Federal Appellate Court Orders FCC (Again) To Consider Whether ILEC UNE Rates Result In Unlawful Price Squeeze for CLECs
WorldCom and other competitive LECs (“CLECs”) recently challenged the FCC’s decision to grant Verizon authority to offer long distance services (so-called “Section 271” authority) in Massachusetts. In a decision released yesterday, the U.S. Court of Appeals for the D.C. Circuit largely rejected WorldCom’s challenge, but did grant its claim that the FCC had failed to properly consider whether Verizon’s rates for unbundled network elements (“UNEs”) may result in an unlawful “price squeeze” situation — i.e., a circumstance in which wholesale prices are set high so as to preclude CLECs from competing profitably with an incumbent LEC (“ILEC”).
Prior to the 1996 Act, former Bell operating companies (now known as the ILECs) were barred from most long-distance markets under the terms of the consent decree that broke up the Bell System in 1984. Under Section 271 of the 1996 Telecom Act, those companies can obtain approval to offer long distance services if they can show that they have complied with a list of fourteen conditions, known as the “competitive checklist.” These conditions are designed to ensure that the local phone markets in the ILEC’s service area are open for competition before the FCC grants long distance authority. One checklist item requires ILECs to offer access to UNEs at cost-based rates. Also, the FCC’s final approval of an ILEC’s 271 application requires that the FCC determine that grant of the application is in the “public interest.”
WorldCom failed to persuade the court on two of its three claims. WorldCom did, however, convince the court that the FCC had not properly considered whether Verizon’s UNE rates created the possibility of an unlawful price squeeze. The court noted that this case differed little from a prior decision in another Section 271 case, Sprint v. FCC, 274 F.3d 549 (D.C. Cir. 2001), where the court found that the FCC had “brushed off” the CLECs’ claims that the ILEC rates created a possibly unlawful price squeeze situation.
In Sprint, the FCC argued that in reviewing UNE rates it was not required to consider whether CLECs could maintain a profit under those rates, only whether the rates were cost-based. The court rejected this argument, explaining that the question is not whether the UNE pricing rules guarantee profitability, but whether they “doom competitors to failure” because rates are set so high that effective competition with the ILEC is impossible. The D.C. Circuit’s decision relied on a Supreme Court ruling that regulatory agencies have the authority, in determining wholesale rates, to consider unlawful price squeeze issues.
The court in Sprint also ruled that even where the FCC finds that UNE rates are cost based, that alone does not rebut a CLEC’s price squeeze argument. Recognizing that ratemaking is not an exact science, the court explained that under the FCC’s “just and reasonable” rate regulation approach the FCC can only determine that certain UNE rates fall within an acceptable range of rates. However, even if the rates fall within a just and reasonable range the possibility still exists that the rates are so high as to create an unlawful price squeeze situation, which would clearly not be in the public interest. Based on these determinations the court remanded the FCC’s decision and instructed the FCC to address the possible price squeeze problem.
Finding no significant differences between the facts in the Sprint case and in the (current) Massachusetts case, the D.C. Circuit also remanded the FCC’s Massachusetts decision back to the agency for further consideration of whether the ILEC’s rates were set so high as to establish an unlawful price squeeze situation.
The practical effect of the court’s Massachusetts decision is minimal. Rather than overturn the entire case, the D.C. Circuit simply ordered the FCC to give more consideration to the price squeeze question. Although the decision will not slow Verizon’s entry in to the long distance market, it does establish that where there is evidence that wholesale rates may unlawfully squeeze competitors out of the market the FCC must address the problem.
Please contact us if you would like additional information on the court’s decision, or the impact of current UNE rates on your operations.