Posted 09/2000
Court Strikes Down FCC's UNE Pricing
By Kim Sunderland
Competitive telecom carriers took a hard hit when the 8th U.S. Circuit Court of Appeals (www.ca8.uscourts.gov) pounded down the FCC's (www.fcc.gov) pricing rules for the network elements that competitors lease from the ILECs.
In the 8th Circuit's ruling, released July 18, the three-judge panel ruled that the Telecommunications Act of 1996 requires that the prices of UNEs must be based on the actual costs incurred by the ILEC providing the network element, rather than on the FCC's Total Element Long Run Incremental Cost (TELRIC) pricing structure. The TELRIC model set those prices on forward-looking costs.
In plain terms, the court ruled that "the FCC's construction of the statute is unreasonable," and that the states clearly know what they are doing when they arbitrate and rule on the interconnection agreements between the incumbents and competitors. Such agreements set up which UNEs must be available to competitors and at what costs.
"The court's abolition of forward-looking cost structures will be a blow to competitive carriers," says Dena Alo-Colbeck, director of public policy for regulatory consultants for Miller Isar Inc. (www.millerisar.com). "The nature of TELRIC pricing encouraged incumbents to utilize the most developed and efficient technology available to them by basing their cost recovery on the presumed use of that technology.
"Allowing incumbents to recover actual costs eliminates any incentive to upgrade systems used for CLEC interconnection and provision of [UNEs]," Alo-Colbeck says. "Incumbents have long whined that TELRIC pricing fails to fairly compensate them for the costs of providing certain services to competitors, arguments which are undermined by rising profits and continued local market dominance."
CLECs, though, say there's no immediate impact on their business operations since their rates are governed by state-approved interconnection agreements that remain in effect.
"In fact," says John D. Windhausen Jr., president of ALTS (www.alts.org), "many of these state rates were set while the FCC's TELRIC pricing methodology rules had been stayed by an earlier 8th Circuit decision. Thus, the prices CLECs pay to interconnect with the ILECs' networks were established under state law and policies that are untouched by [this] decision."
Many of these interconnection agreements, however, are set to expire over the next year or so, creating a situation whereby the CLECs will be faced with new challenges.
"This is a big win for the Baby Bells," says telecom industry analyst Jeffrey Kagan (www.jeffkagan.com). "Long-distance companies and other new competitors to the Baby Bells loved the FCC TELRIC pricing model because it only looked forward, and basically gave them access to the Bells' state-of-the-art networks without having to pay for the billions of dollars the Bells invested in those networks over the years."
William P. Barr, executive vice president and general counsel of Verizon Communications (www.verizon.com), says the court's decision vindicates the ILECs' view that TELRIC unlawfully denied them recovery of their real-world costs.
"The 8th Circuit has determined that the prices of network elements must be based on the actual costs of the incumbent local exchange carrier providing the network element, not on the hypothetical costs of some imaginary carrier," Barr says.
The appeals court did uphold the FCC's power to use forward-looking costs to devise new pricing rules, Kagan adds, but those new rules will have to be based on actual forward-looking costs and less on "hypotheticals."
He also agrees that the effect on pricing in the marketplace will be minimal, but it could put the squeeze on companies who are resellers as opposed to those who own their own networks. "The more a company relies on resale, the more they will be affected," Kagan predicts.
And he says the issue doesn't end here.
"This has been a protracted battle since 1996 between the Baby Bells and facilities-based local phone companies on one side, and the long-distance companies and new competitors who resell Bell services on the other side," Kagan explains.
"I think we can count on this being appealed again," he said. "We haven't heard the fat lady sing yet."
