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Administration's Inaction Could Boost Phone Rates; Critics: Ruling on Regional Bells to Hurt Competition

Posted on: Friday, 11 June 2004, 06:00 CDT

NEW YORK - The Bush administration's decision not to challenge a court ruling on wholesale telephone rates could hamper competition and make phone calls more expensive. It could even force some companies to quit the residential market.

But when those rate increases will come or if they'll really come at all is open to debate.

The telecommunications industry is already so roiled by technology-induced tumult including the proliferation of cell phones and Voice over Internet that some analysts think regulation is hardly needed to keep prices down.

When a federal appeals court in March threw out rules that required regional Bells to sell competitors access to their networks at a discount, MCI, AT&T Corp. and state regulators cried foul.

A day after the White House declined to join the legal fray, the Supreme Court was petitioned to stay the lower court ruling by AT&T, MCI, an association of state regulators, plus California and Michigan.

David Isenberg, an independent telecoms analyst, called the Bush administration's inaction, which is widely seen as favoring the regional Bells, "kind of like a lobster dinner for a dying patient."

The appeals court decision "is fundamentally anti-competitive, but the fundamental basis of competition has changed," he said.

About 19 million consumers roughly 15 percent of those with home phones buy local service from a company other than the regional Bells: Verizon Communications Inc., SBC Communications Inc., Qwest Communications International Inc. and BellSouth Corp.

They can do that thanks to the overturned rules, which the regional Bells said forced them to sell access to their networks at a loss, keeping them from making further network investments. The competitors said the Bells still made money selling access and were fighting the rules because they didn't want competition to lower the price of local calls.

Most telecom industry observers say the decision to scuttle network-sharing rules is bad for consumers.

"The more the regional Bells' death grip on the customer is extended, the less they have to do to offer new services," said Johna Till Johnson, president of Nemertes Research. "Today's high costs stay high and new services that could be coming in don't."

Competition hurt?

Some, like Mark Cooper, director of research for the Consumer Federation of America, go even farther, saying the move will drive competitors out of the local market.

"In the worst case scenario, the competitive local exchange carriers will disappear, and that will take all the competitive pressure off the Bells," he said.

The Wall Street Journal, citing unnamed sources, reported Thursday that the administration's decision could prompt MCI to exit the consumer phone business completely. Its consumer business is about 20 percent of the company's $21 billion in total revenue.

"We will not be able to discuss changes until our own internal analysis is complete," said Carolyn Tyler, an MCI spokeswoman.

Gene Kimmelman of Consumers Union said the move could drive the price of a local phone connection up from below $25 to somewhere between $30 and $35.

"Local phone companies, for years, have been saying they need to charge customers $30 or $35 just to connect to the network," Kimmelman said. "The question is, will something else come in to replace it? We don't see that coming in quickly."

It may not come quickly, but it will come, Isenberg said.

"In 10 more years, when we're all using our computers with voice over Internet Protocol, telecom companies won't really have much to sell," he said.

In the meantime, the average consumer won't see their rates go up, because the percentage using competitive carriers locally is just too small, said Sam Simon, chairman of the Telecommunications Research and Action Center, which helps consumers find the best rates.

People skeptical that the move will raise rates also note that cable companies offering Internet connections are already offering phone service.

"The cable companies are the only other alternative for someone who's seriously considering a competitive option," Johnson said. "The only question is how quickly the cable companies are going to come in and take up the slack."

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