High Court Hears Phone-Rate Case

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New phone and data companies need cheap rates to lease access lines from
phone incumbents in order to compete, but how low those rates should be set was
the question before the U.S. Supreme Court Wednesday.

The Telecommunications Act of 1996 set the stage for local phone and data
competition after a century of monopoly, handing the Federal Communications
Commission the role of establishing the rates new entrants must pay.

But Verizon Communications told the high court the FCC rate rules had to be
set aside because they failed to fairly compensate the company.

Verizon attorney William Barr, a former U.S. attorney general, said the FCC
rates contained a 'systemic defect' in that the agency ordained that rates had
to be based on the most efficient technology extant -- whether or not that
technology was actually deployed -- and that the rates had to be shorn of costs
previously incurred to build the network.

'We are entitled to the value of what we have to spend,' Barr said.

U.S. Solicitor General Theodore Olson, defending the FCC's rules, said the
agency followed the law by setting rates designed to promote competition, lower
prices and deployment of new technology.

'It may not be perfect, but in this rate-setting area, it's the way it should
be done,' Olson said.

Several justices -- including Anthony Kennedy and Antonin Scalia - suggested
that the FCC's rules were arbitrary because the inevitable result was that new
entrants would receive below-cost rates. 'That just has to be,' Kennedy
said.

Scalia indicated that Olson was defending a regulatory 'wheel of fortune'
that provided no certainty as to whether rates would fairly compensate Verizon
and other incumbent phone companies.

Olson replied that Verizon was exaggerating the 'draconian impact' of the
FCC's rules. He also argued that Congress didn't promise that the phone
incumbents would 'recover every nickel they invested.'

In 1996, the FCC issued its rate rules, but the specifics had to be
determined by state regulators when they were called upon to arbitrate pricing
disputes between phone incumbents and their new competitors.

During the 90-minute oral argument, several justices pressed Barr on whether
or not state regulators could ensure that phone incumbents were adequately
compensated.

Chief Justice William Rehnquist said FCC rules 'seem to allow the state
commission to do what you want done.'

Justices David Souter and Kennedy indicated that it might be premature to
toss out the FCC rate rules prior to hearing a case that actually challenged
rates established by the states. 'Our cases say we have to wait until we see
what the rate is,' Kennedy said.

The debate was loaded with the fine points of utility regulation, including
depreciation schedules and return rates on invested capital. Barr emphasized
repeatedly that the FCC rules took billions of dollars in invested capital and
slashed them by 50 percent in calculating network-leasing rates.

Eight justices heard the case. Justice Sandra Day O'Connor did not
participate, likely due to a financial conflict of interest. A 4-4 decision
would mean that the lower-court decision would stand.

In the U.S. Court of Appeals for the Eighth Circuit, Verizon won on the issue
that rates have to be based on the network actually built, and not on the FCC's
hypothetical most-efficient network.

However, the Eighth Circuit upheld the FCC's decision requiring states to set
rates based upon a forward-looking pricing model that excluded historic
costs.

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