Telecom Ruling Is Blow to Cities

States can stop cities and towns from going into the $302-billion telecommunications business, the U.S. Supreme Court ruled Wednesday in a victory for SBC Communications Inc. and other local phone companies.

The 1996 Telecommunications Act, the federal law that encourages phone competition, doesn’t free municipalities from state-imposed limits, the justices said in an 8-1 ruling.

The case pitted Missouri cities against the state and federal governments and SBC’s Southwestern Bell unit. SBC is the nation’s second-largest local phone company and the biggest in Missouri. It’s also California’s dominant phone company.

“The issue here does not turn on the merits of municipal telecommunications services,” Justice David H. Souter wrote for the court. “We think it farfetched that Congress meant” to preempt state laws on local phone service without a specific statement that it intended to do so, he said.

The ruling shields phone companies from one source of new competition. Supporting SBC and the state and federal governments were Verizon Communications Inc., the biggest U.S. local telephone company; Sprint Corp., the third-biggest U.S. long-distance telephone company; and the U.S. Telecom Assn., a local-phone industry group.

They said cities would have an unfair advantage as competitors with their ability to use tax revenue to subsidize phone service.

“These kinds of competitive advantages were issues for the major carriers,” said Paul Glenchur, a telecommunications analyst in Washington at Schwab SoundView Capital Markets who doesn’t own shares of the companies involved. “The risk to them is more theoretical than actual. But of course it’s something that they did not want to have to worry about down the road.”

SBC said in a statement that the ruling was “welcome news” and that local governments should create an environment to let communications companies compete “rather than trying to themselves compete, using public funds, against private-sector telecommunications companies.”

The Missouri municipalities’ lawyer, James Baller, said that the ruling was “not the end of the matter” and that backers of municipal phone service hoped to persuade state legislatures not to enact new restrictions and to eliminate those that existed. He said some municipalities had sought to offer advanced communications that were not offered by commercial companies in an effort to attract economic development.

The Telecommunications Act, which lets local-service and long-distance companies compete against one another, says states can’t prohibit “any entity” from offering telecommunications service.

The Supreme Court said the Federal Communications Commission was correct in deciding the law still left states free to bar local governments from offering phone service.

SBC shares Wednesday fell 27 cents to $23.71 on the New York Stock Exchange.