Federal Ruling Worries Regulators

March 15, 2004
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State regulators, joining an array of players in the telecommunications industry, are urging their federal counterparts to appeal an appellate court ruling that they say could halt competition for local telephone service.

At issue is a March 2 decision by the Washington, D.C. Court of Appeals that set aside a Federal Communications Commission order, handed down in a split 3-2 vote in 2002, that requires phone companies like SBC Communications Inc. to continue leasing space on their telecommunications networks at wholesale rates to companies that resell the access and offer a competing service to consumers.

In a lawsuit brought by the United States Telecom Association against the FCC, the appeals court ruled that federal regulators two years ago did not comply with standards in the 1996 federal Telecommunications Act. The court ordered the FCC to develop new rules for unbundling networks elements (known as UNE-P) that phone companies must lease to competitors at wholesale rates to create competition for local phone service.

The D.C. Court of Appeals ruling also vacated a part of the FCC order that gave state regulators continued authority over wholesale rates and to determine when competition is sufficient enough to remove requirements for the Baby Bells to open their previously exclusive networks to competitors.

The Michigan Public Service Commission wants the FCC to seek a stay of the ruling and appeal the case to the U.S. Supreme Court. State public service commissioners believe market competition for local telephone service will vanish if the D.C. Court of Appeals ruling stands.

“From my perspective, there’s quite a bit at stake — a real possibility that competitive local telephone service as we know it won’t exist. That would conceivably be wiped out,” MPSC Commission Bob Nelson said.

Regulators, as a condition for allowing entry into lucrative long-distance markets, have used the rules to force incumbent phone companies that have held monopoly positions to open their networks for competitors to use to offer local service.

In Michigan, 21.7 percent of the 6.2 million phones lines are now leased by competitive local exchange carriers, according to the MPSC’s annual report on local phone competition issued in June 2003. That has since grown to nearly 25 percent, Nelson said, and compares to 12.8 percent in 2001, 6.5 percent in 2000 and 4 percent on 1999.

While state regulators ultimately want competitors to develop their own telecom infrastructure, they say competition is still emerging and remains in its infancy and the so-called UNE-P rules need to stay. Under those rules, Michigan has become one of the most competitive states in the nation for local telephone service.

“Now is not the time to pull the plug,” Nelson said. “If you pull the plug precipitously, competition will just dry up overnight.”

The MPSC is working with the National Association of Regulatory Utility Commissioners to push for an appeal of the D.C. Court of Appeals decision.

Whether that appeal will come depends on the FCC, which remains split on the issue. Two commissioners, Chairman Michael Powell and Commissioner Kathleen Abernathy, praised the ruling. Their view is that forcing competitors to develop their own telecom networks will ultimately help generate sustainable competition.

Powell said he has directed FCC staff to begin drafting new rules “that will provide the sorely needed clarity and guidance essential to bringing consumers the benefits they were promised and deserve.”

At the same time, the three FCC commissioners holding opposite views say they have instructed the agency’s general counsel to seek a stay of the appellate court ruling and appeal the case to the Supreme Court.

In a speech last week to the National Association of Regulatory Commissioners, Powell said he wants to see both sides work out a compromise through an interim set of rules, negotiated wholesale rates and permanent new rules.

Working in partnership, we can identify the reasonable middle ground — if we can put aside entrenched positions associated with one industry group or another. Doing so will require compromise,” he said. “It will require moving past jurisdictional battles and toward recognition that both of us — state and federal regulators — owe a duty to get this right for consumers. We are entering a remarkable information era that delivers value for consumers and economic growth for America.  Working together we can make meaningful competition a reality.”

The appeals court ruling received strong praise from the U.S. Telecom Association and SBC Communications, which is presently asking state regulators to more than double its wholesale rate in Michigan, claiming the present rate represents a subsidy for its competitors and generates a loss.

The March 2 ruling “is a victory for consumers, and should help this industry move forward in developing healthy, sustainable and economically rational competition that will extend telecommunications innovations farther and faster in the marketplace,” SBC President William Daley said.

SBC, the dominant local phone service provider in Michigan, controlling some 4 million phone lines, has since offered to negotiate what it calls “commercially reasonable” wholesale rates with competitors.

SBC’s chief competitor in Michigan, AT&T, offered a terse response, rejecting a negotiated resolution to what has become a hotly disputed issue.

“Before you can have market-based rates there must exist a market, not a monopoly. The Bells are still in control of a bottleneck facility and SBC’s olive branch is just stems with thorns that will bleed competitors dry,” AT&T stated in response.

One competitive local exchange carrier that would feel minimal effects of the D.C. Court of Appeals ruling is TDS Metrocom. Rather than rely on wholesale access to SBC’s telecom system, TDS has invested more than $70 million in Michigan in the last few years to create its own network infrastructure for local and long-distance phone service.

“It will have a very limited effect, if any effect, on our customers,” said Sarina Gleason, manager of market communications for TDS Metrocom.

TDS Metrocom has 70,000 commercial and residential phone lines in Michigan, about 40,000 of them in West Michigan.    

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