States block local competition, out-maneuver federal government

STEPHEN N. BROWN

While the national press focuses on Washington, DC, as the center of telecommunications reform, equally hard-fought legislative battles are taking place in Texas, Virginia, Georgia, Florida, Tennessee, North Carolina, Washington, Colorado, California, Illinois, New York and Massachusetts. Depending on the state, the resulting legislation may retard the development of competition in local communications markets. Much of the state legislation is at odds with the positions espoused by Vice President Al Gore, the guiding hand behind much of the Clinton Administration`s telecommunications policy. The contention between federal and state goals can be attributed to the organizing and planning capability of the regional Bell holding companies. They are adept at rough political infighting not only in the nation`s capital, but in each state capital, as well, where they are the most experienced and best financed telecommunications players. The companies have no problems finding state legislators to sponsor bills aimed at changing the regulatory law of each state. In January, the holding companies launched state-legislative campaigns to achieve goals that either complement their victories in Washington, DC, or block the potentially adverse effects of federal legislation.

Early this year, it looked as if federal telecommunications legislation would allow regional Bell operating companies to enter statewide and national long-distance markets by 1997. That "date certain" did not survive: The telephone companies` entry will be delayed until they demonstrate that competition is effective and viable in their local markets. The latest round of state legislative activity suggests the companies have decided to play tit-for-tat, making the local market less accessible to a competitor until the telephone companies are allowed to offer long-distance service. Currently, they are allowed to offer long-distance service only within local access transport areas. These are defined by the area codes used for long-distance calling. An intra-LATA long-distance call originates and terminates within the same area code. An inter-LATA call originates in one area code but terminates in a different one. In many states, intra-LATA service is offered not only by the telephone company but also by competitors. Virginia is an exception. In 1986, it granted Bell Atlantic a monopoly on intra-LATA service. In recent hearings, the company opposed the termination of its monopoly, suggesting that the federal prohibition on statewide and national long-distance service would cause customers to shift their intra-LATA calls to such carriers as MCI or AT&T.

In view of what competition might bring, Bell Atlantic is probably wise to protect its monopoly. In Missouri, Georgia, Tennessee and Florida, AT&T is offering small businesses a plan that reduces their long-distance bill--including both intra- and inter-LATA charges--if the small business` cost exceeds a certain threshold, such as $25. By combining both intra- and inter-LATA service, AT&T has a marketing advantage over a regional Bell operating company. AT&T also has a technical advantage: It bills an intra-LATA call for an initial increment of 30 seconds and then in additional six-second increments. Local telephone companies usually bill intra-LATA calls in full-minute increments. Thus, Bell Atlantic may have a lot to lose when competition reaches Virginia`s voice communications market, but such losses could be offset by the company`s access to video markets.

Bell Atlantic now has the legal right to provide video programming services across LATAs. In March, U.S. District Court Judge Harold Greene gave approval that allows the company to:

Deliver video programming nationwide by satellite

Provide local video distribution in multi-LATA systems containing at most four LATAs that are outside the company`s service territory

Use a central video storage facility to serve multiple LATAs throughout the United States

Provide, within Bell Atlantic`s service territory, local video distribution in the same geographic areas now served by cable companies, even if the cable franchise extends across LATA boundaries.

The other telephone companies are on the same track as Bell Atlantic. They need the same legal rights to offer consumers an integrated system of voice, video and data services over one communications line. An integrated system will be very costly, but the Bells are well financed with equity levels of approximately 60%. This percentage is much better than the cable industry, which often has equity levels in single digits. The telephone companies are likely to be the first ones to build a network that brings integrated services to the home and small business markets, which are probably too small to support more than one such network. Therefore, competition in local markets is not predicated on new providers entering cities and building entirely new communications networks. Competition is predicated on access and interconnection to the regional Bell operating companies` networks. However, interconnection is the exact spot where federal and state legislation is failing to maintain a cohesive national policy.

Pending federal legislation

Gore`s office released a position paper that clearly shows the failings of the interconnection provisions in Senate Bill 652, the Telecommunications and Deregulation Act of 1995. The bill allows incumbent local telephone companies to establish interconnection through negotiated agreements with their competitors. At best, the administration sees this as a stall tactic by the local telephone companies. At worst, the administration sees negotiations as providing a means for the Bell companies to bludgeon their way into the long-distance markets: "In allowing [local telephone companies]...to fulfill their duty to interconnect by negotiating agreements...the bill does not ensure timely interconnection for competitors. ...A Bell operating company monopolist may be able to use its vastly superior bargaining power...as a ticket into long distance in a given area. ...The strongest competitors...may be the last to obtain interconnection agreements." The bill requires the agreements to meet several minimum standards and makes state commissions the final arbiters of interconnection disputes [see Lightwave, April 1995, page 26]. However, the agreement is not subject to a commission`s review unless so requested by a party seeking interconnection. Without the request, no one will ever know if the agreement lives up to minimum standards. While state regulators are pleased by their power, the administration worries they will be nothing more than straw men blown away by the gale-like forces of incumbent telephone companies: "The bill...vests tremendous power in state agencies that may be understaffed and may lack the resources necessary to make the many decisions required by the bill." The bill places power in the hands of state institutions that do not usually have the political security to withstand the ebb and flow of forces in state legislatures, the same institutions that create state commissions and approve their annual budgets. State courts are a better choice to oversee an in

Senate Bill 652 withdraws substantial power from the two federal institutions regarded as experts in telecommunications issues--the Federal Communications Commission and the U.S. Department of Justice. The omission is so purposeful and blatant that it drew fire from the position paper: "The [DOJ] should be assigned a decision-making role rather than a consulting role that the bill currently dictates." In addition, Anne K. Bingaman, the Department of Justice`s assistant attorney general of antitrust division, told the Senate Commerce Committee, "Move telecommunications policy...into the hands of the two expert agencies charged with protecting the broad public interest in telecommunications, the [FCC] and...in particular, the [DOJ], which helped launch the telecommunications revolution with its suit against AT&T." The U.S. Senate will not do that, which should please Raymond Smith, the chief executive officer of Bell Atlantic, who stated, "A coalition of Republicans and Democrats in Congress is working to streamline telecommunications regulation and open the local and long-distance markets to competition. ...Adding the Department of Justice to the regulatory morass makes no sense. ...By expanding its role...DOJ becomes another chief regulator. This is bad news for consumers... ."

Despite Smith`s disapproval, there is an important role for the DOJ regarding the enforcement of interconnection agreements. Some centralized regulatory or judicial review is needed, otherwise each state will have a unique version of interconnection. This is well illustrated by pending legislation in Texas, Georgia and Tennessee. A bill in the Texas legislature has turned the interconnection argument upside down. Rather than allowing new competitors to interconnect with local telephone companies` networks, the far-thinking Texans appear to be forcing competitors to build their own local networks. The bill`s sponsor, State Representative Curtis Seidlits, is credited with the "build-out" approach that requires new competitors to duplicate many local telecommunications facilities. The Texas bill fails to make interconnection with competitors a statutory duty for incumbent local phone companies. AT&T and MCI oppose the bill, saying it excludes them from the local markets in Texas.

In Georgia, the state legislature has finished work on Senate Bill 137. It anticipates federal legislation on interconnection by saying, "In the event that such rates, terms or conditions, cannot be negotiated by the parties, the commission shall determine...the conditions for interconnection services." This is contrary to the position paper issued by Gore`s office. In Tennessee, Senate Bill 891 follows an even narrower path, restricting commission review to the initial prices for a new interconnection agreement: "If not resolved by agreement, the commission shall establish initial rates for new interconnection services." Not all states are buying into this negative trend that constrains competition. Washington State Governor Mike Lowry vetoed Senate Bill 5156, a bill he considered to be anti-competitive and one that was strongly supported by US West, the Denver-based regional Bell operating company.

The situations in Texas, Georgia and Tennessee demonstrate how state legislation can be a convenient tool to frustrate local competition. Few states have taken to heart Gore`s admonition, which he delivered to them at the Federal-State-Local Telecommunications Summit held in March: "Competition is always better than monopoly. But monopoly power must never be confused with competition. Two enemies of competition are monopoly power and unwise government regulation. We must remember, after all, that the goal we seek is real competition. Not the illusion of competition; not the distant prospect of competition."

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. For more information, call (615) 399-1239.

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