U.S. Appeals Court Strikes Down FCC "Triennial Review" Order

As expected, and as feared by competitive local telecom companies (CLECs), the U.S. Court of Appeals for the District of Columbia Circuit today struck down key portions of the Federal Communications Commission’s “Triennial Review Order” (TRO).

Among many other things, the TRO had kept in place—subject to state regulatory proceedings—rules that require incumbent local carriers (“ILECs”, including the Regional Bell Operating Companies or “RBOCs”) to lease certain key unbundled elements of their networks (“UNEs”) to competitors at cost-based prices. Thus, those competitors were allowed to serve “mass market” residential and small business customers without duplicating the ILECs’ network facilities, on the ground that the CLECs would be “impaired” in serving those customers without access to those ILEC UNEs. The Court ruled that, under the Telecommunications Act of 1996, the FCC could not “subdelegate” any part of this “impairment” inquiry to state regulators. The Court further found that the FCC’s own “provisional” nationwide finding of impairment regarding certain UNEs—in particular, mass market circuit switching and dedicated transport elements (DS1, DS3 and dark fiber)—was itself flawed. The Court accused the FCC of ignoring the Court’s previous admonition that it must consider narrower alternatives urged by the ILECs (e.g., a “rolling” hot-cut process that would allow for temporary CLEC access to switching) and the agency’s own findings in other proceedings (e.g., finding in the TRO that CLECs are impaired without access to the local switching UNE because ILECs could not provide adequate capabilities for “hot cuts” to CLEC facilities, yet reached contrary conclusions in granting RBOCs long-distance under Section 271 of the Act).

The Court rejected nearly all of the CLECs’ appeals, most notably, upholding the FCC’s elimination of line-sharing and its decision to not require ILEC unbundling of enterprise local switching and most broadband and hybrid loops. The Court also affirmed the FCC’s view that any unbundling requirements under Section 271 of the Act are not subject to cost-based (TELRIC) pricing rules and that an ILEC need not combine those elements for CLECs. Finally, the Court: (1) reversed the FCC’s decision not to take the availability of tariffed ILEC special access services into account in finding that wireless carriers are impaired without access to ILEC dedicated transport, and ordered the FCC to reconsider that finding; (2) vacated and remanded the FCC’s decision that competitors are not entitled to unbundled enhanced extended loops (“EELs”), finding fault with the agency’s distinction between “qualifying” and “non-qualifying” services; and (3) remanded for further findings the FCC’s decision to exclude entrance facilities from its list of UNEs.

The Court criticized but did not strike down—at least, not yet—the FCC’s revised standard for finding “impairment.” Instead, it said that the agency could not justify its blanket nationwide findings, and offered “general observations” that will certainly limit the FCC’s discretion in attempting on remand to satisfy the Court’s concerns. Among other things, the Court stated that the FCC’s pronouncement that impairment occurs when lack of access to a UNE would “make [a CLEC’s] entry into a market uneconomic” is too open-ended. (Said the Court: “Uneconomic by whom? By any CLEC, no matter how inefficient?”) The Court also said that the FCC must consider intermodal competitive alternatives.

Where from here?

The Court stayed the effectiveness of its rulings only for a maximum of 60 days, finding that deadline “appropriate in light of the Commission’s failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings.” The FCC already has indicated that it intends to appeal this decision to the U.S. Supreme Court and presumably will ask that Court to stay the appeals court’s ruling in the meantime. If no further stay is granted, the FCC will be under enormous pressure to make decisions that would almost certainly undercut the ability of competitive service providers to lease key network elements from ILECs at wholesale prices. DWT will keep you advised as further developments occur.