Supreme Court Reaffirms TELRIC Pricing

A U.S. Supreme Court (www.supremecourtus.gov) ruling announced Monday upheld a key part of the government’s effort to give Americans choices for local telephone service, which could be a major boost to service providers trying to compete against the incumbents.

The ruling, passed by a 5-3 vote, upheld the total element long-run incremental costs (TELRIC) rules, which essentially keeps costs low for companies that want to get into a market. By permitting the rules to stand, the decision eventually could lead to cheaper service for consumers, which is what Congress envisioned when it passed the Telecommunications Act of 1996 opening up the $110 billion local telephone service market.

Associate Justice Sandra Day O’Connor recused herself from the case, as she owns stock in AT&T Corp. (www.att.com) and WorldCom Inc. (www.worldcom.com).

Praising the ruling, the Competitive Telecommunications Association (www.comptel.org) released a statement that said: “Finally this five-year battle, which has hindered the development of true competition, can come to an end. The Supreme Court is right on target with its assessment of TELRIC as the appropriate method for pricing the vital elements that competitors need access to in order to serve their customers. The FCC followed the letter of the law in developing the TELRIC methodology.”

Since the FCC (www.fcc.gov) introduced the TELRIC formula, the RBOCs have been contesting them. According to news reports, the major loser in this case was Verizon Communications Inc. (www.verizon.com), a conglomeration of former Bells, and GTE Corp., which wanted to charge other telephone companies higher fees to use their lines. Verizon insisted the FCC’s TELRIC formula would not allow it to recover its own construction costs.

Associate Justice David H. Souter, writing for the court, said “we cannot say whether the passage of time will show competition prompted by TELRIC to be an illusion, but TELRIC appears to be a reasonable policy for now, and that is all that counts.”

Responding to the High Court’s ruling, the vice president and counselor to the general counsel for Verizon John P. Frantz issued a statement that said: While this decision maintains the status quo, the FCC is currently looking at its unbundled network element policies, recognizing that a `course correction’-as noted by Chairman Powell-may be necessary to encourage facilities-based competition as the Telecom Act intended. We hope that the chairman will not follow the bankrupt policies of the past but will provide leadership on this issue. While the court upheld TELRIC methodology as a legal matter, that does not mean this is the best policy for consumers or for the telecommunications industry at large.”

BellSouth Corp. (www.bellsouth.com) also reacted to the decision releasing a statement that said: “Today’s decision maintains an unfortunate status quo: BellSouth must continue to provide pieces of its network to competitors at below-cost prices. This status quo discourages investment by both us and our competitors, resulting in poorer choices for customers. We hope the FCC will correct this incorrect pricing policy and eliminate its unnecessary requirements to provide certain network pieces in dockets now pending before it.”

But consumer advocates were pleased. They had argued before the justices – six months ago-that if the pricing rules were overturned, competition efforts would stall. The decision follows an identical 5-3 decision in 1999 that let the FCC, not individual states, set pricing rules. States determine prices using the federal guidelines.

“Today’s landmark Supreme Court decision could be a turning point for the CLEC industry and for consumers,” said John Windhausen Jr. president of the Association for Local Telecommunications Services (www.alts.org). “For the last six years, CLECs have struggled under a cloud of uncertainty around the prices they pay to purchase piece parts of the telephone companies’ networks. By upholding the TELRIC pricing methodology, the Supreme Court decision re-affirms the 1996 Telecom Act and restores confidence in the competitive telecom model.”

He added, “Most significantly, the Supreme Court decision considers and rejects the Bell companies arguments that the TELRIC standard does not allow them to earn a fair return on their investment. This decision will be enormously useful on Capitol Hill, in other court proceedings, and in many FCC and state proceedings.”

Telecom industry analyst Jeff Kagan (www.jeffkagan.com) said the ruling appears to be a big win for competitive service providers, but it may also have some onerous effects down the road.

“Short term it may have the desired effect of encouraging the competitors since it will help them increase profitability, however I am concerned about the long-term price we may have to pay,” Kagan said in a statement he released. “The CLEC’s aren’t investing in the networks, they are reselling the Bells networks. For the most part they are not stringing a second set of lines to homes and offices and creating a second local phone infrastructure.”

He said that the ruling could discourage the Bells to invest in their networks, which could He also said that he does not believe the ruling will have much effect on pricing. “I don’t see the CLEC’s passing lower costs on to customers in lower rates. Lower costs for CLEC’s will simply make the surviving companies more profitable and stronger. This won’t save the companies who are already dying on the vine, who don’t have enough “Bottom line, it may be a hollow and short-lived victory,” Kagan concluded.