Washington, DC Appeals Court aids incumbents

Aug. 1, 2002

U.S. Court of Appeals vacates the FCC's 'unbundling' rules, neutralizes Supreme Court order.


Recent decisions by the federal courts show exactly why uncertainty and risk still characterize telecom markets. Six-and-a-half years after the Telecommunications Act became law, the federal judiciary is divided on what the law means and how Congress intended to bring competition to local telecom markets. In May, the Supreme Court finally gave the Federal Communications Commission a hammer to build competitive local markets, but a week later, the U.S. Court of Appeals for the District of Columbia hid the nails that would make local competition endure. The hammer was the U.S. Supreme Court's ruling in Verizon v. FCC that the FCC's so-called TELRIC pricing rules are legal: "The 1996 Act...require[s] incumbents...to lease elements of their networks at rates that would attract new entrants when it would be more efficient to lease than to build or resell. Whether the FCC picked the best way to set these rates is the stuff of debate...[however the] FCC's [TELRIC] pricing...rules survive [judicial] scrutiny." TELRIC sets lease prices well below the network element's book cost and has long been resisted by the incumbents, which saw TELRIC as a government-taking of private property and initiated major lawsuits against the FCC in 1996.

Despite the Supreme Court's order, the local phone companies got more than a consolation prize from the DC Appeals Court, which ruled in United States Telecom Association v. FCC that the FCC showed "naked disregard of the competitive context" in determining which network elements (NEs) the incumbents had to make available ("unbundling" in telecom jargon) to competitors. The Appeals Court vacated the FCC's unbundling rules, blocking the lease of any new NE-a fiber loop, for example-and potentially allowing an incumbent to renege on any lease agreement already in effect; the Appeals Court also exempted the incumbents from having to share their digital subscriber loops. TELRIC pricing is legal but useless for now because the Appeals Court neutralized the Supreme Court's order.

Peculiar judgment

If not for the Appeals Court, the United States would now have an enduring policy regarding access to the incumbents' network. The Supreme Court has the authority to review the DC court's opinion, even if it is not appealed by the FCC. The Supreme Court should review because its reasoning and the Appeals Court's logic are in conflict, and represent two vastly different interpretations of the Telecom Act.

The Supreme Court justified its decision: "We cannot say that the FCC acted unreasonably in picking TELRIC to promote the mandated competition" because the Telecom Act "is radically unlike all previous statutes...an explicit disavowal of...familiar...regulation [by]...cost-of-service...[the Act was] designed to give aspiring competitors every possible incentive to enter local retail telephone markets, short of confiscating the incumbents' property." But the Appeals Court made its decision by resorting to a limited standard called "impairment." The Telecom Act directs an incumbent to lease an NE when "the failure to provide access to such network elements would impair the ability of the [competitor] seeking access to provide [its] services...." The Appeals Court asserts that Congress "made 'impairment' the touchstone...the entire argument about expanding competition...boils down to the [FCC's] belief that...more unbundling is better. Congress did not authorize so open-ended a judgment."

There are two competing standards to assess Congressional intent: the Supreme Court's is the "short-of-confiscation" principle and the Appeals Court's is "impairment." However, the Appeals Court makes a concession that weakens its argument: "We note [that]...Congress...gave [the FCC] no detail as to either the kind or degree of impairment" that would hurt competitors. But that inconsistency did not stop the Appeals Court from telling the FCC what it should have done.

The court criticized the agency for "adopt[ing] a uniform national rule...in every geographic market and customer class without regard to the state of competitive impairment," a criticism implying that the FCC has to make a market-by-market or region-by-region assessment of the need for unbundling before an NE could be leased. But the Appeals Court's "competitive impairment" logic is actually a return to market share regulation, shown by the Court's comment: "[E]vidence invoked by the [incumbents]...show[s] the existence of many markets where unbundling is unneeded." Unfortunately, the court is repudiating the Telecom Act's fundamental regulatory bargain: Even though the incumbents had a 100% share of the local market, they were not compelled to reduce that share, provided they kept their markets open to competition, which meant making their networks available for lease [See Lightwave, June 2002, p. 25].

Judicial hubris

The unsound reasoning of the Appeals Court is shown again in its assessment of Congressional intent: "As a result [of the FCC's rules, NEs] will be available to [competitors] in many markets where there is no reasonable basis for thinking that competition is suffering from any impairment of a sort that might have the object of Congress's concern." But how can the Appeals Court identify "any impairment that might concern Congress" when the court has already conceded that Congress gave the FCC nothing to clarify the meaning of impairment? Apparently, the Appeals Court wants to substitute its judgment for the FCC's.

How the Supreme Court will resolve its muted conflict with the Appeals Court is not clear, because the Appeals Court uses the Supreme Court's own words against it. When the Supreme Court ruled in 1999 that the FCC's authority took precedence over state-utility commissions, it concluded: "[W]e do agree with the incumbents that the Act requires the FCC to apply some limiting standard [to unbundling]," an argument the Appeals Court used to reject the FCC's revamped rules. The basic issue remains: If Congress gave no direction to the FCC regarding impairment, how can it be a principle to restrict unbundling, especially if Congress wanted competition by any means short of confiscating private property?

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.

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