SUPREME COURT UPHOLDS FCC'S TELRIC PRICING MODEL, COMBO RULES

At same time, high court refused to reverse 2 other decisions by 8th Circuit that were challenged by ILECs -- lower court’s decision upholding FCC’s basic forward-looking cost philosophy, underpinning of agency’s TELRIC regime, and 8th Circuit’s decision that use of TELRIC didn’t present “takings” claim. Bottom line was that Supreme Court reversed parts of 8th Circuit decision that FCC and CLECs wanted reversed and upheld parts that ILECs wanted reversed.

High court’s ruling was written by Justice David Souter, who was one of strongest supporters of FCC in 1999 Supreme Court decision on similar TELRIC topic, involving whether agency had authority to write such pricing guidelines. Justice Stephen Breyer dissented on part of Mon.’s decision, questioning court’s ruling on TELRIC and combination rule. Justice Antonin Scalia joined in dissent, but only on combination rule. Justice Sandra O'Connor didn’t participate because of her family’s telecom investments.

Among Souter’s comments on TELRIC issue: Argument that TELRIC doesn’t encourage facilities-based entry “founders on fact” because “the entrants have presented figures showing that they have invested in new facilities to the tune of $55 billion since the passage of the Act.” Souter said “we cannot say whether the passage of time will show competition promoted by TELRIC to be an illusion, but TELRIC appears to be a reasonable policy for now, and that is all that counts.” Ruling concluded that “in short, the incumbents have failed to carry their burden of showing unreasonableness to defeat the deference due the Commission.”

Although ILECs’ concerns about effect of TELRIC on depreciation rates and cost of capital appeared to interest Supreme Court in oral argument, court’s opinion held that experience since FCC issued TELRIC decision didn’t support ILECs claims they would face serious threat of rising depreciation rates. One Washington attorney said it was significant that court acted on “substantive grounds” rather than reject TELRIC appeal for procedural reasons.

Court’s comments on other 3 issues: (1) ILECs “picked an uphill battle” in arguing that historic costs had to be considered in determining price of network elements when ILECs lease them to competitors. Court concluded that nothing in Telecom Act’s Sec. 252 “plainly requires reference to historical investment when pegging rates to forward- looking ‘cost.'” ILECs had argued that TELRIC was based on hypothetical efficient network and didn’t allow incumbents to recover their actual network costs. (2) Incumbents’ argument that TELRIC represented unconstitutional “taking” wasn’t presented in normal way because ILECs didn’t give any examples of TELRIC’s actually doing that. “This court has never considered a taking challenge on a ratesetting methodology without being presented with specific rate orders alleged to be confiscatory,” Souter wrote, echoing concerns expressed by court in oral argument (CD Oct 11 p1). (3) On combining elements for CLECs, Souter said Telecom Act wasn’t as clear as it could be in requiring ILECs to combine elements for competitors but “it takes a stretch to get from permissive statutory silence to a statutory right on the part of the incumbents to refuse to combine for a requesting carrier… that is unable to make the combination… or may even be unaware that it needs to combine certain elements to provide a telecommunications service.”

In his dissent, Breyer took issue with FCC’s basing TELRIC pricing on “a hypothetical perfectly efficient firm… assuming that the hypothetical firm were to build essentially from scratch a new, perfectly efficient communications network.” He said it was up to court to determine “whether, despite the leeway given experts on technical subject matter, agency regulations exceed these legal limits,” and, “reluctantly I have come to the conclusion they do.” Concluded Breyer: “In sum, neither the Commission’s nor the majority’s responses are convincing” in showing that FCC’s TELRIC rule was compatible with Telecom Act.” He said he also disagreed with court’s decision upholding combination rule because “I cannot find the statutory authority” for it.

Practical result of court’s ruling isn’t very significant, said Pat Brogan, asst. research dir. of Precursor Group. Basically, this was “status quo” decision, he said, because it tells FCC it doesn’t have to change anything. Although 8th Circuit had overturned TELRIC in 2000, it stayed its decision pending Supreme Court’s action. “Today’s ruling effectively maintains the status quo” on prices ILECs charge to competitors for access to their networks, said SBC. “The court, however, missed a chance to bring reason back to the rules.” Verizon noted that FCC currently was looking at its UNE policies to determine whether changes should be made. Verizon Vp John Frantz said that all court said was that FCC’s TELRIC methodology was permissible but it didn’t say it was good policy.

BellSouth said it retained “unfortunate status quo” because it and other Bells “must continue to provide pieces of its network to competitors at below-cost prices.” It discourages investment by both Bells and competitors, BellSouth said, adding it hoped FCC in pending proceedings would “correct this incorrect pricing policy” and also lessen number of network elements that had to be shared. USTA said ruling “upholds the unjust status quo that requires local telephone companies to give competitors access to their networks at prices below cost” and discourage investment. Qwest said it was disappointed with decision, but it wouldn’t affect its operations because its prices already complied with TELRIC.

FCC Chmn. Powell said decision “brings much-needed additional certainty,” while WorldCom heralded it as “a tremendous victory for consumer and business customers and the competitive carriers such as WorldCom that serve them.” WorldCom said decision “finally ends 6 years of uncertainty created by Bell legal challenges and other stonewalling” and “validates” company’s new all-distance phone offering, “The Neighborhood,” which relies on parts of Bell networks such as loops and switching. AT&T said it was “obviously delighted” because high court decision “repudiates the 6-year-old Bell company strategy of litigating the Telecom Act to death.” Said Allegiance Telecom Chmn. Royce Holland: “Today, the U.S. Supreme Court rebuffed yet another Bell company attempt to regain their stranglehold on U.S. telecommunications by rewriting the Telecom Act.”

Consumer Federation of America also praised decision, saying it upheld one of “cornerstones” of local phone competition. CFA Research Dir. Mark Cooper said: “The FCC must not undermine this decision in its ongoing proceedings by allowing the monopoly phone companies to withhold network elements.” ALTS Pres. John Windhausen said: “Today’s landmark Supreme Court decision could be a turning point for the CLEC industry and consumers.” He said TELRIC decision lifted “a cloud of uncertainty” and “restores confidence in the competitive telecom model.” Windhausen said combination rule also was important because it enabled competitors to give consumers more choices. “By enabling a CLEC to combine its own technology and equipment with the existing ILEC infrastructure, there is now no limit to the services and technologies that innovative CLECs may bring to consumers,” Windhausen said. CLEC attorney said decision on combinations would make it easier for CLECs to obtain enhanced extended links (EELs) and UNE platforms for 2nd lines, new customers to area or other purposes.

Decision enables competitors “to live to fight another day” but “it does not, in our opinion, dramatically change the difficult environment in which the competitors are operating,” said Legg Mason analyst Blair Levin. “For many new local competitors, the ruling is akin to completing a fourth-and-long pass for a first down while trailing late in the game -- it keeps the drive alive but they still have a long way to go to score.” Cato Telecom Policy Dir. Adam Thierer criticized decision as being akin to “Romper Room economics: Sharing is better than competing.” Thierer said ruling “rejects markets in favor of mandates” and “allows federal bureaucrats to micromanage the industry through a complex arsenal of network mandates and price controls.”

NARUC Telecom Committee Chmn. Joan Smith, Ore. PUC comr., said she was “relieved” because decision retained states’ broad discretion to design rate methodologies. NARUC Gen. Counsel Brad Ramsay said he wouldn’t be surprised if FCC opened docket to reexamine TELRIC now that its authority had been upheld. Supreme Court signaled next step in long TELRIC dispute with remand to FCC to clarify any changes required by Supreme Court decision.