FATE OF TELRIC RULES RESTS WITH HIGH COURT

Supreme Court justices begin hearing arguments this week for a case that could undermine the financial plans of most competitive carriers.

At issue is the FCC's standard for determining the prices incumbent carriers charge competitors to use their networks, a formula known as total element long-run incremental cost (TELRIC). Incumbents have long opposed TELRIC, a component of the Telecom Act, claiming it does not let them recover installation costs.

"There is a whole world in the American economy that sells at resale prices-they're called wholesalers, and they manage to make a profit," said Herschel Abbott, BellSouth vice president of governmental affairs.

Competitive carriers contend that they should pay only for the forward-looking costs incumbents bear. Competitive local exchange carriers' financial struggles have added a sense of urgency to the case. "The CLECs are screwed if the Supreme Court decides TELRIC isn't OK because they're all getting squeezed by costs," said Courtney Quinn, senior analyst for The Yankee Group.

Indeed, a loss in the Supreme Court case would be a brutal blow for CLECs, but it won't happen, said Jon Canis, a partner in the Washington office of Kelley, Drye and Warren.

"It would not make sense to interpret [the Telecom Act] in the way that the incumbent LECs are arguing," he said. "The likelihood that they could win at the Supreme is diminimis-0%."

That level of confidence stems in part from a similar case involving TELRIC that reached the Supreme Court two years ago. In AT&T vs. Iowa Utilities Board, the Supreme Court overturned the 8th Circuit in a case regarding the FCC's authority to establish a rate such as TELRIC. This year's case addresses whether TELRIC is an appropriate standard.

HOW THE JUSTICES VOTED IN AT&T VS. IOWA UTILITIES BOARD The Supreme Court ’s January 1999 decision on AT&T vs. Iowa Utilities Board largely reaffirms the FCC’s local competition rules consistent with the Telecom Act. Part I states that the FCC has general jurisdiction to implement the 1996 Act ’s local competition provisions. Part II states that the FCC ’s rules governing unbundled access are, with the exception of Rule 319,consistent with the 1996 Act. Part III states that the FCC has the right to identify the unbundled network elements.
SANDRA DAY O’CONNER	I.Recused II.Recused III.Recused
JOHN PAUL STEVENS	I.Consented II.Consented III.Consented
RUTH BADER GINSBURG	I.Consented II.Consented III.Consented
DAVID SOUTER	I.Consented II.Consented III.Consented
ANTHONY KENNEDY	I.Consented II.Consented III.Consented
ANTONIN SCALIA	I.Consented II.Consented III.Consented

Given the Supreme Court's overwhelming support of the FCC's power under the Telecom Act in the previous case, most believe the FCC's actions will be upheld (see table at left).

"It's really somewhat dangerous for the court to be in a position of substituting its judgment for the expert agency's about whether TELRIC or some other standard is the right method for determining interconnection rates," said Kelly Cameron, a former FCC attorney who is now a partner in the Washington law firm of Powell, Goldstein, Frazer & Murphy.

On the surface, a Supreme Court decision supporting the FCC would be good news for CLECs. But TELRIC has been a mixed blessing, according to Mitchell Brecher, a former FCC attorney who now represents CLECs as a shareholder in the Washington law firm of Greenberg Traurig.

Instead of building networks, competitors were encouraged by investors to pay cheap TELRIC rates to enter the market more quickly, Brecher said. As a result, CLECs essentially are reselling services off the same network as the incumbent, which is a questionable form of competition, he said. "Whether there is a competitive market is not going to be driven by how many competitors are out there," Brecher said.

THE DISSENTERS WERE…
CLARENCE THOMAS	I.Consented II.Dissented III.Consented
STEPHEN BREYER	I.Consented II.Dissented III.Consented
WILLIAM REHNQUIST	I.Consented II.Dissented III.Consented

But ILECs see TELRIC pricing as a money-losing deal and a major disincentive to cooperating with competitors. TELRIC also reduces incumbents' desire to expand their networks-a situation that many analysts believe is the underlying cause of the downturn in the telecom industry, Quinn said.

"If you're a CLEC and you can lease facilities at prices that are below costs, you'll never have the incentive to build your own facilities," Abbott said.

Given the current difficulties of most competitors, some industry observers question whether the case will give the Supreme Court the opportunity to direct Congress and the FCC to rewrite the controversial Telecom Act. Legal analysts say no.

"The costing thing is one of the cleaner aspects of the act," said Dick Metzger, vice president of governmental affairs for Focal Communications.
Glenn Bischoff and Amalia D. Parthenios contributed to this report.