WASHINGTON-
A U.S. Federal Appeals Court Friday denied McLeodUSA Inc.’s bid to overturn a Federal Communications Commission ruling that granted Qwest Communications International Inc. relief from sharing its network at a discount with smaller carriers.
With this Washington Circuit court decision, McLeod—a small, privately owned telephone carrier based in Hiawatha, Iowa—has said previously that it could potentially withdraw service from Omaha, Neb., forcing customers there to find another telephone provider.
McLeod appealed a December 2005 FCC decision giving Qwest substantial relief from having to share its network at deeply discounted prices with smaller carriers such as McLeod to allow them to compete with Qwest in the same market.
The FCC deemed that with the entrance of privately-held Cox Communications Inc. into Omaha, Qwest faced sufficient competition and therefore should no longer have to offer the same discount to McLeod.
Denver-based Qwest must still offer a wholesale discount price to McLeod, but at a considerably higher rate than it currently charges.
“Although the Commission recognized that Cox’s market share was larger in the residential than (in) the enterprise market, it concluded that Cox nonetheless posed a ‘substantial competitive threat to Qwest’ in both sectors,” Senior Circuit Judge Stephen Williams wrote in the majority opinion.
But McLeod argued that while Cox is making significant progress in the local residential market, it wasn’t competing in the same market as McLeod.
Smaller carriers like McLeod are facing more appeals by the larger former Bell companies, which are lodging regulatory relief requests with the FCC with increasing frequency. The Omaha case is seen by many in the industry as a test case for subsequent decisions.
New York-based Verizon Communications Inc. has filed a petition with the FCC similar to Qwest’s related to six major East Coast markets. That matter will be decided later in the year. Verizon and San Antonio-based AT&T Inc. are two of the three remaining “Baby Bells” that emerged from the divestiture of the former Bell System in 1984.
In a January interview with Dow Jones Newswires, McLeod Chief Executive Royce Holland said that if the court ruled against the company, it would be forced to withdraw from the Omaha market entirely.
Holland wouldn’t comment on the verdict because on Thursday McLeod registered plans with the Securities Exchange Commission to take the company public in an initial public offering later this year.
Andrew Lipman, a lawyer with Bingham McCutchen LLP who represented McLeod at the hearing, said that it was always going to be difficult to convince the appeals court to overturn an FCC decision.
“The courts generally give deference to the FCC as the expert (regulatory) agency,” Lipman said. “Everyone involved realized that challenging this appeal was going to be an uphill climb.” He said the company is considering whether to appeal the decision to the Supreme Court.
Neither Qwest nor the FCC was immediately available to comment.
