Key Provisions of FCC’s Phone Rules Overturned

A federal appeals court Friday overturned key parts of landmark federal rules designed to pry open the $100-billion local telephone market controlled by the regional Baby Bell companies.

The Bells and other local phone carriers hailed the decision. But long-distance companies and the nation’s top phone regulator said it could further slow efforts to allow consumers to choose their local phone carrier.

The U.S. 8th Circuit Court of Appeals in St. Louis said the Federal Communications Commission lacked the authority to issue rules governing the pricing of local phone service. Instead, state regulators have that power, the court said. The rules are part of the FCC’s bid to open local phone monopolies under last year’s Telecommunications Act.

Telecommunications experts called the ruling a victory for the Bells and their ally GTE Corp. and a loss for the FCC and long-distance giants AT&T; Corp. and MCI Communications Corp.

AT&T; and MCI have said the Bells and GTE are blocking efforts to open their local monopolies to new entrants. MCI said last week that its losses from trying to get into local markets could hit $800 million this year.

The decision will be appealed to the Supreme Court, FCC officials said. At the very least, it adds to the uncertainty over the FCC’s effort to pump competition into local phone service.

“Delay can mean death for competition,” FCC Chairman Reed Hundt told reporters.

But Charlie Russ, US West Inc. executive vice president, said the FCC’s position “had advantaged AT&T; and MCI at the expense of consumers.” He said the decision “is a victory for consumers, states and for competition that promotes investment in the nation’s telecommunications network.”

The FCC rules spell out how new competitors can hook up to local phone networks and the method for setting prices that new entrants nationwide should pay to use the networks.

The rules--adopted in August but suspended by the court in the fall--are meant to implement the Telecommunications Act.

But the court, in a lengthy ruling, said the act “directly and straightforwardly assigns to the states”--and not the FCC--the authority to set rules governing the pricing of local service. The judges said the FCC’s interpretation of the law was “inconsistent with the plain meaning of the act.”

The FCC had ordered the Bells and other local carriers to offer big discounts by leasing lines in bulk to competitors at rates of up to 25% below retail prices.

The agency also ordered local carriers to “unbundle” their networks into seven pieces, such as call-switching devices, that rivals could lease to create their own local networks.

The “unbundled elements” were to be priced at competitive levels based on the cost of new and more efficient facilities.

“This is a signal that deep discounts are on shaky legal ground,” said analyst Scott Cleland of Legg Mason Precursor Group, the research arm of the Baltimore-based brokerage. “When reading the decision, it’s clear the court felt the FCC misread the Telecom Act.”

The court also overturned FCC rules allowing Baby Bell competitors to pick and choose the terms and conditions spelled out in other carriers’ pacts for linking to the local network.

GTE Executive Vice President William Barr said the court “has thwarted the FCC’s massive power grab.”

But attorney Jonathan Sallet of MCI said the decision “is a setback for consumers” seeking more than one local service.

Although critics of the decision said it could slow the opening of the local market, others said it might have only limited impact.

Many states on their own have already adopted the reference prices and cost methodology that the FCC approved for local networks--at least on an interim basis.