited to, those relating to:
▪ Tagging of fiber
▪ Unauthorized attachment fees
▪ Removal of attachments after agreement termination and reimbursement of removal costs if not removed
▪ Waivable requirement for a bond
▪ Attacher responsibility for hazardous materials they bring onto the ...

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