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Judges' decision benefits Verizon ; Court strikes down local-phone rules

Posted on: Wednesday, 3 March 2004, 06:00 CST

A U.S. appeals court Tuesday struck down federal rules that required Verizon Communications Inc. and other big U.S. local- telephone companies to sell network access to rivals at a discount to foster competition in the $128 billion local-phone market.

The U.S. Court of Appeals panel in Washington, in the 3-0 ruling, also voted to strike down Federal Communications Commission regulations issued in August that delegated to the states authority to set phone network leasing rates.

The court found that competitors in the local-phone market aren't "impaired" without access to the discounts.

"It's a good legal victory for the Bells," analyst Paul Glenchur of Schwab SoundView Capital Markets said. Consumer advocates said the decision could lead to less competition and higher prices.

Verizon, SBC Communications Inc., and other local carriers known as Baby Bells for being formed in the 1984 breakup of AT&T Corp., have challenged the network-leasing rules, which the companies say have cost them as much as $180 million a month and caused customer defections.

The order asks states to determine whether there is sufficient competition in local areas to warrant elimination of the discount leasing, which has helped AT&T, WorldCom Inc., and other recent market entrants sign up more than 13 million customers in the $128 billion local-phone market.

The ruling throws into disarray efforts by individual states, which had already begun looking at whether those local markets are "impaired."

In New Jersey, the Board of Public Utilities has hearings on the issue scheduled for Friday.

BPU Telecommunications Director Anthony Centrella said lawyers are reviewing the ruling to figure out how the board should proceed.

"One possibility is to put the hearings on hold," he said. "We will confer over the next couple of days, seek input from the parties, and the board will make a decision."

The ruling is a victory for FCC Chairman Michael Powell, a Republican, who had advocated that the agency throw out the leasing rules. The three FCC commissioners, who had voted 3-2 against Powell and Republican Kathleen Abernathy to let the states set leasing rates, said in a statement that they had directed the agency's lawyer to appeal the court's order.

In a statement Tuesday, Powell said the court agreed with his argument that the local-phone rules were "inconsistent with the law and would result in years of regulatory uncertainty and unrealized consumer promise." Powell said he has told his staff to prepare new rules.

The judges' ruling cited the FCC's "failure, after eight years" since the Telecommunications Act of 1996, to develop "lawful" rules on wholesale leasing of local-phone networks.

Shares of the Bells rose after the decision. New York-based Verizon climbed 76 cents to $39.46 at 4:04 p.m. in New York Stock Exchange composite trading, San Antonio-based SBC rose $1.23 to $25.48, and Atlanta-based BellSouth Corp. increased $1.13 to $28.81. AT&T, which rents discounted lines from the Bells, dropped 26 cents to $20.11.

The "status quo" may not change until after further legal appeals are heard and the companies renegotiate wholesale agreements, Glenchur said. The judges delayed their decision from taking effect for at least 60 days, depending on the outcome of any further appeals.

The court ruling means a "death by a thousand cuts for competition in the local-telephone market," said Christopher Murray, an attorney with Consumers Union in Washington.

"Competitive telephone companies will no longer have a level playing field with the incumbent telephone monopolies, and the result will be less competition and higher prices for consumers," Murray said.

The trio of judges was the same panel that in May 2002 ordered the FCC to reconsider the discount-leasing rules and better explain them. The court said at the time that the FCC went too far with its rules and the regional-phone carriers shouldn't have to rent all network parts in all markets.

The FCC approved the new regulations in February 2003. Republican Commissioner Kevin Martin joined the FCC's two Democrats to set the guidelines.

Six months later, the FCC released its order with the text of the regulations and the rationale for adopting them.

The U.S. Telecom Association, which represents the Bells and smaller local-phone companies, said in a statement that the ruling is a "decisive victory for consumers, for innovation and for free markets." The group has maintained that the wholesale discounts discourage purchases of network equipment.

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Staff Writer Martha McKay contributed to this article.

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