WASHINGTON-Any euphoria felt by wireless carriers following the recent adoption of new interconnection and local competition rules by the Federal Communications Commission should have melted away by now as the commission faces a long, uphill battle in federal court to defend the proxy-pricing aspects of the order.
The industry, which had been looking forward to interconnection rates equal to fractions of pennies, will have to continue negotiations with local exchange carriers and state commissions in the interim that may end up in contracts containing higher-than-anticipated rates. The upside is that if the court upholds the FCC’s pricing methodology, those contracts will be ratcheted down. The downside is the appeals court believes FCC foes have a good chance of winning their case when all is said and done.
A 21-page decision handed down Oct. 15 by a three-judge panel of the U.S. Court of Appeals for the Eighth Circuit in St. Louis has stayed the proxy-pricing rules until oral arguments can be heard and evaluated in January by those opposing or upholding the FCC’s position. As anticipated, the judges took a states’-rights position in validating all four criteria set forth by several local exchange carriers and public utilities in the original petitions for stay filed at the court in August and September, and following oral arguments almost three weeks ago.
First and foremost, the judges wrote that the petitioners presented a strong argument that the commission “exceeded its jurisdiction by imposing national pricing rules for what is essentially local service.” They added that nowhere in the Telecommunications Act of 1996 is the FCC “specifically authorized to issue rules on pricing … This absence indicates a likelihood that Congress intended to grant state commissions the authority over pricing of local telephone service, either by approving or disapproving agreements negotiated by the parties.” In a footnote, the judges admitted they were skeptical and had serious doubts regarding the FCC’s interpretation of the Telecom Act.
The panel also agreed with petitioners that negotiations between LECs and would-be competitors have broken down since the FCC’s order was adopted because “the proxy rates effectively establish a price ceiling, an observation recognized by the FCC itself, which inevitably confines and restricts the give-and-take characteristics of free negotiations and arbitrations.” While the FCC, in its comments and arguments prior to last Tuesday’s decision, had said that “allegations of irreparable harm are merely speculative and that there is no certainty that proxy rates will ever be applied to the petitioners,” the judges wrote it would be almost impossible for negotiators to work under a no-stay scenario due to the specter of proxy pricing. In addition, absent a stay, if the court ultimately rules for the LECs, any LEC who could prove economic damage due to institution of proxy prices even for a short period could not recoup those losses in court, thus adding fuel to the irreparable-harm fire.
Finally, despite the commission’s assertion that a stay would block the road to open competition, the court harked back to the success many states have had since the signing of the telecom bill last February. It pointed out that Connecticut, Florida and Iowa already had established new rate structures based on local market conditions. “Moreover, the FCC-imposed rate for Iowa is substantially higher than the state-set rate, which was based on the full record from a contested case proceeding, while in Florida, the FCC proxy rate is substantially lower than the state-set rate.”
Victory was sweet for Bell company and state commission proponents, with GTE Corp. speaking for the group. “Competition will move forward now as seen by Congress,” commented William Barr, GTE’s senior vice president and general counsel, who argued the LEC case in front of the panel. “The FCC’s version of stacking the deck against LECs has been dealt a blow.” Like the judges, Barr encouraged LECs and state commissions to continue interconnection negotiations, but he admitted that most significant states will not plug in the FCC’s proxy prices, even if they have no new interconnection policy in place now, because they are arbitrarily low. Instead, each will use its own methodology. “Even the FCC realizes its methodology [in devising proxy prices] was wacko when it discounted prices 40 percent to 50 percent,” he said.
On the other hand, the fallout was swift. “The Eighth Circuit’s stay throws a monkey wrench into the carefully designed congressional machinery for introducing competition into the local exchange marketplace,” said FCC Chairman Reed Hundt. “We intend to go immediately to the Supreme Court. We will ask them to lift the stay so that the congressional competition policy can promote investment and job growth all over the country.” GTE’s Barr believes it would be highly unlikely for the highest court in the land to rule against a circuit court on such a matter.
“This can’t be a good thing if aspects of the pricing rules have been stayed,” said Rob Hoggarth of the Personal Communications Industry Association when he first learned of the appeals court action. “We will be looking for opportunities for the wireless industry to seek some options.” PCIA has petitioned the court to be an intervener on the FCC’s side.
“The irony of this unfortunate decision is that the states and the new entrants appear to want essentially the same thing-full and open competition at the local level,” commented PCIA President Jay Kitchen in a written statement. “We are dismayed at the court’s decision. PCIA is working closely with members and other parties to deal with this legal setback. We have examined the court decision carefully, are studying our options thoroughly and will plan our strategy accordingly.”
Tom Wheeler, president of the Cellular Telecommunications Industry Association, said, “Obviously, we’re disappointed that the court stayed the order, but onward to January.” Wheeler took heart in that other parts of the order, including reciprocal termination rates, remain in place for wireless carriers.
While admitting that many wireless carriers have been stalled since the order was first stayed Sept. 27, Wheeler said his group has been urging its constituency to continue negotiating for fair and reasonable rates. “It’s a long way between three cents and two-tenths of a cent,” he added.
Participants in a Cato Institute round-table discussion that took place just prior to the court’s release of its decision pitted LEC and competitive interests against each other one more time in hopes of swaying interconnection opinions one way or the other. David Baker, head of the Georgia Public Utilities Commission, said most utilities commissioners don’t want to take the regulatory bat away from the FCC-they just don’t need such a weapon in their states. “Georgia opened up its markets long before the Telecommunications Act of 1996, and we now have 24 competitors to BellSouth,” he explained.
Agreeing was Robert Blau, vice president of regulatory affairs for BellSouth. “Why did the commission go to such great lengths [to supersede state rules]? So that new entrants could get into the market quickly and LECs would lose market share quickly,” he said. “The likely consequences are that a lot of new resellers will enter the market, pushing rates down in metropolitan areas and up in rural areas.”
Not many states are as progressive as Georgia, commented Oscie Thomas, vice president of government affairs for AT&T Corp., which stands behind the FCC’s order.
Wrapping the discussion up was Peter Pitsch, a former FCC attorney now in private practice along with being an adjunct fellow of the Hudson Institute. “The potential for cost reduction in telecom is tremendous,” he said. “We should not be surprised that telecom carriers will experience painful changes, and the people will pay for what they get. Carri
ers need to think two and three years down the road beyond interco
nnection.”
