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Bush Hands Local Phone Giants Big Win

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

Rules that govern how telephone companies compete for local customers will expire next week under a decision announced today by the Bush administration, throwing into question how much residents and small businesses will pay for future service and what choices they will have.

The Justice Department announced today that it would not appeal a federal court's decision that rejected government rules requiring local phone giants to lease their networks to rivals at a discount. The rules are now set to be taken off the books on June 15.

The Justice Department's decision is a huge blow to already struggling long-distance companies such as AT&T Corp. and MCI Inc. that have used the regulations to launch their own brand of local service. And it adds confusion to an industry already being roiled by fundamental technological changes, as wireless phones take off and Internet calling becomes a reality.

Approximately 19 million telephone lines or about 14 percent of the local phone market is served by companies that relied on the government regulations to compete for customers. AT&T said today that the decision could lead it to raise rates and possibly abandon local service in some markets.

"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," said James Ciccone, AT&T's general counsel in a prepared statement.

The Justice Department declined to comment on its decision, which followed months of intense lobbying by the nation's largest telecommunications companies. Sources on both sides of the issue say the senior White House staff was divided.

The political staff, lead by senior advisor Karl Rove, raised concerns that rising telephone rates could hurt President Bush in the upcoming presidential election. The policy staff opposed an appeal, saying the rules run counter to Bush's efforts to reduce business regulation.

The White House had hoped to avoid a decision by calling on the companies to reach their own voluntary agreements with one another. However, those talks, including a recent round hosted by Federal Communications Commission Chairman Michael K. Powell, failed.

The rules at the center of today's decision are the byproduct of the Telecommunications Act of 1996, an effort by Congress to introduce competition into the market. At the time, the industry was largely shaped by a court decision that broke up AT&T into several companies. The regional giants, such as Verizon Communications Inc. and SBC Communications, were given the local phone business while AT&T was handed the long distance market. The Telecommunications Act allowed the regional giants, known as Baby Bells, into the long distance market and AT&T and other long-distance carriers into the local market in the hopes that they would compete with each other. But the local companies have faired much better than their rivals in the past eight years.

Verizon is now the nation's largest local phone company with a territory that stretches from Maine to Virginia. It is also one of the nation's largest long-distance providers with more than 17 million customers. In some states such as New York, it is the largest provider of long-distance service. Verizon and other regional players have been able to successfully invade the long-distance market by bundling local and long distance together.

While Verizon is growing its long-distance business, AT&T and MCI are regularly reporting double-digit declines in their core consumer business. AT&T and MCI claim that without the ability to offer local phone service at competitive rates, they may be forced out of the residential market altogether.

A federal court in Washington found that the FCC had failed to adequately justify the need for the rules. The Justice Department declined to appeal that to the Supreme Court, drawing sharp criticism from consumer groups.

"This demonstrates that the Bush administration is willing to let the nascent local competition dry up and disappear, handing monopoly telephone service back to the Bell giants," said Gene Kimmelman, director of the Washington office of Consumer's Union.

The regional phone giants disagreed, hailing the Bush administration's decision as an important victory.

"Consumers have been well served by the Solicitor General's conclusion that this is not a case for the Supreme Court," said Herschell Abbott, senior vice president governmental affairs for BellSouth in a prepared statement.

Abbott said BellSouth would not cut off service or raise rates after June 15 to wholesale customers such as AT&T and MCI "without going through established processes." A BellSouth spokesman noted that any changes to existing contracts must still be approved by state regulators.

The regional Bell companies argued that the prices imposed by the rules forced them to subsidize competitors with deep discounts. They also argued that the subsidies were so steep that it discouraged companies from building their own telephone networks.

AT&T and other companies countered that it would be virtually impossible to offer consumers competition without rules that allow them to lease networks from rivals at discounts. They also argued their wholesale rates were fair and allowed the regional giants to recoup a reasonable profit.

Shares of Verizon rose 31 cents or just under 1 percent to close at $35.86 today. In contrast, shares of AT&T fell 39 cents or more than 2 percent to close at $16.56.

While Justice Department Solicitor General Theodore Olson declined to take the case, AT&T and other competitors have said they will file an appeal on their own. However, legal experts and industry analysts said the odds are slim that the Supreme Court would agree to hear an appeal after the solicitor general has passed on it.

"The solicitor general is often seen as the 10th justice. The court is very unlikely to" take the case, said Blair Levin, a telecommunications analyst and former FCC chief of staff.

CompTel/Ascent, a coalition of companies that competes in the local phone industry, said recently that if the Justice Department failed to appeal the DC Court of Appeals decision, it would air ads attacking the Bush administration in the months leading up to the presidential election. However, today, the group said it not yet decided whether it will air the ads which it claims have already been prepared.

"Our primary focus right now is filing for a stay . . . today or tomorrow. Beyond that we haven't made any final decisions," said H. Russell Frisby Jr., chief executive of CompTel/Ascent.

Scott Cleland, a Washington-based telecommunications analyst, said that the groups are not likely to attack the Bush administration.

"It's a bluff," said Cleland. "Why make a mortal enemy if this is something you have to live with for four years?"

AT&T's Ciccone said the competitors will not pull their punches. "We are not going to conceal from our customers the reason why we are raising prices or exiting markets. We owe them an explanation of what happened and why, otherwise they are going to blame us," Ciccone said.

Reported By TechNews.com, http://www.TechNews.com

(20040609/WIRES /)

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