D.C. CIRCUIT VACATES FCC'S DSL LINE-SHARING, UNE REMAND ORDERS

FCC Chmn. Powell said decision directed Commission to undertake more focused examination of Act’s unbundling obligations, and agency in its Triennial Review notice is examining its unbundling framework, including line-sharing rules. “We will be exploring many of the issues that the court raised in its opinion in the coming months as we evaluate the record in this proceeding,” Powell said. “While we continue to evaluate the court’s opinion and consider all the Commission’s options, in the meantime, the current state of affairs for access to network elements remains intact.”

D.C. Circuit said 1999 Supreme Court ruling in AT&T v. Iowa Utilities Board “plainly recognized” that unbundling wasn’t “unqualified good” and FCC needed to apply limiting standards related to goals of Telecom Act. Court rejected FCC arguments that it should focus only on DSL market in evaluating competition in market because that was service CLECs sought to offer when they requested line-sharing from ILECs. Nothing in Telecom Act gives Commission “license” to inflict types of economic costs cited by Supreme Court Justice Stephen Breyer from mandatory unbundling, including disincentives to R&D by both CLECs and incumbents, court said. “The Commission’s naked disregard of the competitive context risks exactly that result,” it held. Circuit Judge Stephen Williams wrote unanimous decision, joined by Judges Harry Edwards and Raymond Randolph.

On UNE remand order, D.C. Circuit’s strongly worded ruling said “gap in the Commission’s reasoning is the greatest” when it comes to markets where ILECs must charge above-cost rates to offset losses in subsidized markets. It said competitive impairment could vary between markets in which state PUCs imposed subsidies such as universal service. Court said that usually created undercharges for rural and residential subscribers and “overcharges” for urban or business users in more densely populated areas: “The Commission never explicitly addresses by what criteria want of unbundling can be said to impair competition in such markets, where, given the ILECs’ regulatory hobbling, any competition will be wholly artificial.” Telecom Act required that when evaluating which network elements be made available by ILECs, FCC consider whether failure to provide access would impair ability of competitor seeking access to provide services it wanted to offer.

ILECs had argued that FCC’s UNE remand order hadn’t fully complied with Supreme Court’s mandate because it didn’t impose “meaningful” limits on Bell unbundling obligations. They cited requirement that Commission consider whether competitors had alternatives to using ILECs’ UNEs. FCC order, which created national list of UNEs, said alternatives wouldn’t be considered unless they were available throughout geographic areas and customer categories. The ILECs said that meant, in essence, that they couldn’t stop unbundling any element until alternatives to that element were available everywhere. “To the extent that the Commission orders access to UNEs in circumstances where there is little or no reason to think that its absence will genuinely impair competition that might otherwise occur, we believe it must point to something a bit more concrete than its belief in the beneficence of the widest unbundling possible,” D.C. Circuit ruled. FCC had made “little” effort to “pin ‘impairment’ to cost differentials based on characteristics that would make genuinely competitive provision of an element’s function wasteful,” court said.

Court Questions Cable Exclusion in Line-Sharing

On line-sharing order, which judges also vacated, court referred to FCC’s own findings on state of broadband competition to back up why it thought Commission had failed to consider relevance of competition outside of DSL services. Line-sharing requirements gave CLECs trying to provide data service upper portion of local copper loop, instead of making them pay for whole line. Sec. 706 report of FCC, current as of June 2001, found cable companies had 54% of high-speed lines, compared with 28% for asymmetric DSL. In local competition order under review in this case, court noted FCC had said CLECs and cable companies appeared to be leading ILECs in rollout of advanced services. Court disagreed with FCC’s reading of Sec. 251 of Telecom Act, which requires agency to consider whether failure to provide access to network elements would impair ability of carrier seeking access “to provide the services that it seeks to offer.” FCC believed it was justified in focusing only on DSL because that’s what CLECs sought to offer under line-sharing, court said, calling that conclusion “quite unreasonable.”

Reaction of Bell companies to decision was predictably upbeat. “Now the FCC must follow the clear standards set forth in the law and must take into account whether or not a network element is indeed necessary for competition,” SBC Gen. Counsel James Ellis said. “This will provide clear guidance to the FCC during its ongoing triennial review and broadband proceedings.” USTA Pres. Walter McCormick said the ruling reinforced the message the group had been telling the FCC: “With regard to unbundled network elements, the Commission must apply basic economic principles and take into account the availability of alternatives in a market.” McCormick said that because FCC had created regulatory framework for broadband services, it must consider “intermodal competition,” including cable, satellite and wireless platforms “and acknowledge that wireline carriers are not the dominant provider in today’s broadband marketplace.” BellSouth Vp Governmental Affairs Herschel Abbott said decision “lends support” to the direction that FCC appeared to be heading with its reviews of rules affecting Bell networks. Referring to Triennial Review, he said: “The Commission has launched a fact-based proceeding to see which rules are really necessary to spur competition and which can be abandoned because competition has already taken hold. The court decision seems to support going down that path.” Abbott said BellSouth was “confident” FCC would follow ruling’s suggestion “that similar and competing technologies be treated equally.”

While Covad said court was “off base” in its decision, founder and Gen. Counsel Dhruv Khanna said it “ultimately shouldn’t change a thing for Covad.” He said CLEC had contractual arrangements with all Bell companies and he thought line-sharing would remain in place. “The only reason that the court cited for remanding the line-sharing mandate back to the FCC is to allow the Commission to consider the availability of cable broadband service in its decision,” Khanna said. “Since the FCC unanimously supported line sharing originally, including the current chairman, we feel confident that the Commission will remain committed to keeping line sharing permanently.” ALTS also expressed optimism about extent to which remand order might not be disruptive to previous FCC decisions. “The Court of Appeals did not disagree with the list of unbundled network elements; it simply questioned the scope of the FCC’s competitive analysis in explaining its decision,” ALTS Pres. John Windhausen said: “Except for line sharing, the unbundling rules were not vacated.” He said FCC already was reviewing UNE issues as part of its Triennial Review proceeding. “The guidance provided by this decision should make it even more likely that the FCC’s Triennial Review decision will be sustained on appeal.”

Decision pushes FCC in direction where it already appeared to be heading and bolsters Bell arguments for trimming the UNE list and line-sharing requirements, Legg Mason said in research report Fri. Legg Mason said Supreme Court recently upheld low-cost TELRIC (Total Element Long-Run Incremental Cost) rates. Unbundling requirements of UNE rules had made them available to CLECs at TELRIC rates. Legg Mason said: “What the Supreme Court giveth CLECs, the D.C. Circuit and the FCC may taketh away.” On FCC’s review of UNE rules, ruling isn’t necessarily decisive, research note said. “The FCC still has to make policy calls on what elements should be unbundled and in what markets that should occur.” On line- sharing, Legg Mason said decision was in line with view of FCC Chmn. Powell that cable modem broadband service should have been part of earlier evaluation. It said Powell as commissioner had voted for line-sharing order, and including cable in analysis didn’t necessarily mean policymakers would conclude that line sharing shouldn’t be unbundled. “Nonetheless, the decision currently improves the odds that line sharing will be cut back in some manner,” Legg Mason said. Line-sharing decision also calls into question ILECs’ obligations to honor existing line-sharing contracts, development that could be particularly important to Covad, report said.