Supreme Court Upholds FCC Network Rates

Competitive Local Exchange Carriers (CLECs) and consumer advocates declared victory Monday after the U.S. Supreme Court backed the
Federal Communications Commission’s (FCC) rate-setting formula for unbundled network elements (UNEs) like loops and other services.

“The Supreme Court today has upheld one of three cornerstones of local phone competition; pricing of unbundled networks,” said Mark
Cooper, director of Research at the Consumer Federation of America (CFA). “The FCC must not undermine this decision in its ongoing
proceedings by allowing the monopoly local phone companies to withhold network elements. It is time for the FCC and the states to
fully and finally open all local phone markets by combining today’s Supreme Court decision giving the go ahead for TELRIC [the FCC’s
model] pricing with true nondiscriminatory access to operating support systems and the elimination of anticompetitive business
practices.”

Baby Bell Verizon Communications had challenged the FCC’s forward-looking pricing model — put in place with the
Telecommunications Act of 1996 — which required phone companies to price their network elements based on the cost of newer, more
efficient and less expensive equipment, rather than the generally higher prices the phone companies paid to install the equipment in
the past. Verizon argued the formula makes it impossible to recoup the expenses of its investment in infrastructure.

But in a 6-2 vote, the court found in the FCC’s favor, noting that the commission had followed the guidelines set forth in the
Telecommunications Act.

“Whether the FCC picked the best way to set these rates is the stuff of debate for economists and regulators versed in the
technology of telecommunications and microeconomic pricing theory,” Justice David H. Souter wrote for the majority. “The job of
judges is to ask whether the commission made the choices reasonably within the pale of statutory possibility in deciding what and
how items must be leased and the way to set rates for leasing them.”

He added, “The FCC’s pricing and additional combination rules survive that scrutiny.”

The combination rules, which require the phone companies to sell bundled network elements in the combinations that CLECs request,
were also hailed as a victory by CLECs.

“The Supreme Court has ruled in favor of competition and consumer choice,” said Charlie Hoffman, chief executive officer and
president of Covad Communications. “The ruling provides competitors with greater certainty concerning the prices they pay the phone
companies and should accelerate competition as intended by the 1996 Telecommunications Act. In addition, the ruling gives
competitors greater opportunities to sell combinations of network elements that are owned by he incumbent phone companies. Choice
and competition remain the law of the land.”

The Baby Bells said they would seek to convince the FCC to alter the rules.

“We hope the FCC will correct this incorrect pricing policy and eliminate its unnecessary requirements to provide certain network
pieces in dockets now pending before it,” BellSouth said in a statement.

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