Court Rules RBOCs Must Follow FCC Pricing Scheme

Must base local network-leasing prices on forward-looking costs.

In a ruling that consumer advocates hope will prevent a rise in the cost of telecommunications services, the U.S. Supreme Court ruled last week that the century-old RBOCs must abide by a federal pricing scheme when leasing elements of their local networks to rivals.

The scheme, developed by the Federal Communications Commission following enactment of the Telecommunications Act of 1996, requires that the Regional Bell Operating Companies base network-leasing prices on forward-looking costs, rather than historic costs. For enterprises that rely on long-distance companies and startup carriers, rather than 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 effectively nullify the effectiveness of the courts opinion. The proceedings contemplate releasing the RBOCs 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 other RBOCs 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, or total element long range incremental cost. They said 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 RBOCs of network sharing obligations for broadband services.

In upholding the TELRIC pricing formula, the court touched on the broader argument presented by the RBOCs, possibly indicating 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."