Telephone Showdown Hits U.S. High Court With Diminished Stakes
Bloomberg News
October 9, 1998, 4:14 p.m. ET
Telephone Showdown Hits U.S. High Court With Diminished Stakes
Washington, Oct. 9 (Bloomberg) -- As the U.S. Supreme Court
prepares to review rules governing local telephone deregulation,
the fight resembles a football game in which the playing field
has shrunk.
When the Baby Bells and GTE Corp. first challenged the
rules, adopted in 1996 by the Federal Communications Commission,
the litigation shaped up as a titanic struggle. It pitted the
incumbent local carriers against potential rivals such as long-
distance companies AT&T Corp. and MCI WorldCom Inc. over the
rules for entering the $100 billion market.
Now, the stakes aren't quite so high. New stances taken by
regulators, coupled with changes in the industry, have taken the
punch out of some of the main issues in the case. The impact of
the high court's ruling may not be as great as previously
thought.
''Whereas 18 months ago, it seemed like there was a 50- or
60-yard difference between the two sides, now it's a 10-yard
difference,'' said Tom Tauke, Bell Atlantic Corp.'s top
government affairs official.
The case is sure to draw wide attention Tuesday when the
justices hear two hours of oral argument, double the usual
allotment. The court already has received dozens of legal briefs
filed by more than 30 different companies, trade groups and
government bodies.
Still, analysts and industry officials say the outcome
likely will have only a modest effect on the growth of new
competitors to the Baby Bells, GTE Corp. and other incumbent
local phone companies. Competition for business customers already
is growing at a brisk pace, although the fight for residential
customers has largely failed to materialize.
''People will watch it, but it doesn't have the investment
bite that we thought it would have a year ago,'' said Scott
Cleland, managing director of Legg Mason Inc.'s Precursor Group.
Unbundled Elements
Perhaps the most hotly disputed issue in the case involves
one of the three options given to new local phone companies under
a 1996 law that set deregulation in motion.
Under one method -- the only one that doesn't require
newcomers to own some of their own facilities -- rivals may
purchase retail services from incumbent carriers at wholesale
rates and then resell them for a profit. New entrants with their
own networks also may simply interconnect to existing networks.
The third option, the controversial one, allows rivals to
lease ''unbundled network elements'' at deep discounts. Those are
pieces of the existing networks such as the line that runs from
the home to the street. The idea is to allow rivals with some of
their own facilities -- for example, the switches that direct
calls to their intended destinations -- to gain access to the
elements they don't own.
The high court will decide whether the incumbent carriers
must lease elements as a combined package, rather than as
individual components that the rival must then connect itself. A
St. Louis-based federal appeals court sided with the Bells and
GTE in July, saying the 1996 law required only a la carte
leasing.
The Bells and GTE argue that, if they must combine the
elements, rivals will demand access to a complete, end-to-end
package of facilities at ultra-low prices -- below the wholesale
rates under the resale option. The incumbent carriers say that
would effectively undermine the resale provision.
Facilities-Based Competition
The unbundled elements dispute has cooled in recent months.
AT&T and MCI have turned their attention to amassing their own
facilities -- AT&T through its acquisition of local service
provider Teleport Communications Group Inc. and its pursuit of
cable giant Tele-Communications Inc., and MCI by combining with
WorldCom. They're now less interested in the potential discount
of leasing an entire package of unbundled elements, Legg Mason's
Cleland said.
''For their main business event they have chosen
facilities,'' Cleland said. Resale ''has gone from a primary
strategy to a secondary strategy.''
New entrants say the unbundled element issue is still
important to them. Separating the elements, they say, would mean
they couldn't woo current Bell customers without the possibility
of a gap in service while the new carrier reinstates connections
severed by the previous phone company.
''Unbundled elements are absolutely critical to quickly
reach a broad customer base,'' said Jonathan Sallet, MCI's chief
policy counsel. ''Congress recognized that it would be
inefficient and unrealistic to expect that any new entrant, even
a company like MCI-WorldCom, would be able to duplicate the
incumbent telephone network to every home and business
overnight.''
Still, the Supreme Court fight may not be the final word on
that issue. Even if the Bells win at the high court, regulators
may find other ways to accomplish the same end. In Bell
Atlantic's case, Tauke said, the company will offer unbundled
elements on a combined basis as a condition of getting regulatory
approval to offer long-distance service in New York.
Antitrust enforcers and regulators also could demand
concessions as part of their review of Bell Atlantic's
acquisition of GTE and SBC Communication Inc.'s purchase of
Ameritech Corp.
Pricing Rules
The unbundled elements issue isn't the only aspect of the
high court case with diminished importance. The justices also
will review the FCC's 1996 decision to issue a methodology for
states to use in setting the prices that Bells can charge for use
of their networks.
Bells want the pricing rules set by the states, which
traditionally have been more generous to them than the FCC. They
say Congress left that power with state regulators. The appeals
court agreed, barring the FCC from setting the methodology.
Since that time, state regulators have taken a harder line
than expected with the Bells, with many adopting virtually the
same methodology as the FCC.
Some Bell competitors, such as MCI, say they're not fully
satisfied with the states rules and are challenging pricing rules
in more than a dozen states. Rivals also say they want to ensure
a uniform methodology that applies in all 50 states.
Still, state-by-state regulation hasn't resulted in the
patchwork some feared, said Emily Williams, who serves as the
acting general counsel for the Association for Local
Telecommunications Services, a trade group of small carriers
seeking to reinstate the FCC's authority.
''We thought it was going to be very difficult to deal with
50 separate rules,'' Williams said. ''While each state is still a
little different, it's easier than we thought it would be if all
50 states were going all over the place.''
A final question concerns a provision in the 1996 law known
as ''pick and choose.'' Under that provision, if one rival
reaches an agreement with an incumbent to use part of a network,
others may piggyback onto it and demand the same arrangements in
their own contracts. The issue for the high court is whether new
entrants can pick out particular clauses or instead can demand
only an entire package.
The eight justices -- Justice Sandra Day O'Connor won't take
part in the case -- will issue a ruling before their 1998-99 term
ends in July. The case, actually eight consolidated appeals, is
known as AT&T v. Iowa Utilities Board, 97-826.
--Greg Stohr in Washington, with reporting by Heather Fleming, |
