High Court Hears Case on Phone Service Fees

The Supreme Court heard oral arguments Wednesday about the fees powerful regional Bell phone companies can charge rivals to use their equipment to offer new local phone services.

Analysts say the case’s outcome could encourage greater competition for residential local phone service and cut prices, as well as speed the roll-out of more high-speed Internet service, video on demand, and even consumer-friendly phone bills that clearly explain billing charges.

The case was brought by Verizon Communications Inc. and other Bell companies against the Federal Communications Commission. It comes nearly six years after Congress passed the landmark Telecommunications Act--a measure supporters promised would jump-start competition in local telephone markets nationwide.

Although business users have generally enjoyed lower prices and a wider selection of phone service providers since the Telecom Act, there has been little change in residential phone service.

In California, only about 250,000 of the state’s millions of residential phone lines are held by local phone upstarts. And nationwide, fewer than 10% of the old Bell phone system is leased by rival companies.

Rivals have charged that the Baby Bells and other incumbent local phone carriers have been slow to open their phone networks to competitors and want to charge excessive fees for the privilege. This year alone more than 29 local phone upstarts--including Teligent Inc., Winstar Communications Inc. and Digital Access Inc. of Bala Cynwyd, Pa.--entered bankruptcy proceedings or closed their doors, according to the Assn. for Local Telecommunications Services, a Washington trade group.

“This case could have an impact on the balance of power in the local phone industry because it affects the economics of entry,” said Patrick Brogan, an analyst at the Precursor Group, a Washington research firm.

The court case centers around a controversial pricing formula for equipment leasing fees the FCC approved in 1996 to encourage upstarts--such as WorldCom Inc. and Allegiance Telecom Inc.--to enter local phone markets.

The FCC formula set the Bells’ compensation at roughly $180 billion, based on today’s lower equipment prices rather than the higher prices paid for the equipment years ago.

But the Bells contend that competitors should pay them based on the estimated $343 billion they spent to build the nation’s phone network. Rivals and regulators counter that the Bell price is inflated with corporate overhead.

“If the world was as the [Bell] incumbents would have us believe, we would have all the money and they would be in trouble,” Donald B. Verrilli Jr., a lawyer for WorldCom, told the Supreme Court.

Consumers won’t directly pocket any of the billions at stake in the case because it concerns wholesale rates competitors pay to lease phone facilities to gain access to the Bells’ copper phone lines that transmit calls.

The high court peppered both sides with questions, but gave little indication on how it might resolve the case.

Justice Antonin Scalia joined Chief Justice William H. Rehnquist in sharply questioning Verizon general counsel William P. Barr. The justices argued that the possibility the Bells might be harmed by the FCC pricing scheme was insufficient to strike down the agency’s overall pricing formula.

“The mere possibility you may not recover your costs is not enough,” Scalia told Barr.

Justice David H. Souter said he also was troubled by the lack of evidence suggesting the Bells might be hurt financially.

“Why haven’t you come in here and told us about rates that are bleeding you dry?” Souter asked. He added that any Bell complaint about unfair rates should be levied against the states who set phone rates, not the FCC whose rules simply propose an overall pricing formula.

It may be months before the high court rules on the case.

Justice Sandra Day O’Connor did not participate in the case because she owns stock in long-distance carriers AT&T; Corp. and WorldCom.

Wednesday’s oral argument was the second time the Supreme Court has taken up FCC rules concerning how rivals can connect to the public phone network.

In 1999, the court overturned a federal appeals court and ruled the FCC could set the rules governing the prices incumbent phone companies may charge to lease out their facilities to rivals.

Still, experts said the Bells would gain little immediate financial relief if they win the current case. The incumbent phone companies would have to go to each of the 50 state public utility commissions and get them to roll back previously established rates.