DATE: Saturday, July 19, 1997               TAG: 9707190216

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: STAFF AND WIRE REPORT 

DATELINE: WASHINGTON                        LENGTH:  113 lines

COURT RULES AGAINST FCC IN SETTING PHONE RATES THE AGENCY PLANS TO APPEAL, BUT THE RULING COULD DELAY COMPETITION FOR LOCAL SERVICE.

A federal appeals court Friday threw out key parts of new regulations aimed at opening the $100 billion local phone market to long-distance companies and other rivals.

The 8th U.S. Circuit Court of Appeals said the Federal Communications Commission exceeded its authority by setting prices for would-be rivals to lease pieces of existing local phone networks or buy local service and resell it to consumers.

Such pricing authority, the St. Louis court ruled, resides with individual states.

The FCC's pricing rules, adopted last August, were suspended by the same court and never took effect.

The agency plans to appeal the ruling to the Supreme Court.

``It is a very regrettable setback for the purpose and intent of the 1996 Telecommunications Act,'' said FCC Chairman Reed Hundt. ``In several significant respects the decision is wholly inconsistent with the mandate and intent of Congress.''

State regulators have been moving forward with their own pricing rules in an effort to bring local phone competition to customers.

In Virginia, the State Corporation Commission held a series of hearings last fall, heard testimony from representatives of Bell Atlantic, AT&T and MCI, and then settled the matter. The SCC ordered Bell Atlantic to lease its local network to long-distance companies and other prospective competitors at a discount of 21.3 percent.

The discount rate is important, because the long-distance giants plan initially to compete for Bell Atlantic's local phone customers by leasing the Bell network and reselling it.

The appeals court's Friday ruling confirmed a state's authority to conduct such hearings, and settle the contentious questions presented by the telecommunications act, an SCC spokesman said.

``The opinion affirms states' authority over intrastate pricing,'' SCC spokeswoman Andrea Leeman said, ``which basically means what we've been doing and are doing is what we're supposed to be doing.''

In the 8th Circuit case, the regional Bells challenged the pricing structure laid out by the FCC.

Communications experts offered mixed opinions on whether the ruling would delay or accelerate efforts to give local phone customers multiple companies to buy local phone service from, just as they do now with long-distance service.

David Roddy, chief telecommunications economist for Deloitte & Touche Consulting Group, predicted the ruling would delay local phone competition.

``For all practical purposes, your local telephone company now will be your local telephone company in 10 years,'' he said.

But AT&T, which backed the rules, said it's too early to tell.

BellSouth Corp. said the decision won't affect the pace of competition. ``We've been negotiating all along with competitors,'' said spokesman John Schneidawind.

And Hundt predicted, ``There's a major potential to slow down the pace. . .

The FCC's rules were intended to carry out provisions in the Telecommunications Act deregulating those industries. The law made it possible for local and long-distance companies to get into each other's businesses, subject to state and federal regulatory conditions.

``We conclude that the Act plainly grants the state commission, not the FCC, the authority to determine the rates involved in the implementation of the local competition provisions of the Act,'' the three-judge panel said.

GTE Corp., backed by regional Bell telephone companies, led the attack on the pricing provisions, which went to the heart of the FCC's rules.

``The Eighth Circuit has thwarted the FCC's massive power grab,'' said GTE General Counsel William Barr, who argued the case. ``The FCC's rules were unfairly biased against local exchange companies.''

But long-distance carrier MCI called the ruling ``a setback for American consumers, who look forward to the day when they can choose their local telephone company.''

Local phone companies argued that the FCC's pricing rules forced them to give competitors, such as AT&T and MCI, access to local networks at prices well below their actual costs.

The FCC had defended its jurisdiction to set prices, saying the rules set a national policy to guide states into the new era of competition but gave states leeway to make decisions that would best serve local customers.

FCC Deputy General Counsel Chris Wright, who argued the case in court, asserted that the agency has the authority to issue and enforce the pricing rules under both the Communications Act of 1934 - the core law on telecommunications policy - and the 1996 Telecommunications Act, which is now part of the 1934 law.

Hundt said, ``For the first time in the history of the Federal Communications Commission - for the first time in 63 years - a court has ruled that when Congress writes a specific statute, we do not necessarily have the authority to write a rule to implement it.''

Roddy said the ruling will make it more difficult for would-be rivals to break into the local phone business because they'd have to go to regulatory commissions in each state - a lengthy and expensive process.

``This is the brick wall at the end of the tunnel.''

But AT&T doesn't necessarily believe the court's action will automatically delay its ability to offer local service. That's because since the FCC's rules were suspended last fall, the company has been working with states on the terms and conditions for entry into the local phone business.

``Today's decision does not change the prices and other conditions that have been established in the states,'' said AT&T's vice president of law and public policy, Mark Rosenblum. ``These state decisions are largely consistent with what the Act and the FCC's rules would prescribe.''

Still, AT&T said, national, uniform pricing guidelines are better than a patchwork of state rules because they make it easier to develop a nationwide strategy to deliver local service. AT&T contended the FCC has the legal authority to set such rules and was disappointed by this part of the court's ruling. MEMO: Staff writer Lon Wagner contributed to this report. ILLUSTRATION: Graphic

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