Wednesday, March 3, 2004 | 11:10 a.m.
SUN STAFF AND WIRE REPORTS
A federal appeals court handed a victory to the four large regional Bell telephone companies on Tuesday, striking down regulations that required the Bells to lease their local networks to rival companies at low prices set by state regulators.
If Tuesday's decision survives further legal challenges, it would be a substantial blow to AT&T, WorldCom and smaller companies that have relied on inexpensive access to the local networks to reach their customers. By increasing the cost of access, the ruling could significantly reduce competition in local markets and lead to higher prices for callers, according to competitors of the Bell companies, consumer groups and some analysts.
In Las Vegas, the effect of the ruling is unclear. Regulators with the Public Utilities Commission of Nevada declined immediate comment on the court ruling. A spokeswoman for the commission said the commission needs time to examine the decision before commenting.
Nevada Consumer Advocate Tim Hay lamented the decision, saying that consumers have received little benefit from the Telecommunications Act of 1996, which originally spelled out the rules on competition.
"In the eight years since the act was passed it has been a real struggle for competition to emerge in any sort of robust way," he said. "I think this is another stumbling block."
The ruling also puts Overland Park, Kan.-based Sprint in an awkward position. The company is a competitive provider in many markets and sent out a corporate statement criticizing the decision.
In Las Vegas, however, Sprint is the dominant local phone company and stands to benefit if the ruling survives a likely Supreme Court appeal.
"I would expect the local Sprint folks are pleased," Hay said.
A local Sprint spokeswoman said local executives also would need more time to review the ruling before commenting.
At least one local Sprint competitor welcomed the decision.
Bob Jankovics, president of Nevada Telephone, said the existing leasing arrangement doesn't work. Instead of creating a level playing field, it allows companies to enter the market with little or no investment and then leave town after making a quick profit while leaving disgruntled customers behind, he said.
"It should be a stepping stone for companies to come in and establish their own switch," Jankovics said, adding that his company leased network access from Sprint until it had the customer base needed to establish a switch of its own.
A switch allows companies to manage their own calls, which are still routed over phone lines leased from Sprint. Only a handful of other Sprint competitors operate similar "facilities-based" service, including XO Communications, Mpower Communications, SBC Communications and TelePacific Communications.
Sprint said those companies would be unaffected by the ruling.
Having fewer companies operate in the market without investing in their own facilities will allow competitors willing to make a local investment stronger, Jankovics said.
"(The ruling) is not going to hurt competition at all," he said. "It's going to make the competitor we already have more viable."
Nevada Telephone, which launched its first local line in 1996, has about 30,000 customers in Las Vegas, most of them residential. The company spent about $2 million establishing its local switch, a process that should be complete in about six months.
Mpower has 350 employees and about 30,000 customers locally. About 20 percent of the company's revenue comes from its Las Vegas operations, company spokeswoman Michele Sadwick said in November.
In a statement this morning, Mpower Chief Executive Rolla Huff said the decision should not alter the company's plans.
"We expect business as usual at Mpower with the only potential adverse effect that may result from the uncertainty created by continued legal battles and not from any impact on any specific revenue or cost element of our business," Huff said, adding that non-facilities based competitors could be harmed.
Mpower was founded in Las Vegas as MGC Communications and moved its headquarters to Rochester, N.Y., in 1999. The company changed its name in 2000.
A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit sharply narrowed the role of state regulators in overseeing competition in the phone market. It criticized the Federal Communications Commission both for its delegation of authority to the states and for issuing other regulations last year that a majority of the commissioners had said were intended to make local phone markets more competitive.
After the decision, separate statements issued by the FCC chairman and another commissioner, who had opposed the rules, and by the three commissioners who approved them, suggested that the agency was in a kind of civil war over the regulations.
The three commissioners who approved the rules said they had instructed "our general counsel" to seek an appeal to the Supreme Court. But the chairman, Michael K. Powell, who dissented from the rules, said he had instructed the staff to begin drafting new regulations to comply with the appeals panel's order. A fifth commissioner who had dissented with Powell applauded the decision and urged the FCC to rewrite the rules.
As a matter of protocol, the agency will consult with the Justice Department, which argued in favor of the new rules before the court, before deciding whether to pursue an appeal.
Rivals of the Bells criticized the decision. "At a time when consumers and small-business owners are just beginning to realize the benefits of competition, the D.C. Circuit Tuesday held up a stop sign and halted eight years of progress," said James Cicconi, AT&T's general counsel. "This decision is not in the public interest, but is instead in the interest of four Bell monopolies."
But executives of the regional Bell companies contended that the rules never made economic sense and in reality discouraged greater investment in local phone networks. The rules, they argued, had forced the Bells to set artificially low leasing rates to rivals.
William M. Daley, president of SBC Communications, said: "Today's court action 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 further and faster in the marketplace. This appears to be a victory for those who support markets free of rules that have repeatedly been judged illegal and which have eliminated jobs, shrunk investment and hurt fair competition."
The news of the decision, which came about two hours before the market closed, sent the share price of the regional Bells -- SBC, Verizon, BellSouth -- up, while AT&T shares declined.
The 62-page opinion in the case, United States Telecom Association v. Federal Communications Commission, was written by Judge Stephen F. Williams and joined by Judges Harry T. Edwards and A. Raymond Randolph.
The judges were harshly critical of the commission, saying it ignored the court's previous decisions on phone regulation and the mandate of the Telecommunications Act of 1996.
The court's frustration with the FCC and its "unbundled network elements rules" was reflected in the last paragraph of the decision, which ordered the commission to rewrite the rules in the next 60 days or after the denial of a petition for a rehearing, whichever comes later. "This deadline is appropriate in light of the Commission's failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings," it said.
But the issues raised by the case may take many months to resolve, particularly if the Supreme Court decides to review it in its next term, beginning in October. And it is not known if the current commission will act soon or whether the issues will be put off until next year, when the agency's composition might change after the presidential election.
For the time being, at least, the decision was vindication for Powell, who lost control of the commission and predicted in February 2003 that the new rules would not be able to withstand judicial challenge. He found himself in the uncomfortable position of being the first chairman in more than a decade to dissent from a major telecommunications decision.
The court upheld rules, supported by Powell and two other commissioners, that had relieved the Bell companies of their obligation to give rivals low-cost access to many of the crucial elements of their new high-speed Internet networks.
Powell issued a statement after the decision that all but said, "I told you so."
"I dissented from the majority's decision on local telephone competition because it was inconsistent with the law and would result in years of regulatory uncertainty and unrealized consumer promise," he said. "Today, the court agreed and restored the opportunity to bring about new advanced services and true competition that will bring consumers choice and innovation."
"My fellow commissioners and I need to expeditiously get to work to produce a set of judicially sound rules, once and for all," Powell said. "I have already directed the staff to begin preparing new rules that will provide the sorely needed clarity and guidance essential to bringing consumers the benefits they were promised and deserve."
But there was no indication that Powell had any more control over the agency now than he did when the agency approved them last year.
The three commissioners who approved rules, Jonathan S. Adelstein, Michael J. Copps and Kevin J. Martin, suggested in a brief statement that the court's opinion was inconsistent with earlier decisions by 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," said the three commissioners. "Today over 50 million Americans benefit from the new local and long distance one-rate plans offered by both incumbents and competitors that are a result of our rules." Those commissioners also said they have instructed their "General Counsel to seek a stay and to appeal the D.C. Circuit decision to the Supreme Court so that we can clarify tension with the Supreme Court's past decisions."
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