Justices affirm FCC's plan for local phone competition

Ruling could eventually lead to cheaper service

May 14, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

The Supreme Court upheld yesterday a key piece of federal law meant to undo the monopoly in local telephone service, but analysts were split on whether the decision would bolster competition and lower consumer prices, or merely sustain the status quo in a battered industry.

In a 5-3 vote, the justices affirmed the system that the Federal Communications Commission established after Congress passed the Telecommunications Reform Act of 1996.

The high court overturned an appeals court ruling and backed the federal system that allows phone competitors to piggyback on the former Bell System's extensive network. Rarely at a loss for awkward acronyms, regulators call the wholesale pricing system "TELRIC" for "total element long run incremental cost."

"We cannot say whether the passage of time will show competition prompted by TELRIC to be an illusion, but TELRIC appears to be a reasonable policy for now, and that is all that counts," Justice David H. Souter wrote in the majority opinion.

He was joined in the decision by Chief Justice William H. Rehnquist and Justices Anthony M. Kennedy, John Paul Stephens and Ruth B. Ginsburg. Justices Antonin Scalia, Clarence Thomas and Stephen G. Breyer endorsed various parts of the decision.

Justice Sandra Day O'Connor did not participate in the case because she owns stock in AT&T Corp. and WorldCom, two major phone competitors that could benefit from the ruling.

Advocates for consumers and phone competitors said the ruling could revive investment in the $110 billion telecommunications industry, lead to lower prices for local phone service and shift the political debate in Washington to their side.

"This is a huge morale boost. It gives more confidence to investors to put money into the industry. They now know that the rules of the road aren't going to change," said John Windhausen Jr., president of the Association for Local Telecommunications Services in Washington.

The trade group represents competitive local-exchange carriers, or CLECs, which have about 10 percent of the local phone market in the United States compared with 90 percent for the powerful regional Bell companies, including Verizon Communications.

"The competitive phone industry has been decimated in the past two years. Two-thirds of the companies have gone out of business, and the stock of those that survived are all trading below $3, so this decision could be a turning point," said Windhausen, who was so certain of a lesser victory that his group had begun drafting a news release describing such an outcome.

But others were less sanguine. They believe that the companies that spun off from the Bell System - Verizon Communications, SBC Communications Inc., Qwest Communications International Inc. and BellSouth Corp. - will maintain their positions of strength.

"It's a Pyrrhic victory. The competitors are allowed to live to fight another day, but this is not the only question mark there is," said Michael Balhoff, managing director for the telecommunications group at the Baltimore-based investment firm Legg Mason Wood Walker Inc. "Overall, the markets appear to have shrugged off the decision."

Indeed, shares of Verizon, which brought the suit against the FCC, closed up $1.59, or 4 percent, to $40.94 yesterday.

Nevertheless, the Bell competitors described the ruling as a significant victory - and a rare one of late. The companies that emerged from the Bell System breakup have increasingly won federal approval to enter long-distance markets in various states while remaining dominant in local service. Verizon applied last month to eventually add Maryland to the 42 states where it offers long-distance.

The justices affirmed the system that Congress outlined six years ago to seed the kind of competition in local phone service that has taken root in long-distance since the breakup of Ma Bell in 1984.

Local phone providers are able to lease parts of networks owned by the large companies that used to be part of the Bell System. Lawmakers arranged the setup because they believed that no competitor could afford to replicate the Bell network that had been built in a monopoly eventually deemed to be illegal.

The 8th U.S. Circuit Court of Appeals had ruled in favor of Verizon, which argued that the prices competitors pay to use its network are too low and discourage competitors from investing in their own equipment.

But the Supreme Court upheld the right of state public utility commissions to require the Bells to offer their networks at wholesale price.

The court also upheld the so-called "forward-looking" basis that states use to calculate wholesale rates. Regulators base the rates on estimated future costs rather than the Bells' past costs of building the system because their prior monopoly lacked incentives to restrain costs.

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