FCC in drivers seat as Bell companies seek entry into long-distance markets

FCC in driver`s seat as Bell companies seek entry into long-distance markets

The FCC will likely lose its case in the Eighth Circuit Court, but the agency still has a strong hand in determining when the local telephone companies may enter long-distance markets

StePHen n. brown, mev inc.

In January, the Eighth Circuit of the U.S. Appeals Court heard legal arguments in FCC vs. Iowa Utilities Board, in which Iowa and other states and GTE challenged the Federal Communications Commission`s authority to set rules governing the emergence of competition in local telephone markets (see Lightwave, December 1996, page 30). Those markets remain the bailiwick of the regional Bell operating companies and GTE. Their most likely competitors are the established long-distance car riers such as AT&T, Sprint, mci/bt, and MFS/Worldcom. There is a consensus among the carriers that the FCC is going to lose its legal battle, which will be a major defeat for AT&T, MCI, and any other company counting on national rules rather than state-specific ones to develop competition in local markets.

The issue of state versus national rules is a vestige of how political and market power used to be divided in the telecommunications world. Supposedly, state-specific rules are good for local companies, which have well-developed political contacts from working with state commissions and state legislatures. On the other hand, state-specific rules are supposedly bad for potential competitors, which have no major presence in local markets and do not have the personnel and the experience to match the power of the local companies. The FCC`s rules were meant to correct this perceived imbalance. But even though the Iowa Utilities Board challenged the FCC, other state commissions are using the FCC`s rules as a guideline.

The Minnesota Public Service Commission recently ordered US West to give its local competitors access to local telephone lines at a rate of $12 per month--a 20% discount from the $15 per month the company charges its retail customers. The discount is in line with the FCC`s rules, which had set discounts between 17% and 25% below retail rate levels. Minnesota`s order enraged the company. US West`s communications vice president for Minnesota, Jim Smiley, said, "The Commission`s decision is bad public policy. ...If the Commission`s decision stands, it is clear that US West will have to reevaluate the nature and extent of its business activities in Minnesota."

Meeting the competitive checklist

To the extent that state utility commissions yield to such threats and deviate from the FCC`s recommended pricing rules, a new entrant into local communications markets will end up like the man who took a knife to a gunfight. To avoid this end, long-distance carriers have one last line of defense: the Bell companies` desire to offer long-distance service in states where they already provide local service, which the Telecom Act of 1996 refers to as "in-region interlata service." The companies may offer such service once they have gained the FCC`s approval but that will not be an easy task. The rules governing the Bells` entry are in the United States Code Annotated, Title 47, Section 271. Therein lies the statutory competitive checklist that each Bell must meet for each state where the company wants to offer long-distance service. In January, the Bells were expected to request the FCC`s approval for in-region interlata service because, in the companies` opinion, they have met the requirements of the competitive checklist.

However, compliance with the competitive checklist may not be enough to compel approval because the law gives the FCC broad discretion in its decision-making. The discretion is in the law`s wording: "Not later than 90 days after receiving an application...the Commission [FCC] shall issue a written determination approving or denying the authorization requested in the application for each State. The Commission shall not approve the authorization...unless it [the FCC] finds that...the requested authorization is consistent with the public interest, convenience, and necessity." This appears to be a carte blanche for the FCC, but there is additional language that may constrain the agency. The law further states: "The Commission may not, by rule or otherwise, limit or extend the terms used in the competitive checklist." Which language prevails in the event that the FCC does not approve a Bell company`s application for in-region interlata service? There is no doubt this issue will go to an Appeals Court.

The following scenario is likely to occur over the next several months. The Bell companies will petition for immediate access to in-region long-distance markets and will assert that they have met the competitive checklist. They will further assert that meeting the checklist is in fact and in law "consistent with the public interest, convenience, and neces sity." When the FCC denies a portion of the companies` request, they will appeal to the court and argue that the denial is based on an implicit and legally improper extension or limitation of the terms in the competitive checklist.

The FCC will counter by telling the court that if Congress had intended the checklist to be the final, sole, and ultimate criterion for approval of a company`s application for in-region interlata service, then Congress would have never included the public-interest language in the law. The FCC will say that Congress imposed on the agency the statutory duty to make its decision on factors that are inclusive of, but broader than, the competitive checklist. As proof of Congress` intent, the FCC will point to the law`s wording, which says the agency "shall consult with the Attorney General" and "shall consult with the State [regulatory] commission of...[the affected] state" when the agency evaluates a Bell company`s application for in-region interlata service. The FCC is likely to prevail in this contest, even if it loses the case in the Eighth Circuit Court. The Bells will be wasting their time if they challenge the FCC in this arena. They will be better off developing cogent public interest arguments on their own behalf.

For example, they should figure out a way to remedy the damage done by Richard Notebaert, the chief executive of Ameritech. Notebaert was quoted in an article in the October 23, 1996, issue of The Washington Post, which analyzed GTE`s strategy to protect itself from would-be competitors: "The big difference between us and them is that they`re already in long distance. What is their incentive" to cooperate? This is a revealing statement because it suggests that once the Bells are in the long-distance market, then they, too, will have no incentive to cooperate in opening their local markets. Their local competitors will have the best opportunity to enter the local market before the FCC approves the Bells` in-region interlata service. The day after that approval, as Notebaert suggests, the local competitors can expect to be stonewalled.

AT&T picked up Notebaert`s theme less than two weeks after its publication and used it against Southern New England Telephone Co. (snet) and GTE. Speaking in Connecticut, AT&T chairman Robert Allen said that "AT&T is involved in arbitration...before Connecticut regulators to open snet`s local markets. ...Snet is resisting. ...Who could blame them?...They already have the freedom to offer long distance. They are not in a hurry to open up their local service monopoly." In Virginia, AT&T entered into negotiations with GTE and issued a press release that said: "The Virginia State Corporation Commission will begin arbitration proceedings between potential local telephone service providers and GTE. ...However...GTE is already in the long-distance markets [and] has no incentive to open its own local monopoly to competition."

All-or-nothing approach

Notebaert`s comment and its quick pickup by AT&T highlight a fundamental weakness in the Telecom Act. It embodies an all-or-nothing, irreversible approach to market entry in long distance, a condition that may cause local-market competition to be stillborn. At this point, the public interest argument comes into play. It allows the FCC to expand its scope of consideration beyond the competitive checklist, giving the FCC the option to delay approval of the Bells` in-region interlata service and protect the public until the danger of market failure is reasonably diminished.

The expanded scope could be used another way. The public interest may demand that the FCC consider the recent price increases by AT&T, MCI and Sprint as a factor in favor of the Bells` entry into long-distance markets. In a letter sent to FCC chairman Reed Hundt, Bell Atlantic`s chief executive Raymond Smith said the price increases "will help the Big Three build significant war chests with which to protect their long-distance market shares and to enter local markets."

Smith has a point, but to make its decision, the FCC will assess the comparative damage being done to the public, the Bells, and the established long-distance car riers--the same process used by the Eighth Circuit Court when it imposed a stay on the the FCC`s pricing rules. In assessing comparative damage, the Court said: "...Our decision, either way, will unavoidably adversely affect the interests of either the incumbent local exchange carriers or their potential competitors. If we...grant the stay...the companies seeking entry into the local telephone markets will have to negotiate and arbitrate their agreements without the added leverage of the FCC`s pricing rules. ...The inconvenience...is outweighed by the harm...of its alternative. ...Any harm that other parties may endure as a consequence of imposing a stay is outweighed by the irreparable injury that the petitioners would sustain absent a stay." Just as the court used its judicial expertise to make economic conclusions and protect certain parties, so, too, can the FCC use its regulatory expertise to protect the public interest. q