Supreme Court Upholds Bell Pricing Scheme

By Caron Carlson  |  Posted 2002-05-13

In a ruling that consumer advocates say will prevent a rise in telecommunications services prices, the U.S. Supreme Court on Monday said that the century-old Bell Operating Companies must abide by a federal pricing scheme when leasing elements of their local networks to rivals.

The pricing scheme, developed by the Federal Communications Commission following the Telecommunications Act of 1996, requires that the Bells base network-leasing prices on forward-looking costs rather than historic costs. For enterprises that rely on long distance companies and start-up carriers rather then the regional telephone monopolies for local service, the ruling means that alternative providers can continue to connect to the network at reasonable rates.

"Business users have had more competition than residential users, but the majority of that competition is based on network elements [leased to competing carriers]," said Mark Cooper, director of research at the Consumer Federation of America, in Washington. "If the Supreme Court had gone the other way, at least half of that competition would be dead."

FCC Chairman Michael Powell applauded the ruling, which upheld decisions by his predecessors. However, Powell recently initiated two proceedings that could nullify the effectiveness of the courts opinion. The proceedings contemplate releasing the Bells from their obligation to lease portions of the local network to rivals, which would make the methodology for such pricing irrelevant.

Responding to the Supreme Court decision, BellSouth Corp. pinned its hopes for relief from network sharing on the FCC. BellSouth and its sibling Baby Bells argue that they have been forced to give competitors access to the network below cost under the federal pricing scheme, which is known in regulatory circles as TELRIC, for "total element long range incremental cost." They claim that new entrants have no incentive to build their own infrastructure and that they, the incumbents, have less money to invest in upgrading their networks—an argument that has garnered considerable sympathy on Capitol Hill, where several bills are pending to relieve the Bells of network-sharing obligations when it comes to broadband services.

In upholding the TELRIC pricing formula, the high court touched on the broader argument presented by the Bells, possibly portending the direction of future judicial decisions.

"If the problem with TELRIC is that an entrant will never build because at the instant it builds, other competitors can lease the analogous existing (but less efficient) element from an incumbent at a rate assuming the same most efficient marginal cost, then the same problem persists under the incumbents methods," the court said in an opinion written by Justice David Souter. "For as soon as an entrant builds a more efficient element, the incumbent would be forced to price to match, and that rate will be available to all other competitors. The point, of course, is that things are not this simple."

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