Copyright 2003 The Deal, L.L.C.

Daily Deal/The Deal

August 25, 2003 Monday

Telecom industry players may agree on only one aspect of the Federal Communication Commission’s new local phone and broadband competition rules: Everyone’s got something to bitch about.

The rules, detailed Friday, Aug. 22, in a 576-page FCC report, are certain to prompt a host of legal challenges.

The Baby Bells — Verizon Communications Inc., SBC Communications Inc., BellSouth Corp. and Qwest Communications International Inc. — are expected to challenge the so-called UNE-P rule. Specifically, they object to a provision in the rules that gives state utility officials control over the rates Bells charge for local phone competitors to lease their legacy transmission networks.

The Bells will likely mount their challenge in the U.S. Court of Appeals for the District of Columbia because it handed them a favorable decision in May 2002, said Dana Frix, partner at Chadbourne & Parke LLP in Washington who represents Bell company rivals.

In FCC v. United States Telecom Association, the Washington appellate court ruled that the agency had exceeded its authority in determining which parts of the Bell network had to be leased to competitors at cheap rates.

“Some would argue that the D.C. court has most recently been sympathetic to Bell arguments,” Frix said.

Indeed, another telecom attorney said the Bells are likely to argue that the new telecom rules are inconsistent with the USTA decision.

Alternatively, the Bells could press their case in the U.S. Court of Appeals for the Eighth District in St. Louis. That court also appears sympathetic to the Bells, observers note. In 1997 it overturned many of the conclusions in a massive FCC order based on the 1996 Telecommunications Act.

Frix noted that Bells could also challenge the rules separately at appeals courts within their own geographic markets.

Bell company rivals such as AT&T Corp., WorldCom Inc. and other so-called Competitive Local Exchange Carriers, will appeal another section of the report that frees the Bells from previous requirements to provide low-cost access to their fiber-optic lines and switches.

CLECs argue that this will stifle competition and force many of them into bankruptcy. That’s because they lack the resources to build proprietary fiber-optic lines to compete with the souped-up Bell networks.

“There will likely be challenges in every appeals court around the country,” said Russell Frisby, president of the Competitive Telecommunications Association, a Washington-based advocacy representing CLECs.

The last remaining national broadband company, Covad Communications Inc., is expected to challenge another provision dealing with “line-sharing,” under which the Bells lease the high-frequency portion of their lines for residential broadband service.

The new rules effectively will dramatically increase the cost for Covad to provide residential broadband access. Although the line-sharing discount will be phased out gradually over three years, Covad will eventually have to pay market rates to lease the Bell lines.

A Covad spokesman said its strategy is to contest the line-sharing rules in federal appeals court. A likely venue is the U.S. Court of Appeals for the Ninth Circuit in San Francisco. The broadband company also will request the FCC to delay implementing the rules until the agency decides on a petition to reconsider the regs.

Frix said corporations also should consider filing petitions asking the FCC to clarify the rules. “This order does not have a lot of details about telecom networks and the way in which the new changes will impact them,” he said.

A major element in the legal battle over UNE-P will center on an unexpected change in the report that could boost the Bells. As outlined in an earlier version of the rules, state utility regulators retain control over access to and pricing of the Bell networks.

But in some cases, according to the report, federal telecom rules will take precedence. For example, in markets where at least three Bell competitors offer local residential phone service using their own switches, states will not be able to offer rivals discounted pricing. States also will be restricted from offering Bell rivals’ low-cost rates to access their networks in markets with at least two wholesale telecoms providing switching services to other competitors.

That means telecoms that lease Bell lines in large cities will not receive price discounts and could be forced to move their operations out of densely populated areas.

FCC Chairman Michael Powell said in a statement that he thought there would only be a few markets where this “trigger” will take effect, but other telecom observers are not so sure.