U.S. appeals court stays FCCs pricing rules

Dec. 1, 1996

Stephen N. Brown

The Eighth Circuit Court has handed a victory to the states and local telephone companies regarding federal oversight of competitors` entry into local telephone markets, but the court`s reasoning is not balanced

The Eighth Circuit Court in St. Louis has decided to stay and perhaps strike down pricing rules of the Federal Communications Commission (FCC). The court says the FCC`s rules pose "the threat of unrecoverable economic loss...[and] irreparable harm" to local telephone companies. The agency issued the rules in August to fulfill the duties imposed on it by the Telecommunications Act. The rules were meant to govern competitors` entry into the local telephone markets now controlled by the local telephone companies and were immediately challenged by local telephone companies and state regulatory commissions, which asked the court to stay the rules because the FCC has no oversight authority in local markets. The court agreed and concluded its order saying, "We grant the petitioners` motion to stay the FCC`s pricing rules...pending a final decision on the merits."

Path of influence

The best thing about court orders is that they are written. Anyone willing to read them can get a sense of what the judges were thinking and why, while also noting the gaps in reasoning and the biases in judgment. Thus, the final order is hardly a complete documentation of all the factors that influenced the judges. Influence--its path and power--is particularly important in this case because it involves the titans of telecommunications: MCI, AT&T and other long-distance carriers support the FCC rules while the regional Bell operating companies and GTE oppose them.

For example, James R. Young, Bell Atlantic`s vice president and general counsel, said, "The Court of Appeals made the right move. With the FCC pricing rules out of the way, we and the states can get on with creating a new competitive telecommunications marketplace and providing some real choice in long distance. The only result of the complex FCC rules so far was uncertainty and gridlock in negotiating agreements that would lead to true competition." Mark Rosenblum, AT&T`s vice president for law and public policy, said: "We believe the FCC`s...rules are exactly what Congress intended. ...We intend to defend the FCC`s rules vigorously and are confident they will be affirmed when they are heard on the merits next year. State Commissions should use them as a guide as they continue...to open local markets to competition."

While companies criticize or praise the decision, peculiar circumstances surround it. For example, the Eighth Circuit Court handles appeals that originate in Iowa, Minnesota, Missouri, North and South Dakota, Nebraska and Arkansas. This court has no prior experience or skill in telecommunications cases. The U.S. Appeals Court has 12 circuits and appeals by state commissions who opposed the FCC`s pricing rules were filed in the Second, Fifth and D.C. Circuit Courts as well as in the Eighth Circuit.

Iowa was the only state that had filed an appeal in the Eighth Circuit, but that proved to be fortuitous for the states and local telephone companies. When appeals regarding the same issue are filed in several circuits, federal judicial procedures require that one circuit be selected by a random drawing. According to Rule 24 of the Federal Rules of Procedure of the Judicial Panel on Multidistrict Litigation, "the Clerk of the Panel...shall randomly select a circuit...from a drum containing an entry for each circuit wherein...a review is pending." Because of Iowa`s appeal, the Eighth Circuit had a 1 in 4 chance of being selected. Thus, the Iowa Utilities Board and one of the companies it regulates, GTE, played pivotal roles.

Granting the stay

The court consolidated all petitions into Docket 96-3321: Iowa Utilities Board v. Federal Communications Commission. In its final decision, the court said it had to consider, among other things, the public interest in granting the stay. Central to the public interest is the issue of state versus federal oversight of competitors` entry into local telephone markets.

The court used Iowa as a foil to the FCC`s claim that local telephone companies would "impose unreasonable rates for their services" on competitors. In footnote 7 of its order, the court says, "We note that...the FCC-imposed rate for Iowa is substantially higher than the state-set rate..." The court added, "We have no reason to doubt the ability of the state commissions to fulfill their duty to promote competition in the local telephone service markets and thus conclude that the public interest weighs in favor of granting a stay."

This is an economic, rather than judicial, conclusion. The judges have confused a result with a method to achieve that result. When an appeals court reviews a criminal case, it does not say: "Because Mr. X was found guilty we conclude the trial was properly conducted." But that is what the Eighth Circuit did in this case: It is as if the judges said, "Because the FCC-imposed rate for Iowa is substantially higher than the state-set rate, we conclude that Iowa and all other states have better procedures than the FCC."

Perhaps the example of Iowa subtly influenced the court because one of the three judges hearing the case was a jurist in Iowa for 28 years. Judge David R. Hansen practiced law in Iowa from 1963 to 1976 and, from 1976 to 1986, he was a state judge in Iowa`s Second Judicial District. From 1986 to 1991, he was a federal judge in the U.S. District Court, Northern district of Iowa, and was appointed to the Eighth Circuit Court in 1991. If there is a connection between Hansen`s career in Iowa, the Eighth Circuit Court`s decision and its special emphasis on Iowa, such a connection does not suggest inappropriate behavior by anyone. But the circumstances beg the questions: Would Iowa`s example have been notable in another federal circuit court? Is the state-set rate in Iowa typical of the rates set by other states? Did Iowa use a reasonable method to set its rate? These unanswered questions make it imperative for the Eighth Circuit to broaden its net before it proceeds to a final decision in this case.

The circumstances further suggest that someone understands the leanings of the Eighth Circuit. Of all the players in this case, no one knows judges better than former Attorney General William P. Barr, GTE`s senior vice president and general counsel. He was a powerful figure in the Bush Administration, and his efforts led to the ouster of William Sessions, once a federal judge, as the director of the FBI. As head of the Justice Department, Barr was in the position to understand those people who were appointed as judges during Bush`s term as president.

Perhaps this explains why GTE played the role of chief strategist for the local telephone companies: Although several telephone companies presented legal briefs to the court, it was GTE that presented the oral arguments on behalf of the incumbent local exchange carriers. The court granted a temporary stay on September 27, and Barr said: "Far from delaying the transition to competition (as some falsely claim), a stay of the FCC`s order will ensure that the transition to competition complies with the process Congress chose. While the stay is in effect, parties will negotiate agreements under the act, and state commissions will continue their arbitration proceedings. In short, the transition to completion will continue right on schedule."

Barr`s statement is remarkably similar to the language in the court`s final order: "The [Telecommunications] Act`s system of private negotiations backed by state-run arbitration was operating without input from the FCC. A stay would preserve the continuity and stability of this system--a system that has initially proved successful." It proved successful, of course, because the judges had the convenient and unscrutinized example of Iowa before them.

While GTE made the oral argument for the telephone companies, the Iowa Utility Board made the lead oral argument for state commissions. But it may not have been that way if Barr had his way. Before the final hearing granting the stay, Barr telephoned the chairman of the Iowa Utilities Board and asked him to allow GTE, which has operations in Iowa, to make the oral argument for the state, according to reliable sources. To the chairman`s credit, he refused Barr`s request. Perhaps Barr`s call signaled a skilled effort to control what the court heard, his eager anticipation of a favorable decision and a desire to tie up loose ends, to wit: making the oral argument for Iowa lest the state fumble and fail to show how its actions justify for every state the staying of the FCC`s pricing rules.

The Eighth Circuit has a duty to be thorough in its assessment. Unfortunately, its order of October 15 demonstrates a willingness to be coaxed into conclusions. Judicial ethics require judges to rid themselves of predispositions that allowed them to pass the political litmus tests of the people who appointed them. Otherwise, their decisions can be interpreted as payback to their political selectors.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. He can be contacted at tel: (615) 399-1239.

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