Court rebuffs FCC's new telecom rules

In a sweeping order combining challenges from big local phone companies and their competitors, the U.S. Court of Appeals for the District of Columbia said that the Federal Communications Commission was wrong to force local phone companies to share specific parts of their networks with rivals like AT&T or MCI, as well as to push important decisions about the telecommunications competition to the states.

But judges also said regulators had been justified in saying that the big phone companies would not have to share or "unbundle" their new advanced broadband networks, which use technology such as fiber optics, with potential competitors. Like the FCC, judges said that other rivalries, including that from cable broadband services, would provide ample competition for next-generation broadband customers.

"Unbundling would skew investment incentives in undesirable ways, and...competition from cable ensures the persistence of substantial competition in broadband," the court wrote.

The decision and the 2003 FCC order that sparked it are aimed at establishing the competitive ground rules for phone and Internet competition well into the future. The outcome will help determine how much customers pay, how many companies can operate in any given business, and what kinds of services will be available.

But these rules have been the source of continual conflict and litigation since the passage of the 1996 Telecommunications Act by Congress. Virtually every FCC attempt to write rules enforcing competition in the local phone companies' previous monopoly territories has prompted years of lawsuits and bitter criticism from all sides.

Last year's so-called Triennial Review decision was no different. The former Bell companies complained angrily about elements of the order that would continue to force them to share elements of their networks with rivals such as AT&T. Meanwhile, small companies and consumer groups protested against the FCC's broadband decision, saying that the lack of competition on future high-speed networks could lead to higher prices and poor service.

On Tuesday, consumer groups again said that the D.C. court's ruling upholding the advanced broadband decision was dangerous, since cable and telecom giants alone wouldn't produce enough competition to serve consumers' interests.

"The implication to the consumer is that the Bells aren't going to let people use their networks, and we'll have two crummy incumbents who don't compete with each other a great deal," said Mark Cooper, the director of research for Consumer Federation of America. "There are not enough ISPs competing for my business, and that's the competition that drove and created a consumer friendly Internet. That's what we're losing."

The court also upheld the FCC's ruling that "line sharing"--a process that has helped drop DSL (digital subscriber line) broadband prices from rival companies such as Covad Communications Group--could be phased out over the next few years.

The FCC's wrong number
On the traditional telephone side, the court threw out the FCC's mandate that big phone companies provide full bundles of "network elements" to rivals such as AT&T and MCI, which those companies had used to provide their own local phone offerings. It also said that the FCC had to make hard decisions about competition in local markets, instead of leaving those up to state regulators.

The decision is already leading to considerable confusion, including conflicting statements from the FCC commissioners themselves as to what step comes next.

A trio of FCC commissioners said they would seek a stay of the ruling, contending that their order had helped spur the "one rate" local and long-distance plans offered by local phone companies and their rivals.

"We believe that the rules preserve competition in a manner that is lawful and recognize the important role that states have historically played," Commissioners Michael Copps, Kevin Martin and Jonathan Adelstein said in a joint statement.

In a sign of how completely the issue has split the Commission, FCC Chairman Michael Powell?-who had dissented from much of the 2003 order--released his own statement praising the court's action and hinting at a different course for the regulatory body.

"My fellow Commissioners and I need to expeditiously get to work to produce a set of judicially sound rules, once and for all," Powell said in his statement. "I have already directed the staff to begin preparing new rules that will provide the sorely needed clarity and guidance essential to bringing consumers the benefits they were promised and deserve."

The big local phone companies quickly hailed the ruling as a victory. They have long said that forcing them to sell network access to their rivals hampered investment and put them at a disadvantage to potential competitors such as cable companies.

"We applaud the court's decision, which allows companies like Qwest to put their full focus on meeting the needs of customers," Steve Davis, a senior vice president at Qwest Communications International, said in a statement. "Today's decision will soon free customers of mandates that force them to subsidize the operations of Qwest's competitors."

Bell rivals, critics and consumer groups contended that the ruling would be bad for ordinary customers, however.

"Today, the D.C. Circuit leveled a staggering blow to the benefits of local telephone competition," said Sen. Ernest "Fritz" Hollings, D-S.C., one of the authors of the 1996 telecommunications law. "Within a few short months, tens of millions of Americans could face higher prices and fewer choices as competitive alternatives are eliminated due to the meddling of an activist court."

MCI said it would seek an emergency stay and review by the U.S. Supreme Court.

The court said the order would not take effect for 60 days, giving the FCC time for an appeal or a request for a longer stay. It showed little patience for further review, however.

"This deadline is appropriate in light of the Commission's failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings," the court wrote.

CNET News.com's Jim Hu contributed to this report.