updated 6/9/2004 4:46:43 PM ET 2004-06-09T20:46:43

In a setback for federal regulators, U.S. Solicitor General Theodore Olson has decided against an appeal to the Supreme Court to revive new rules aimed at increasing competition for local telephone service, according to the Federal Communications Commission.

The agency issued a statement Wednesday saying that it has been informed by Olson's office of his decision. The commission can still appeal on its own, but the Supreme Court would have been more likely to consider the challenge had the Justice Department joined the appeal.

The FCC issued rules last August allowing states to require that the four major regional phone companies, Verizon, BellSouth, Qwest and SBC, lease parts of their networks at low prices to competitors such as AT&T and MCI.

The regionals balked, saying the rules left them at a competitive disadvantage, and in March, the U.S. Court of Appeals for the District of Columbia threw out the rules.

Consumer groups and others have warned that vacating the rules could lead to higher phone bills for millions of Americans.

The appeals court had agreed to delay its decision until June 15 to give the regionals and their competitors more time to negotiate separate line-leasing deals, and the FCC had been encouraging both sides to strike some agreements.

Long-distance company MCI was able to work out a deal with Qwest, but few other agreements have been reached so far.

AT&T was disappointed by Olson's decision.

"Decisions have consequences, and the results of this decision will be especially harmful," said Jim Cicconi, AT&T General Counsel. "Failure to appeal this case could do lasting damage to the entire competitive telecom industry - and will lead inevitably to higher prices and fewer choices for Americans."

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