Court of Appeals Says No to SBC, Upholds FCC Denial of Oklahoma 271 Application

Posted: 05/1998

Regulatory News

Court of Appeals Says No to SBC, Upholds FCC Denial of Oklahoma 271 Application

By Danny E. Adams, partner Kelly Drye & Warren LLP

The Federal Communications Commission (FCC) won an important (and much
needed) victory March 20 when the U.S. Court of Appeals for the D.C. Circuit upheld the
agency’s denial of SBC Communications Inc.’s request to offer interLATA service in
Oklahoma. In addition to keeping its decision intact, this victory will provide a
well-timed morale boost to the commission. This ruling is important for several reasons,
including the obvious one: Section 271 should have teeth.

This ruling is especially important because all appeals of Bell company
requests for interLATA authority under Section 271 must be taken to the D.C. Circuit. This
decision, which supported the FCC on virtually every point, is the first precedent from
that court. From the FCC’s perspective, it is a very good one. The court’s policy of
deference to the commission’s expert judgment where statutory ambiguities are found (the
proper judicial role) also is a welcome change from the hostility shown to the FCC by the
8th Circuit Court of Appeals in the local interconnection decisions.

SBC had made three basic arguments to the D.C. Circuit. The first of these was that the
FCC erred in its decision that "Track A" of Section 271 was not satisfied. For a
Bell operating company (BOC) to qualify for interLATA authority under Track A, there must
be a local "competing provider" in the state of sufficient size to provide an
"actual commercial alternative" for business and residential service. The FCC
concluded that no residential competition was present in Oklahoma because Brooks Fiber
Properties Inc., the only competitive local exchange carrier (CLEC) serving residential
customers, was limited to four of its own employees in a free trial. As a result, the
commission ruled that no "competing provider" was present in Oklahoma. SBC
contended that the four-person free trial, along with Brooks Fiber’s Oklahoma Corporation
Commis-sion (OCC)-approved statement of terms and conditions for providing commercial
service to others, were enough to fulfill the Track A requirement and permit its interLATA
entry. SBC argued that the FCC acted unreasonably in rejecting this contention.

The D.C. Circuit stated that it "does not think much" of this SBC argument.
The court found that the Track A phrase, "competing provider" is ambiguous and,
therefore, the FCC is entitled to adopt any reasonable interpretation which its expertise
finds appropriate. Here, the opinion goes on to say, "We doubt that (SBC’s)
interpretation, even if adopted by the commission, would be thought reasonable."

Another aspect of the D.C. Circuit decision which is of great interest is the court’s
dismissal of the OCC’s support for SBC. According to the court, "the statute does not
require the FCC to give the state commission’s views any particular weight." The
court found that in Section 271, "Congress has clearly charged the FCC, and not the
state commissions," with Section 271 review. This ruling is especially good news for
the FCC in the still-pending appeal brought by BellSouth over denial of its application to
provide interLATA service in South Carolina.

SBC’s second–and principal–argument was its claim that it also qualified for
interLATA authority under "Track B." This alternative approach creates a method
for consideration of BOC interLATA applications in cases where Track A is unavailable
because no local competitors have requested interconnection. In SBC’s view, there were
only two possible outcomes in this case. Either a competing provider existed and Track A
had been satisfied or, if no "competing provider" had actually initiated service
under the Track A requirements, then, SBC contended, it must be allowed to qualify under
Track B. The FCC found differently, concluding that a valid interconnection request from a
local competitor under Track A brings an end to the Track B option, even though the
"competing provider" had not yet initiated service. Under this view, Track B is
only available where no valid local interconnection request has been made. The FCC
rejected SBC’s argument that Track B remained open until a competing provider had actually
initiated service.

The court agreed with the FCC, following a thorough and careful analysis. While it
found the statute unclear, the court concluded several factors supported the FCC’s
interpretation. For example, the structure and purpose of the bad faith clause in Section
271–applying only to CLECs and not incumbent LECs (ILECs)–was seen as an indication that
the BOCs could be prevented from interLATA entry merely by improper negotiations. This
fact is consistent only with the FCC’s view that the mere initiation of interconnection
negotiations forecloses the BOCs from Track A.

In concluding its examination of Track B, the D.C. Circuit stated that "Track B,
like Track A, is ambiguous" and therefore the FCC’s views must be upheld if
reasonable. "We have no doubt that it passes that test," the court wrote, saying
"it may again be the only reasonable interpretation."

This decision essentially ends the usefulness of Track B as a vehicle for BOC interLATA
entry. The high degree of interconnection negotiations in nearly every state provides
sufficient "competing providers" and interconnection requests to foreclose Track
B entry to the BOCs everywhere.

SBC’s third major challenge to the validity of the FCC’s Oklahoma ruling concerned the
agency’s failure to give more detailed guidance to SBC on the overall requirements of
Section 271. The court again rejected the BOC position, stating that "we do not see
how a reviewing court can fault the commission for refusing to answer what on this record
could be thought a hypothetical question."

In the end, the D.C. Circuit concluded that SBC’s arguments "boil down to the
proposition that the commission cannot be trusted to fairly implement the statute."
However, the court ruled that "Congress quite clearly gave the commission the primary
responsibility to make delicate judgments under this statute and we may not presume that
the commission will perform that task in bad faith."

Overall, the Oklahoma Section 271 ruling is a total victory for the FCC. It stands for
several important propositions, including an end to BOC Track B applications under Section
271, no need for deference to pro-BOC state public utilities commission rulings
recommending interLATA entry without an adequate basis, and a requirement for an actual,
viable "commercial alternative" to the BOCs before Track A approval is to be

And because the law requires all Section 271 appeals to be heard by the D.C. Circuit,
the BOCs cannot seek to change the outcome of this decision by appealing to friendlier
courts in the future. This fact may lead them to step up their already strong lobbying
campaign to bring Congressional pressure on the FCC to grant interLATA authority to some
BOC in some state. At the same time, this court victory should bolster the FCC’s ability
to stand up to political pressure of that sort.

The next Section 271 case to be heard by the D.C. Circuit is BellSouth’s appeal of the
FCC’s denial of its South Carolina application. That request was made under Track B and
was denied for several reasons, including that Track B was inapplicable. In view of the
Oklahoma decision, BellSouth should drop the South Carolina appeal right now.

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