Court Rejects Phone-Network Rules

An appeals court struck down Federal Communications Commission rules for how regional telephone companies must open their networks to competitors, a victory for the phone companies that consumer groups said likely will lead to higher prices for local telephone calls.

Federal law requires regional phone companies to lease parts of their networks to rivals at reasonable rates, which are set by the states. The phone companies have contended that they have been forced to offer competitors below-cost rates. If Tuesday's ruling stands, rival local-service providers likely would face higher prices for access to the networks or have to invest in their own equipment.

The court decision is a victory for regional phone companies such as Verizon Communications Inc., BellSouth Communications Inc., SBC Communications Inc. and Qwest Communications International Inc., and a blow to long-distance companies including AT&T Corp. and MCI that have taken market share from the regional players by relying on the low rates. Some 19 million consumers now get their local phone service from alternative providers.

Consumer groups and the losing companies were quick to say that the court ruling -- which is certain to be appealed -- would mean higher prices for consumers. AT&T and MCI could be forced to pay as much as $3 to $5 more each month for every phone line they lease, said Tim Horan, an analyst at CIBC World Markets.

The decision by a three-judge panel on the U.S. Court of Appeals for the District of Columbia also gave a boost to FCC Chairman Michael Powell, who was overruled by a majority of his own commission on parts of the matter last year. The ruling "will provide the sorely needed clarity and guidance essential to bringing consumers the benefits they were promised and deserve," he said.

In its 62-page decision, the court found that the FCC wrongly delegated power to state regulators to decide which parts of big telephone-network systems must be made available to rivals at reasonable rates. The court also sided on two related matters with the Baby Bells, as the regional phone companies are known. The court upheld an FCC decision that found these companies aren't required to lease their high-speed data lines to competitors at discount rates the way they do their phone networks. The judges also said regional phone companies don't need to provide wireless-phone companies with access to their networks.

The implementation of the law deregulating telephone service has been in contention since it was passed in 1996. The matter has bounced back and forth between the courts and the FCC, and Tuesday's decision represented the third rebuke of the commission on the matter. The Supreme Court in 1999 and the D.C. appeals court in 2002 found the FCC wrong in deciding what elements of the phone systems needed to be opened up to new players to foster competition.

At its root, the dispute involves two approaches to bringing competition to the industry: The majority on the FCC and the phone companies challenging the Baby Bells contend the government needs rules to restrain lingering monopolies and nourish competition. The other side, including the Baby Bells, contends that competition will best flourish if rules are lifted and market forces allowed to take effect.

These latest rules were the subject of a contentious 3-2 FCC vote in February 2003 in which Republican Commissioner Kenneth Martin sided with two Democrats and outmaneuvered Mr. Powell, who predicted the courts would overturn the rules. Tuesday's court decision bolsters Mr. Powell's longstanding arguments that the FCC needs to discard old rules that don't keep up with the pace of technological innovation in a world where people are getting phone service from wireless and cable providers, as well as from the Internet.

Showing its displeasure with the FCC, the court Tuesday set a deadline for its decision to take effect, either in 60 days or until a petition for rehearing is considered by the full nine-member appeals court. "This deadline is appropriate in light of the commission's failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to prior judicial rules," the court said.

The court ruling won't settle the fight. An appeal to the full appellate court and, perhaps, the U.S. Supreme Court is likely. Mr. Martin, along with Democratic commissioners Michael Copps and Jonathan Adelstein, already said they will push for an appeal of the decision to the Supreme Court. "We believe that the rules preserve competition in a manner that is lawful, and recognize the important role that states have historically played," they said in a joint statement.

Consumer groups echoed the sentiment, saying the decision would likely inflate phone prices. "If our goal is more local competition, then low-cost rental from the Bells is the only game in town that is succeeding in real numbers," said Chris Murray, legislative counsel for Consumers Union, a Washington-based consumer-advocacy group.

Walter McCormick, president of the United States Telecom Association, an industry group that represents regional phone companies, hailed the decision. "It is a new world in communications, one defined by heated competition among numerous companies investing in many different technologies to deliver new services and choices to consumers."

But Stasia Kelly, general counsel at MCI, said the court's scrapping of the rules undermines "the significant progress we have made to deliver consumers lower rates and innovative service." She said the FCC rules have helped MCI, a big long-distance-service provider, to sign up 3.5 million customers for local phone service.

The court's opinion was written by Judge Stephen Williams, a Reagan appointee who is among the most conservative members of the appellate court in Washington.

Write to Anne Marie Squeo at annemarie.squeo@wsj.com and Shawn Young at shawn.young@wsj.com

Updated March 3, 2004