updated 3/2/2004 3:58:24 PM ET 2004-03-02T20:58:24

An appeals court Tuesday rejected federal rules giving states more authority to determine which companies may offer local phone service within their borders.

The D.C. Circuit Court of Appeals upheld local telephone companies' challenge to the Federal Communications Commission's rules. The companies said the rules allow competitors to use their networks at artificially low prices.

The three-judge panel unanimously threw out the FCC's rules, the third time the commission's attempts to write rules for local telephone service competition have been rejected by the courts.

The rules were issued last August. They gave states the right to require the former Bell phone companies — Verizon, BellSouth, SBC and Qwest — to lease elements of their networks, such as lines and central office switching capabilities, to competitors at wholesale rates.

The rules were the result of a contentious 3-2 FCC vote in February 2003. Chairman Michael Powell was on the losing end of the vote, the first time he had been on the losing side since taking over the five-member panel in 2001.

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