Who Sets Local-Phone Competition Rules? States Battle the Feds

In its push to make America's local telephone service as competitive as long distance, the federal government has run into a significant - and potentially huge - legal obstacle: states' rights.

Local telephone companies and state utility regulators are arguing that the federal government is overstepping its bounds by setting pricing guidelines for the states. This week's flurry of legal maneuvers from the local carriers was expected. But the outcry from the states is another matter.

Historically given the power to set local telephone rates, state regulators are worried about losing that authority to the Federal Communications Commission (FCC). Several are expected to file court challenges to the FCC's pricing guidelines, which were announced last week. Such legal objections could tie up telephone deregulation in the courts for a year or more.

"We want to get it done as quickly as possible," says Brad Ramsay, assistant general counsel to the National Association of Regulatory Utility Commissioners in Washington. But "whatever comes out of this will go to the Supreme Court." The key question: Who sets the pricing?

Establishing the cost of local telephone service has long been a sensitive point in telecommunications deregulation. Local telephone companies argue they make little or no money on providing local service. Long-distance phone companies and other would-be competitors claim that such operations are cash cows.

The argument is important because would-be competitors can't quickly build rival local networks. So, for a period of time, these competitors will have to lease portions of the existing networks. They want hefty discounts - good wholesale rates, in effect - to lease those lines. Many local telephone companies have balked.

When the two sides haven't agreed, state regulators have tried to settle the dispute. California has proposed wholesale discounts of 7 percent for residential service and 12 percent for business. Illinois has called for steep cuts of 22 percent.

In its wide-ranging telecommunications reform bill, Congress tried to push forward this process by giving the FCC expanded powers, but giving final say to state regulators. What is causing the states to cry foul is that the FCC is setting interim pricing guidelines, officially published last week. The guidelines suggest that state commissions order discounts in a range of 17 to 25 percent until they determine what the actual discount should be.

The association of utility commissioners and the New York's utility commission have already filed appeals in federal courts challenging the FCC rules. The Florida utility commission has voted to seek a stay of the FCC rules until the federal cases are resolved. Mr. Ramsay expects other such state challenges in coming days.

Meanwhile, local telephone companies are filing similar suits. GTE and Southern New England Telephone Company have announced plans to challenge the FCC rules in court. Several of the regional Bell companies, known as Baby Bells, are expected to do the same. "We're going to appeal the major issues for sure," adds Jocelyn Miceli, spokeswoman for the United States Telephone Association, the Washington group representing local carriers.

The carriers are using similar states' rights arguments. "The legislation in no way supported the FCC pricing authority," says Bob Bishop, a spokesman for GTE. "The law leaves that up to the states. The California PUC [Public Utility Commission] knows what's best in California and the New York PUC knows what's best in New York."

One of the carriers' biggest concerns is that competitors will "cherry-pick" their markets, choosing to compete in only the most lucrative areas, while leaving local carriers to service high-cost, low-revenue markets. The FCC is supposed to take up this issue when it determines how competitors will subsidize these high-cost areas. But local telephone companies are uneasy about handing out big discounts to competitors while the issue is unsettled.

Critics contend that the local carriers are using the legal arguments merely to delay the entry of new competitors. By delaying the opening of their market, the local carriers gain time in their quest to begin moving into others, such as long-distance phone service, says Bradley Stillman of the Consumer Federation of America in Washington. "I don't think they'll ultimately be successful. [But] the bottom line is that no monopoly gives up its power without being forced to do so."