Telecom industry battles over amendments to Telecom Act

May 1, 1998

Telecom industry battles over amendments to Telecom Act

By STEPHEN N. BROWN

The continuing failure of the Bell operating companies to pass muster on statutory requirements and the legal uncertainty over the Telecom Act`s constitutionality compel new legislative efforts.

The Bell operating companies are still unable to offer long-distance telephone service. Every company`s application to offer such service has been turned down by the Federal Communications Commission (fcc). The agency judges the applications according to the Telecom Act`s Section 271, which the fcc interprets as requiring the companies to give their competitors open and irreversible access to local markets prior to approving the application.

But the fcc may grant approval to Bell Atlantic regarding its provision of long-distance service in New Jersey or New York. A carefully conditioned approval of Bell Atlantic would not be a blank check to other operating companies. At the same time, an approval would protect the fcc from charges that it cannot make impartial judgments about the Bells. The companies worry about the fcc having an ulterior motive: After entry into one state is granted and the agency shows itself to be supposedly impartial, it will revert to its prior stance and delay the Bells` long-distance entry in other states. To counter this possibility, the chairman of the Senate Commerce Committee, Senator John McCain (r-az), is proposing a bill to repeal Section 271 and replace it with a one-year waiting period, after which the operating companies would be able to enter the long-distance market.

New bills proposed

Senator McCain`s bill is a return to the operating companies` original proposal of 1995, when they wanted access to long-distance markets by a "date-certain," such as January 1, 1999. The date-certain idea was opposed by nearly all non-Bell parties. They argued that it gave the companies no reason to open a local market to competition; thus, a date-certain would grant the Bells access to long distance while they stone-walled their would-be local competitors. at&t, mci, and others have not changed their perspective. They oppose McCain`s bill, and it is unlikely to become law.

Another bill is being crafted to relieve the Bells` frustration. Senator Mike DeWine (r-oh) and Senator Herb Kohl (d-wi) have proposed that the companies be allowed to bypass the Section 271 procedures and enter the long-distance market in exchange for divesting themselves of key local assets that could be used to block local competition. This latest proposal is named the "Telecommunications Competition Act of 1998." It allows a Bell company to submit a local facilities divestiture plan to the Department of Justice (doj) for review by its Antitrust Division. If the doj approves the plan, the company would be granted immediate entry into long-distance markets.

For each state where the Bell company owns local networks, "divestiture" means "to spin off the local network facilities of the company with respect to the State by creating one or more separate corporations that are unaffiliated with the company in order to operate such local network facilities." To ensure that there is no bond between the new local company and its former parent, the bill requires that the local network facilities corporation "not have any board members, officers, employees, assets, brand or trade names, or network facilities in common with the [Bell] company...[and] the directors, officers, or agents of the [Bell] company [shall not] directly or indirectly own any stock of any such local network facilities corporation."

The bill was discussed during a hearing conducted by the Senate Judiciary Committee`s Antitrust and Competition Subcommittee, which is chaired by DeWine. The subcommittee heard from several witnesses, including fcc chairman William Kennard, who described the divestiture bill as "a very important issue to be raised.``

Naturally, the bill is supported by the established long-distance carriers and the Bells` local competitors. But there appears to be no good reason for such support because local divestiture is voluntary rather than mandatory. Also, it would be irrational for the Bells to voluntarily divest because local facilities provide access to many other markets. The companies` one-stop-shopping strategy, whereby they offer local, long-distance, Internet, and video services, is predicated on control of local facilities. DeWine`s bill appears to be an empty exercise at first glance.

Credibility problem

However, if the Telecommunications Act of 1996 were amended by DeWine, the Bells would face a long-term credibility problem in Congress. They have argued for years that local networks are a money-losing business. This theme was reiterated by sbc`s president of operations, Royce Caldwell, who told the subcommittee, "The local-exchange market is characterized by basic telephone service...which for the vast majority of customers is priced below cost....at&t Chairman Michael Armstrong announced [that] at&t needs a 50% to 60% discount to compete [in the local exchange]....[I]t is impossible for a local-exchange carrier to acquiesce... and remain financially viable."

This argument would be neutralized by local divestiture. If the local exchange network is unprofitable, then it makes sense for the local company to "spin off" these facilities and move into the more profitable long-distance arena. Apparently DeWine`s bill can do no harm because it does nothing more than give the Bells an opportunity to free themselves of unprofitable networks. This is where the trap is sprung. The longer the Bells hang onto local networks, the less credible is their complaint about profit, and the more it seems that what they really want is market control. If they resist DeWine`s bill, the Bells undermine their efforts to free themselves of Section 271 and ensure that McCain`s proposal goes nowhere.

DeWine and Kohl`s bill is a response to a Texas federal circuit court opinion that Section 271 is unconstitutional (see Lightwave, March 1998, page 34). In a letter sent to the assistant attorney general of the doj`s Antitrust Division, Joel Klein, both senators expressed their disappointment with the court: "We are especially concerned [the] decision will disrupt the process explicitly designed...to open local telecommunications markets to competition....[I]t is more important than ever that the Antitrust Division show resolve in vigorously implementing all aspects of the law....[W]e support you in your efforts."

It is no accident that DeWine`s proposal places a substantial amount of power back into the doj. This is a replay of an old issue, as is McCain`s proposal. When the Telecommunications Act was first negotiated, there was great disagreement over whether the fcc or the doj should have final authority to approve the Bells` applications under Section 271. Senator Strom Thurmond (r-sc) raised this issue in the subcommittee`s hearing and asked Klein, "You know that Congress decided that the fcc would make the decision....How has this proven to be in practice?" Klein responded, "Let me thank you personally for bringing about that compromise, because I think it is the right structure. I think that the fcc should be the ultimate decision-maker. From our part at the [doj]...we are satisfied with it."

But Klein`s response is accurate only to the extent that Section 271 is constitutional. If it is not, then the final decision-maker will no longer be the fcc, as indicated in the doj`s response to DeWine`s letter: "If the district court`s ruling invalidating Section 271...is not reversed on appeal, the [doj] will consider all possible options currently under review, including a possible reinstatement of the at&t consent decree, in order to protect and promote competition in all telecommunications markets." Under the consent decree, the doj was the sole arbiter of the Bells` market entry.

Despite the potential reassertion of the doj`s authority, DeWine`s bill has merit because it severs the tie between technological advancement in local networks and a company`s aspirations in long-distance markets. Corporations that have only local network facilities will have incentive to profit by increasing the networks` carrying capacity so that every conceivable service could be brought to users by someone other than the local company. mci`s chairman Bert Roberts suggested this possibility when he told the subcommittee, "We think that there will be a need for a symmetrical network...capable of moving information in and out of the home at the same speed...that will facilitate the creation of all kinds of services." The best fit for a symmetrical network is fiber-to-the-home, where profit is not necessarily based on a flat rate, but on a bit-rate applied to traffic sent to and received from the network. This would be a perfect pricing scheme if there were sufficient traffic. q

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