The bluebird of happiness: Circuit Court rejects FCC pricing plan

The 8th U.S. Circuit Court of Appeals took control last week of the seesaw decision process for determining incumbent carrier interconnection fees by rejecting the FCC's total element long run incremental cost, or TELRIC, pricing model and ordering the commission to develop a new model.

In what some industry pundits call a win for incumbent local exchange carriers (ILECs), the FCC's TELRIC model must be revised to reflect actual costs vs. hypothetical costs.

"It's a bluebird that dropped in our lap, and we're very happy for it and we'll try to exploit the opportunity," said Joseph Nacchio, chairman and CEO of Qwest Communications.

The United States Telecom Association called the court's decision a major victory for rural and non-rural incumbent local telephone companies that "constitutes an across-the-board repudiation of the FCC's interconnection rules."

BellSouth's reaction was more tempered. A spokesman for the company said that BellSouth saw "a slight positive for the ILECs, and by extension, a negative for the CLECs, in that all the current state commission ordered unbundling prices will need to be renegotiated - most probably at a higher level."

Competitive LECs (CLECs) saw the decision differently. The Association for Local Telecommunications Services deemed it a non-event. "The... decision has no immediate impact on the business operations of the competitive local exchange carriers. Our rates are governed by state-approved interconnection agreements that remain in effect," said John Windhausen, president of ALTS. "Unfortunately, this decision reflects another effort by the monopoly local telephone companies to stymie the growth of local competition."

There is some speculation that the consumer eventually will feel the pain of this decision. "It will ultimately result in slightly higher prices, and it will keep energies focused where it's not terribly helpful," said Nancy Kaplan, vice president of Renaissance Strategy. "I don't think it was a terribly beneficial decision."

The ruling resulted from a remand by the Supreme Court to the 8th District Court of Appeals to rule on the legality of the TELRIC pricing model. The Supreme Court last year overturned a ruling by the appeals court that gave individual states, not the FCC, jurisdiction in designing a pricing methodology.

The court of appeals vacated TELRIC, stating in its decision that, "It is clear... that Congress intended the rates to be based on the cost of providing the interconnection or network element, not on the cost some imaginarycarrier would incur by providing the newest, most efficient, least-cost substitute."

However, the court supported the FCC on two of the four grounds on which it was challenged by GTE and the ILEC community earlier this year, and it put off a decision on a third.

The court agreed with the use of a forward-looking methodology in determining costs, citing a determination by the 7th District Court that said, "Historical costs associated with the plant already in place are essentially irrelevant... since those costs are `sunk' and unavoidable." This prevents ILECs from recovering past investments in their infrastructure by including them in interconnection fees.

The appeals court disagreed with the petitioners' claim that ILECs paid a disproportionate share of the cost of providing universal service and delayed ruling on a claim that TELRIC violates the Constitution by under-compensating ILECs for the use of their property.

Two other elements of the decision appear to favor incumbent carriers. The court vacated and remanded rule 51.609, which addresses wholesale rates, saying that this rule treats the ILEC as if it were strictly a wholesaler.

"If we're going to create a competitive market in the United States, the wholesale market has to be compensatory. If we have compensatory returns on wholesale, I will be very aggressive on opening up this network," Nacchio said.

The court also vacated a ruling on rural exemptions, claiming the FCC rule disregarded two of the three statutory requirements necessary before a state commission can terminate an exemption to Section 251.

"We are particularly pleased about the reinvigoration of the rural exemption," said Roy Neel, CEO and outgoing president of the USTA.

Though the ILECs appear to have won a battle, the war goes on. "There are no clear winners or losers in [this] decision. The court clearly rejected the pricing model of the incumbent local phone companies," said William Kennard, chairman of the FCC. "We will take immediate steps to minimize any uncertainty created by this decision while continuing to foster competition and consumer choice in local phone service."