Supremes Rule for Competitive Carriers

The United States Supreme Court gave competitive local exchange carriers (CLECs) and interexchange carriers (IXCs) a shot in the arm earlier this week when it upheld the Federal Communications Commission (FCC)'s right to continue regulating the prices regional Bell operating companies (RBOCs) charge their competitors for access to facilities.

The 6-2 ruling by the high court is seen as a big win for the competitive carrier market. If the ruling had gone the other way, these carriers would have faced huge price hikes from RBOCs that would have pushed many of them out of the market altogether.

Justice David Souter wrote the majority opinion, while Justices Stephen Breyer and Antonin Scalia dissented. Justice Clarence Thomas endorsed only part of the decision. And Justice Sandra Day O’Conner recused herself from the vote because she owns stock in AT&T Corp. (NYSE: T) and WorldCom Inc. (Nasdaq: WCOM).

With larger problems looming at competitive carriers, Wall Street didn’t notably react to the ruling. Several RBOC stocks like Verizon Communications Inc. (NYSE: VZ) and BellSouth Corp. (NYSE: BLS) have gained, while long-distance carriers like AT&T and WorldCom fell. BellSouth was up 1.56 (5.22%) to 31.42 today, while WorldCom, which has had its debt reduced to junk status, was trading down 0.12 (8.33%) to 1.32 (see WorldCom's Junk Status Fuels Fears).

"A few years ago this ruling would have been a big deal,” says Blair Levin, a telecom and media analyst with Legg Mason Inc.. "But today, market forces are much more important than regulatory matters.”

Reactions from the carriers were as expected. The CLECs and IXCs were pleased with the ruling. The five Baby Bells expressed disappointment. The RBOCs have complained that they have been required to lease their networks well below cost since the 1996 Telecom Act was passed, when the FCC got the right to set prices for unbundled services based on a method of pricing called "total element long-run incremental cost" or TELRIC.

In a statement issued Monday, BellSouth said that the court was maintaining “an unfortunate status quo” that would discourage investment by both the RBOCs and their competitors (see BellSouth Rips TELRIC Ruling). Randolph May, a lawyer working for The Progress & Freedom Foundation, a policy think-tank that is partially funded by the incumbent carriers, endorses BellSouth’s assessment of the situation.

May says that the 1996 Telecom Act created false competition that is unsustainable under normal economic conditions. He argues that the widescale failure and bankruptcy of many competitive carriers, like Broadband Access, McLeodUSA Inc. (Nasdaq: MCLD), and WinStar Communications Inc., in the last couple of years is evidence of this.

“We don’t have a viable CLEC industry right now. Just look at all the bankruptcies,” he says. “In the short run you can prop up an industry and manage pricing, but ultimately that is not a sound business model.”

Other pundits argue that that the CLEC demise had nothing to do with the 1996 Telecom Act and that without forced competition the RBOCs will continue to rule the local telephone network as well as the emerging broadband market.

“I don’t think you can link those bankruptcies to the unbundling rules,” says Levin, of Legg Mason. “There are lots of different reasons for companies to go bankrupt -- poor management, bad business plans.”

Levin served as chief of staff to chairman Reed Hundt at the FCC from December 1993 through October 1997, where he helped draft the current pricing model the FCC uses.

While competitive carriers may have won this battle, the war isn’t over. The high court merely cleaned up the legal issues, stating that the FCC had the right to use its current method for pricing the unbundled network services. But the FCC can at any point decide to change the pricing method or do away with it altogether. Some competitive carrier supporters worry that Commissioner Michael K. Powell favors the RBOCs too much.

“Powell is definitely for deregulation,” says Levin. “But I don’t think he is on any sort of ideological jihad to get rid of all the rules. What we have told investors is that the rulings by this commission might end up being more favorable for the Bells without any incremental benefits to the competitors.”

Currently, the FCC is reviewing a whole slew of its rules in an effort to level the playing field when it comes to broadband (see Competitive Carriers Lash Out at FCC and FCC Stirs Up Competitive Carriers). While cable, wireless, and satellite broadband networks are essentially unregulated, wireline services like DSL (digital subscriber line) fall under the same category for regulation as the old telephone network.

The general consensus is that the current commission will likely not do away with the TELRIC pricing method or even change it much. Rather, the commission is more likely to redefine which elements of the network are subject to unbundling and therefore subject to TELRIC pricing.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com