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  • Supreme Court Special Report

  •   High Court To Review Phone Rules

    By Mike Mills
    Washington Post Staff Writer
    Tuesday, October 13, 1998; Page C01

    With billions of dollars at stake among warring factions of the telecommunications industry, the Supreme Court will consider today whether to reinstate federal rules designed to speed competition in the $110 billion-per-year market for local telephone service.

    The rules were imposed by the Federal Communications Commission two years ago – and later overturned by a federal appeals court – to regulate what an established monopoly phone company can charge newly emerging competitors that want to lease lines on the incumbent's phone system. The lower court said the rules usurped state powers to set local rates.

    Bringing competition to one of the last great bastions of monopoly control of the telecommunications industry – local telephone service – was a prime objective of the 1996 Telecommunications Act. But so far competition is stalled, in part because of legal battling over these rules.

    Companies wanting to challenge the dominant Bell companies can build their own networks, lease capacity on the Bells' networks for "resale" to customers under their own brand names or lease separate "unbundled" elements of a network.

    No one can agree, however, on what the rates should be, or who should set them. But all sides agree that the price will be an important factor in how widespread competition becomes.

    State regulators say the federal rules trample on their decades-old authority to set local phone rates. They have allies in the regional Bell companies and GTE Corp., which dominate local telephone service and prefer letting states decide pricing issues rather than having a uniform FCC pricing method.

    Those companies also want the court to reject FCC rules that allow competitors to get around the high price of leasing capacity on an entire phone network. Under the rules, rivals can instead lease components piece-by-piece to achieve the same result, at substantially lower rates.

    If the court upholds the FCC rules, would-be local telephone competitors including AT&T Corp. and MCI WorldCom Inc. say their cost of entering the market would be lower. As a result, they say, residential telephone consumers could sooner choose among rival local telephone companies like they do long-distance carriers.

    "It would have an enormous impact on the speed and breadth with which consumers enjoy local telephone competition and services," predicted Thomas O'Neill III, chief litigation counsel for MCI WorldCom.

    Attorneys for the Bells and GTE, however, already are hinting at further litigation if the court sides with the FCC. "If by chance the Supreme Court were to reverse" the lower court's rejection of the rules, "I think it would send us back to court . . . on the basis that [the rules] would effectively be taking our property without just compensation," said William Barfield, associate general counsel for BellSouth Corp.

    Attorneys for the FCC, AT&T and MCI WorldCom have their work cut out for them. Justice Sandra Day O'Connor has recused herself from the case (as she does with any case involving AT&T, presumably because of family investments in the company). As a result, the commission and its allies have only eight justices from which to win the five votes that they need to prevail.

    A 4-to-4 tie would uphold a ruling by the 8th U.S. Circuit Court of Appeals, which rejected the FCC rules. "The odds are against" the FCC, said Scott Cleland, an industry analyst with the Legg Mason Precursor Group in the District.

    The case grew out of complaints from the Iowa Utilities Board that the FCC was usurping state authority to set local phone rates when it issued its local market-opening rules in August 1996. In mid-1997, the 8th Circuit agreed.

    Behind that state-federal powers battle lies an old war between local carriers and the long-distance industry over how much the Bells and GTE should be able to charge for the access to their networks that is necessary for completion of long-distance calls.

    When private negotiations over such charges fail, state regulators are called in to settle the disputes and set connection fees.

    The FCC rules at issue had demanded that states, when arbitrating pricing disputes, use a method that takes into account only the actual cost of providing circuits on local phone facilities to competitors. The Bells and GTE say their "historic" costs of building their local phone networks also should be factored in, which would mean higher rates.

    Important as it is to the industry, the outcome of the case may be less important today than it was two years ago, analysts said. Over the past year, AT&T and MCI have declared they no longer would pursue a "resale" strategy to reach residential consumers, because the discounts allowed by local carriers were not deep enough to allow a profit.

    Instead, AT&T bought Teleport, a company that is building alternative local networks in many U.S. cities. AT&T also is planning to reach consumers with its own facilities through its purchase of cable television giant Tele-Communications Inc. MCI has since merged with WorldCom, and the combined company is also spending heavily to build its own facilities to reach largely business customers.

    © 1998 The Washington Post Company

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