A U.S. Court of Appeals rules that the FCC line sharing order impairs incumbent carriers' ability to reap DSL profits. Will the FCC take steps to foster competition or does it intend to allow the return of government sanctioned telco monopolies?

by Patricia Fusco ISP-Planet Managing Editor [June 7, 2002]

Following the U.S. Supreme Court's January 1999 decision to remand the "impairment standard," at least as it applies to rules made by the Federal Communications Commission, federal regulators went back to the drawing board to develop new rules to encourage the deployment of advanced telecommunications services in the U.S.

The Commission came up with the "local competition order." The FCC claimed, "This Order is intended to ensure that as many companies as possible will be able to deploy new technologies on a faster, more cost-effective basis, and should accelerate the ability of residential and small business customers to access competitive broadband services from their choice of providers."

The order was in line with the Commission's directive to foster competition among telecom service providers as mandated by the 1996 Telecom Act. The line sharing order took aim at localized cartels built on monopolizing access to the local loop and blew the U.S. digital subscriber line (DSL) market wide open.

Capital expenditure in the telecom sector was flying sky high in 1999 as companies like Covad Communications, Rhythms, and NorthPoint sprung up, aggregating contracts with incumbent carriers like SBC, Verizon, and Qwest to resell DSL access to U.S. homes and businesses.

Networks were upgraded and services were extended into new markets, stock prices soared, the price of DSL access plummeted, and consumers in metropolitan markets had a choice of providers. The FCC had successfully fostered competition among advanced telecom service providers through its 1999 line sharing order—life was good. DSL providers could not keep up with the demand for business and residential services.

Then the world changed.

As a result of the price drops, telecom profits dipped. As investment in the telecom sector dried up, capital expenditure fell and network expansions ceased. Stock prices spiraled further downward. Telecom companies had assumed piles of debt to build their networks. With the market unwilling to purchase new issues of stock and capital investment down, the price of debt soared. Large volumes of debt came due just as the cost of refinancing rose and revenues fell—life was not so good.

The Commission's 1999 line sharing order was now part of the problem, instead of being part of the solution. At least that's what the U.S. Court of Appeals for the District of Columbia decided late last month when it ruled that the FCC had shown a "naked disregard of the competitive context" by ignoring the fact that cable Internet services dominate the broadband markets.

Disorder in the order
Specifically, the Court ruled that the 1999 FCC order "materially diminished" incumbent carriers' ability to provide services in some areas of the country. Citing instances where ILECs were prohibited from charging above-cost rates for unbundled network elements, the court ruled that the line sharing order actually provided CLECs with a competitive advantage and therefore "impaired" incumbent carriers financially.

Incumbent carriers successfully argued that unbundling at FCC-mandated prices reduced the incentive for innovation and investment in petitioners' facilities. Their reasoning, of course, is that a regulated price below true cost will reduce or eliminate the incentive for an ILEC to invest in innovation because it will have to share the rewards with CLECs.

In the end, the court felt that the entire argument about expanding competition and investment boiled down to the Commission's belief that "more unbundling is better." Of course, Congress did not authorize so open-ended a judgment—it made "impairment" the touchstone.

The court decided to vacate and remand the 1999 FCC order altogether.

The ruling gives the Commission 45 days to respond before its line sharing order is vacated.

Additionally, interested parties have 90 days to file an appeal of the D.C. decision. However no one, including AT&T, a company that intervened in defense of the line sharing order alongside FCC attorneys, will contest the issue with the U.S. Supreme Court unless the Commission does so, first.

According to AT&T Spokesperson James McGann, the likelihood that the Supreme Court would grant a writ of certiorari is nearly nil if the FCC does not also file to defend the line sharing order.

Besides asking the Supreme Court to review the lower court's ruling, the Commission could request that the U.S. Courts of Appeal hear the case en banc. Rather than accepting the decision of the three judges that ruled in this matter, the Commission could ask for a decision from all of the D.C. circuit court judges. According to FCC Spokesperson Michael Balmoris, the Commission has not take either action, to date.

Go to page 2: Case for Denial >