Telecommunications reform legislation a candidate for veto

Stephen N. Brown

Telecommunications reform may be dead. President Clinton recently stated, "If [the legislation] is sent to me without deletion or revision of a significant number of...provisions, I will be compelled to veto it in the best interests of the public." If the legislation is passed in its present form, the long-distance carriers will have lost a major battle to the seven regional Bell operating companies. The carriers will work for a veto and probably be generous supporters of Clinton`s re-election campaign. The current Republican leadership has rabbit-punched and stepped-on the established carriers. They will probably return the favor if at all possible. The newest story begins with former U.S. Senate leader Howard Baker, who was elected to the Senate three times and ran for the presidency in Republican primaries during 1980. He came to national prominence as the leading Republican on the Senate`s committee that investigated Watergate, which led to President Richard Nixon`s resignation. Does anyone out there remember this once-powerful figure of the Republican party? If you do not, then you have something in common with Speaker of the House Newt Ging rich (R-GA) who could not remember Baker either. After last November`s elections, the former leader of the U.S. Senate became chairman of the Competitive Long Distance Coalition, which includes the Big Three interexchange carriers--AT&T , MCI and Sprint--and another 500 smaller long-distance companies.

In July, the interexchange carriers were desperately trying to communicate with Gingrich about last-minute revisions he ordered in H.R. 1555, the Communications Act of 1995--the House of Representatives` version of telecommunications reform. The House Commerce Committee, headed by chairman Thomas Bliley (R-VA), had approved the bill in May. The regional Bell operating companies were unhappy with it and prevailed upon the Speaker for revisions. Alarmed, the interexchange carriers turned to Baker, who then called the Speaker`s office to ask for a meeting. Three days later came the return message from an aide: "Access Denied." Marlin Fitzwater, who as President Bush`s press secretary is another well-placed Republican working for the coalition, said, "We are taken aback by the size and scope of the changes." He suggested that Bliley was unwilling to compromise because he had received instructions from Gingrich to alter the bill. The coalition was caught napping--caught by the Bell companies` portrayal of the Big Three interexchange carriers as robber barons of the long-distance markets.

The regional Bells` revisions were launched through their lobby, the Alliance for Competitive Communications. In June, its chief lobbyist, Gary McBee, sent a letter to all members of the U.S. House complaining about H.R. 1555`s proposed constraints on the Bells` long-distance services. Topping McBee`s list was the vision of H.R. 1555 as a cozy deal for the interexchange carriers: "The residential entry test (`facilities-based`) for Bell companies to enter long distance is more difficult than current law; it will protect the Big Three [AT&T, MCI and Sprint] from competition for years and deny consumers the lower rates they deserve." The facilities test supposedly meant that a non-Bell network would have to be working in local markets and offering an alternative to the Bells before they could enter long-distance markets. The provision was overturned.

Resale provision

The Bells railed against H.R. 1555`s resale provision. McBee wrote: "The bill requires local telephone companies to sell services to their new competitors at discounted rates, even though the Bell companies already provide local service to customers for less than cost in many cases. This below-cost resale constitutes a direct threat to the universal service subsidy system." Although there is no industry consensus on the subsidy issue, the resale language was meant to develop secondary providers of local service. In the absence of a second or a third local network, the providers purchase time and capacity on the Bells` local networks.

As the term "resale" implies, the time and capacity would be resold to end users. This procedure has been used in the long-distance markets for a decade, allowing 500 companies to offer long distance in the United States. Many of these businesses--tiny though they may be--are viable and offer alternatives to the Big Three interexchange carriers. AT&T owns much of the nation`s long-distance network, but alternative providers have the right to make wholesale purchases of the network`s time and capacity. The resale language was aimed at similar development in local markets. Resale implies the setting of a wholesale price and a regulatory review of that price. The Bells did not object to setting a price, but they did object to a regulatory review. Like the facilities test, the resale provision was overturned.

The regional Bells also objected to the financial separation of local activity from long-distance operations. McBee`s letter said: "The requirement that the Bell companies must establish separate subsidiaries to offer long-distance services will add costs for consumers..." The separate subsidiary provision was intended to prevent the Bells` long-distance prices from being subsidized by local services, which must happen as far as the interexchange carriers are concerned. This provision was revised and weakened. The carriers reacted to these changes with predictable outrage. MCI chairman Bert Roberts sent a letter to Gingrich saying the revisions "would heavily tilt this legislation in favor of monopoly interests and would devastate congressional efforts to achieve competition." The harsher words were left to Jim Crawford, MCI`s director of public relations: "This is an unprecedented abuse of power." In a letter to Gingrich, Sprint chairman William Esrey said: "We believe the most responsible course of action would be to work hard to defeat any legislation that enables the monopolist to squelch emerging competitors, devastate markets and harm consumers." In a public statement, AT&T chairman Robert Allen said, "If Congress doesn`t get the details right...then this legislation could come back to haunt consumers in the form of higher prices."

Disguising economic self-interest

All the previous statements--from McBee`s to Allen`s--are disingenuous. All parties are using consumer welfare to disguise their economic self-interest. It is difficult to imagine telephone executives dressing up as consumer lobbyists and descending on Capitol Hill--but descend they did. Intending to lobby every U.S. Representative, 3000 AT&T managers from several states traveled on chartered buses and trains to Washington. Sprint organized its people on the same day and sent "hundreds of employees...to the offices of the northern Virginia congressional delegation...to oppose H.R. 1555, an anti-competitive telecommunications bill. ...Sprint employees...ask[ed] the congressmen to reject the backroom dealing that turned fair and honest telecommunications legislation into a special-interest bill that would hurt competition, hurt consumers and hurt Sprint."

The scope of AT&T`s and Sprint`s efforts apparently worried the Bell companies. All U.S. representatives in Ameritech`s seven-state region received a letter from the company`s chairman, Richard Notebaert, who said: "We think you know that Ameritech employees [are not going] to Washington to rally in support of the bill. Ameritech employees are at home, on the job, delivering quality customer service to more than 13 million customers." This "we-are-more-honorable-than-they-are" message was followed by the summer`s most trivial advice. Gary Lytle, Ameritech`s vice president for federal relations, told House members: "Don`t let the AT&T show of numbers sway you. These employees are rallying on company time." Really? Raymond Smith, chief executive of Bell Atlantic, reminded the House that robber barons were on the loose and fleecing consumers: "AT&T managers were petitioning the House of Representatives to protect a chummy long-distance cartel that now feels threatened by H.R. 1555. The thousands who descended on Capitol Hill do not represent American consumers or the public: They represent the special interests of one of the world`s largest and richest companies--AT&T."

The two other factions most affected by telecommunications reform are the cable industry and the equipment manufacturers. Both have stayed out of the fray. The cable industry is on the verge of being deregulated and is not concerned about long-distance markets: "We don`t have a dog in that fight. ...We support the bill and think it will pass," said Bob Thomson, a spokesperson for Tele-Communications Inc. Stephen Efros, president of the Cable Telecommunications Association, said the interexchange carriers were just doing "a little saber-rattling" and suggested the bill could be a lot worse for the long-distance companies.

Equipment manufacturers represented by the Telecommunications Industry Association tread closer to the battle. Jot Carpenter, the TIA`s vice president for government relations, said the bill`s revisions "will make it more difficult for new competitors to enter the local exchange market. ...[The revisions] are likely to have a negative impact on the demand for telecommunications equipment. This is not the direction we want the bill to move." Reading these statements at face value, The Wall Street Journal reported that the TIA had withdrawn its support for the bill. However, if the interexchange carriers thought they had an ally, they were mistaken. Carpenter quickly recanted the TIA`s remarks, saying: "Its shortcomings notwithstanding, enactment of H.R. 1555 should serve to dramatically [increase] the demand for the products manufactured by our members. We will seek [the bill`s passage] at the earliest possible date."

There is an old adage: "Be careful what you wish for; you may get it." The Bells` wish to enter long-distance markets may be their undoing. In Geodesic Network II, Peter Huber of the Manhattan Institute suggests that AT&T`s large investment in fiber optics networks makes the company the low-cost provider of long-distance services--now and well into the future. Huber says: "It would be demented for MCI and Sprint to kick off any serious price war with AT&T. ...Why do MCI and Sprint survive? AT&T could wipe them out in very short order if political, regulatory and antitrust inhibitions were ever swept aside." The Bells are sweeping away those inhibitions. If Huber is correct, the Bells` long-distance offerings are destined for extinction and will survive only to the extent that local services are fodder for the long-distance battle. The picture should be complete by Halloween, McBee`s estimated date for passage of the legislation.

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