Federal court blocks Illinois rate hike law

The U.S. Court of Appeals for the 7th Circuit today upheld the permanent injunction issued by a federal district judge in June that prevents enforcement of a controversial Illinois law sought by SBC Communications that would increase wholesale rates in the state.

The law would require the Illinois Commerce Commission to use actual costs when determining wholesale rates. In addition, it would have required the ICC to adjust the fill factor and depreciation components of the Federal Communication Commission’s TELRIC (total element long run incremental cost) formula used by state commissions to set such rates. The net result would be a minimum 50% wholesale rate increase.

Federal District Judge Charles Kocoras–who chaired the ICC from 1977 to 1979—previously had ruled the Telecom Act gives state commissions, not state legislatures, the sole authority to arbitrate interconnection disagreements between incumbents and competitors. He agreed the Illinois law contradicts TELRIC rules, which direct state commissions to consider only the forward-looking costs of operating and maintaining a hypothetical "most efficient" network.

The appeals court ruled the Illinois General Assembly erred by enacting a law that addressed only the fill factor and depreciation components, because while Congress allowed for federal judicial review of wholesale rates, it did not provide for a review of individual factors influencing those rates. "Their propriety should not have been evaluated in isolation from the other components of a TELRIC rate," the court said.

However, the appeals court sided with SBC over the role of state legislatures in rate setting, saying the Telecom Act contains no language that would bar them from that role. The court also said the ICC’s application of TELRIC in response to the law conflicted with both the formula and the Telecom Act. Specifically, the court said the ICC erred in adjusting only the fill factor and depreciation factors, as directed by the law, while "setting in stone" all other rate-setting factors. "A rate for unbundled network elements generated by combining some factors that are six years out of date with two other factors that are not forward-looking cannot possibly satisfy federal law," the court said. The net effect is that SBC still is charging wholesale rates that were first established in 1997, the court said.

The court also said the Illinois General Assembly was free to pursue rate-setting legislation provided it addresses all rate-setting factors as part of a "comprehensive process designed to generate a rate that complies with TELRIC." In the meantime, it directed the ICC to reinstate the rate setting proceeding submitted by SBC in December 2002 that was scuttled when the law was enacted in May.

"A rate that is long out of date, as this 1997 rate is, frustrates the goals of TELRIC every bit as much as does a rate generated under the flawed state legislation," the court said.

AT&T called the ruling a significant rebuke of the Bell companies’ "anticompetitive crusades."

"[It] should send a clear message to their supporters in other states who are considering similar anti-consumer legislation," said Mike Tye, regional vice president of law and government affairs, in a statement.

SBC lllinois President Carrie Hightman said in a statement that the carrier was disappointed in the ruling, but was encouraged that the court acknowledged "the legitimate role" of state legislatures in wholesale rate-setting proceedings and that the current rates are "long out of date" and must be updated "speedily."