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Justice Department Decision Buoys BellSouth on Local Phone Service Competition

Posted on: Wednesday, 9 June 2004, 06:00 CDT

Jun. 10--The U.S. Justice Department decided Wednesday not to seek a Supreme Court challenge to revive rules aimed at increasing competition for local phone service.

In Georgia, the move potentially could make it more difficult for AT&T, MCI and other so-called competitive local exchange carriers to snatch more customers from BellSouth, particularly if the carriers have to pay more to lease parts of BellSouth's phone network.

Some providers could pull out of rural and smaller urban markets to focus on larger ones, such as Atlanta, said Robert B. Baker, a member of the Georgia Public Service Commission. And prices could rise.

"But it's all an educated guess at this point," Baker said.

Federal Communications Commission rules had required BellSouth and other local phone companies to give rivals such as AT&T and MCI access to their telecommunications networks at discounted rates. Those rival carriers use the network access to offer consumers service that competes with BellSouth.

But in March the U.S. Court of Appeals ruled that BellSouth and other local phone providers no longer must open their networks to rivals at rates set by state utility regulators. The court said the rules, set by the FCC, were illegal under the Telecommunications Act of 1996.

Last Friday the court declined a request by AT&T, MCI and the FCC to push back the June 15 deadline for expiration of the rules.

The appeals court had set that deadline to give the regional Bells and their competitors 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 Communications International, but few other agreements have been reached so far. BellSouth has struck agreements with eight companies but not its biggest rivals, such as AT&T and MCI.

Wednesday's decision by U.S. Solicitor General Theodore Olson not to ask the Supreme Court to reverse the appeals court decision makes it tougher for AT&T and MCI to persuade the Supreme Court to consider their appeal.

AT&T was disappointed by Olson's decision, as were groups such as the Consumer Federation of America.

"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."

Mark Cooper, research director of the Consumer Federation of America, said, "Without access to these facilities at reasonable rates, telecommunications carriers that compete with the Bells will be driven out of the market, and the billions of dollars of savings linked to competition will be gone."

Regional carriers argue they are being forced to lease their networks below cost, discouraging them from spending on equipment upgrades.

"Consumers have been well-served by the solicitor general's conclusion that this is not a case for the Supreme Court," said Herschel Abbott, BellSouth's vice president of governmental affairs. He added that BellSouth has told wholesale customers that it will not cut off service or raise rates "for any wholesale interconnection services without going through established processes."

He said BellSouth has offered to lock in current wholesale rates until the end of the year and set stable rates through 2007 by negotiating and signing new long-term agreements.

"We will redouble our efforts to negotiate these agreements," Abbott said.

UBS analyst John Hodulik predicts the regional Bells will move aggressively to boost wholesale rates.

"We believe the Bells will move to raise rates in both the business and consumer markets, although any increase is unlikely to take effect until 2005," Hodulik said in a note to clients Wednesday. "Some of the Bells have already informed competitors that wholesale rates would increase to resale or retail rates in the business market."

Without the current discounts, MCI General Counsel Stasia Kelly warned, the company "may be forced to raise prices in some markets and pull out of others."

At risk are rural and smaller urban markets, said Georgia PSC Commissioner Baker, where competitive local exchange carriers already pay higher wholesale rates than in larger urban areas, such as Atlanta.

"My best guess is that you will see some of the smaller CLECs serving rural areas and small cities possibly changing their entire business strategy from resale of (elements of BellSouth's phone network) to deployment of their own network, or withdrawal from the markets," Baker said.

"For the bigger CLECs, you may see them pulling back to large urban areas, where the higher concentration of customers can justify capital investment to put in their own switching equipment and upgrade their networks."

Bloomberg News and The Associated Press contributed to this article.

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