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Taking The Baby Bells' Fight To The States
Recognizing that federal relief may be next to impossible, competitive telecommunications carriers are asking states to break the Regional Bell Operating Companies into separate wholesale and retail companies.
"It is an unbelievably bizarre proposal that is not only anticompetitive, but anti-consumer," said Ken Johnson, spokesman for Rep. W.J. (Billy) Tauzin, R-La. "If they would try to pursue this legislatively, it has two chances: none and absolutely, positively none."
The political shift began last session with the introduction of a bill to eliminate the reciprocal compensation billing system that governs how telephone companies reimburse each other for connecting and disconnecting calls and the introduction of H.R. 2420, which would loosen regulatory restrictions on data services for the Bells. The shift culminated with the retirement of House Commerce Committee Chairman Thomas Bliley, R-Va., who did not support those measures and prevented full committee votes on them.
Now Tauzin heads the reorganized Energy and Commerce Committee and he sponsored both those efforts in the 106th Congress. While new legislation in the 107th Congress would have to originate in the Telecommunications and the Internet Subcommittee chaired by Rep. Fred Upton, R-Mich., there is no doubt that similar measures will resurface.
"The investment community began to see a shift in Washington away from competition and more toward deregulating the Bells," said John Windhausen, president of the Association for Local Telecommunications Services, adding that the shift helped shake investor confidence.
An Appeal To The States
Realizing the tenor on the federal level and feeling the need for some sort of regulatory help, the competitive local exchange carriers (CLECs) are appealing to the states. "We are trying to add a stick to the [1996 Telecommunications Act]," said Russell Frisby, president of the Competitive Telecommunications Association.
Complaining that the Bell companies treat them unfairly and engage in anticompetitive behavior, CLECs, such as AT&T, are pushing for structural separation.
That push amounts to state public utility commissions (PUCs) or legislatures taking an enforcement club to the regional Bells and breaking them into two pieces — a wholesale arm and a retail arm, which would buy network services from the wholesale arm.
The idea is that the Bell wholesaler would treat its own retail firm fairly, creating a reliable yardstick by which to measure the treatment of other companies. For example, the price and speed of providing service requests the Bell offers its own company should be offered to competitors, Frisby said, and if the conditions for competitors are different, they can easily prove to regulators that something is amiss.
"It is ultimately deregulatory," Frisby said, because the retail affiliate would be free of restrictions on its ability to offer long-distance services.
The Pennsylvania PUC voted in favor of breaking up the Bells in August 1999, but did not rule on the specifics and could do so as early as March 8. AT&T last week filed a petition with the New Jersey PUC, Access Integrated Networks recently filed a petition in each state in the Bell South region, and legislation on the issue has been introduced in both Maryland and Illinois. Hearings have held on the Maryland bill, but observers say the bill is not expected to go any further this session.
Michael Morrissey, vice president of law and government affairs at AT&T, said the stick is needed because the promise of long distance is not enough to coax the Bells into opening the local market as envisioned in the telecom act.
Questions Of Cost And Intervention
The Baby Bells disagree. "This is not a viable solution to any regulatory problem," said Edward Young, Verizon senior vice president of federal government relations.
Young said the separation effort is nothing more than an AT&T delaying tactic to keep the Bells out of the long-distance market by distracting the state PUCs from approving long distance, or 271, applications and tying up Bell resources. "This is just another attempt by AT&T to delay the inevitable," he said. "The long-distance markets will be opening up and they will have to compete head to head."
William Cook, a partner at Manatt, Phelps and Phillips, agrees, saying the effort is the gasp of a dying industry trying to stay alive. "There are way more CLECs than the market requires, and that is what is at issue," he said, adding that "running to the legislature is that last refuge of a bad business plan."
If the goal is to benefit consumers, this plan isn't going to do it, Verizon says. The increased costs from duplicating efforts would be passed on to consumers, and it would create a disincentive to invest in network infrastructure upgrades, said Harry Mitchell, a Verizon spokesman.
The cost of basic service also would increase because Bells keep their wholesale price artificially low and make up the costs through auxiliary services like caller ID. Forcing similar basic rates would force the Bells to up their basic price, Mitchell said.
Verizon has estimated it would cost about $1 billion per state to separate its company and $300 million each year to maintain, figures that have been called into question by CLECs and the Pennsylvania commission.
Mitchell said Verizon has hundreds of pages of documentation and added that the figures represent "the best estimates of the experts who do that sort of thing."
Almost more disturbing than the cost, Young said, is the idea of state interference in the management prerogatives of a company. "They have really crossed the line when it comes to management," he said of the plan to break up the Baby Bells, adding that the legal grounds for such action are shaky.
Can They Really Do That?
But legal experts say there is nothing in the 1996 act that prohibits the states from ordering structural separation of the Bells, and state law grants a good deal of authority for regulating public utilities, including basic phone service.
Most state PUCs have the authority to order separation of the Baby Bells' services, but in some states, such as Maryland, where that authority may be unclear, CLECs are seeking legislation that would either break up the Bells or grant the PUCs the authority to do so, Morrissey said.
Section 253 of the telecom act gives states much leeway to ensure public welfare and safeguard consumer rights, but part of that section includes a clause giving companies avenues for redress if the states do anything that hinders competition or harms the public welfare. They could appeal through the courts or the FCC.
Verizon believes it would win any appeal, saying the FCC already has addressed the issue four times. But the FCC notes that the rulings were part of other proceedings, such as merger reviews, and the agency has not taken a comprehensive look at the issue.
The facts and circumstances of those four decisions may or may not be applicable to the state proceedings and are not necessarily indicative of how the FCC would rule, an agency spokesman said.
But the Bells do not think the states ultimately are going to rule for separation. "If I were a regulator, I would be annoyed that I would be asked to address this," Young said, adding that when states see the realities of the competitive environment, they will find no need to act.
Scott Cleland, founder and CEO of the Precursor Group, agrees. "Nationally, it is a non-starter with the U.S. Congress," he said, and "at the state level, it is an interesting nuisance with some legs, but not much."
 | - by Teri Rucker |
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