Court ruling may boost resale

A federal court ruling last week on unbundled network elements won't slow local telephone competition, but it could prompt more companies to enter the market by resale, executives and analysts said.

The Oct. 14 decision by the Eighth Circuit Court of Appeals in St. Louis-the latest action in a series of legal challenges to federal regulators-vacated an FCC rule involving unbundled network elements. In a victory for the Bell companies, GTE and other incumbent telcos, the court found that they can't be forced to recombine network elements such as local loops and tandem switches and lease them at deep-discount prices to new competitors.

The ruling is a defeat for long-distance carriers and the Federal Communications Commission, which had argued that having incumbent local exchange carriers recombine and sell network elements to competitors upon request would speed local competition.

FCC Chairman Reed Hundt vowed an appeal to the U.S. Supreme Court. "This order permits monopoly local telephone companies to dismantle their networks for no reason other than to subvert competition," he said in a statement.

Under the court decision, new competitors can still lease as many unbundled network elements as they want. But the job of bundling the elements, either as a whole or with rivals' own equipment, to provide actual phone service is left to the rivals. If incumbents take on the job, they can charge more than the FCC would have allowed.

"The court basically said you can't buy all the [network elements] and ask the LECs to combine them. That's really resale," said Edward D. Young III, Bell Atlantic associate general counsel.

"The effect of this decision is to establish a distinction between resale and [unbundled network elements]. The FCC had obliterated that distinction," said Mary McDermott, vice president of legal and regulatory affairs at the U.S. Telephone Association.

It costs new competitors more to resell local services than to lease network elements because of the different discount rates that state utility commissions set. On average, resale discount rates run about 20% off incumbents' retail prices, and about 50% off unbundled network element rates, said Young. Resellers also pay access charges, while lessors of network equipment do not.

The decision could also change how companies get into the local phone business. "It may be a little more expensive for them to enter the market. It may cause a shift toward resale as an entry strategy," said Young.

NEXTLEVEL EXIT? NextLevel Systems is considering selling its NextLevel Communications telephony products division. The company also announced that Richard Friedland has resigned as chairman and CEO. Ed Breen, president of the Broadband Networks Group, has been appointed president and acting CEO.

EAST BUYS INTO WESTERN Hutchison Telecommunication Ltd. last week agreed to buy a 5% stake in Western Wireless Corp. for $74 million. Hutchison Telecommunications also will pay $248 million for a 19.9% stake in Western PCS Corp.

HEILMEIER GIVES NOTICE George H. Heilmeier will retire as chairman and chief executive officer of Bellcore when the company's sale to Science Applications International Corp. closes later this year.