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Baby Bells win FCC victory

Local telephone companies win a major victory when an appeals court overturns a Federal Communications Commission ruling that requires them to share lines with their competitors.

Local telephone companies won a major victory Friday when an appeals court overturned a Federal Communications Commission ruling that requires them to share lines with their competitors.

"This eliminates line sharing, which has been a tremendous fiscal pain in the neck," said Bill McCloskey, director of media relations for BellSouth.

Other Baby Bell companies like Verizon Communications and SBC Communications also consider the ruling a resolution to an issue that's been going on for years. Friday's decision by the U.S. Court of Appeals for the District of Columbia supported the Bells' challenge to a 1999 ruling from the FCC.

Analysts say the deal is a victory for a class of telecom companies known as incumbent local exchange carriers (ILECs), but it could be a setback for interexchange carriers (IXCs) and competitive local exchange carriers (CLECs), particularly Covad Communications. The ruling will also strengthen telecom companies' position against cable companies. But it's not the end of the regulatory battle, by any means, analysts added.

The ruling will likely open up two more areas of controversy: It is likely to delay the FCC review of its rules on other unbundled network elements, and it will set up a battle over whether individual states can make up their own rules about bundling beyond what the FCC mandates.

"Today's decision is, like a number of court decisions, simply a battle in a much longer war," said Blair Levin, an analyst at equity research firm Legg Mason.

The ruling also overturned a 1999 rule that required dominant carriers to share a portion of a local line into a home so that the customer could have a different provider for DSL (digital subscriber line) service, but keep their local telephone provider.

"We are gratified that the court particularly recognized the level of competition Bell companies face from cable companies to provide broadband services," Herschel Abbott, BellSouth's vice president governmental affairs, said in a prepared statement.

But AT&T called the ruling "out of step with recent positive developments promoting competition" and said in a prepared statement that the ruling "will bring added uncertainty to an industry that is just beginning to show signs of a rebound." Unbundling of technologies through line sharing is necessary to competition, the company said, adding that it will work "diligently with the FCC" to demonstrate that.

Levin wrote in a research note that "the ruling could also disrupt the plans of AT&T and WorldCom--which purchased the assets of DSL providers NorthPoint Communications and Rhythms NetConnections, respectively--to move forward with DSL offerings to consumers and businesses."

The ruling also overturned a 1999 rule that required dominant carriers to share a portion of a local line into a home so that the customer could have a different provider for DSL service, but keep their local telephone provider.

Cable companies have had an advantage, since the FCC doesn't require them to share their lines. Part of Friday's decision said that the FCC's earlier ruling wasn't acceptable because the commission hadn't considered the presence of cable modem service in its decision that line sharing was necessary for competition.

Levin also said the ruling leaves open the question of the ongoing obligation of ILECs to honor contracts for line sharing which could have a negative impact on Covad. But Covad representatives said they didn't expect to see any effect from the ruling.

The decision only sends the issue back to the FCC, which "has a history of strong support for line-sharing policy," Covad said in a statement.

"We believe we have a continued right to line sharing under our agreements with the phone companies and antitrust law," Covad Executive Vice President and General Counsel Dhruv Khanna said.

Levin agreed that the ruling was not definitive, but said FCC Chairman Michael Powell is moving toward a position that is more favorable for the Baby Bells.