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Stalemate in the Phone Fight

By Catherine Yang While most Americans were grilling hot dogs over Memorial Day weekend, the CEOs of the nation's largest phone companies were holed up at a hotel in Washington. Convened by Federal Communications Commission Chairman Michael Powell, the chiefs of Verizon (VZ), SBC Corp. (SBC), BellSouth Corp. (BLS), and Qwest Communications (Q) faced off across the table with their counterparts from long-distance giants AT&T (T) and MCI (MCIA). Their task: to break a deadlock and reach agreements for the Baby Bells to lease their networks to the long-distance guys, which want to build out their own competitive local-calling business.

After arduous negotiations, the group produced just one deal between the two weaker players of the bunch -- MCI and Qwest. "We're very disappointed that the Memorial Day weekend negotiations failed," says an AT&T spokesperson. "The only agreement that most of the Bell monopolies seemed interested in striking was one that increased prices substantially on consumers and small businesses immediately."

The Bells may not agree with that characterization. But one thing's for sure: It's bad news for the Bush Administration, which during an already difficult election year had hoped to avoid getting sucked into one of the most intractable issues in telecom. The failure of the weekend phone summit seemed to dim the outlook for further agreements between the biggest Bells and the long-suffering long-distance carriers.

CALLING THE SUPREMES? How did the Administration get in this pickle? On Mar. 2, the D.C. Court of Appeals had overruled a FCC order requiring the Bells to lease their networks to rivals. But the FCC asked the court for some more time to get the Bells and their competitors to come to voluntary agreements before the court ruling takes effect.

Now that those talks have essentially failed, the Justice Dept. could decide by mid-June to ask the Supreme Court to rule on this messy legal battle. Some in Washington believe Justice might petition the high court on behalf of the long-distance carriers if the White House wants to take a pro-competitive stance."

But if Justice decides not to intervene, as many in Washington believe will happen, then the FCC would be asked once again to figure out a way to get the powerful Baby Bells to negotiate with the weaker long-distance carriers over whether the carriers get access to the Bells' networks, and if so, at what price. Meantime, the Bells most likely will continue to fight.

TECH SOLUTIONS. The long-distance carriers have struggled for nearly a decade to make inroads in the local-calling market. Ironically, before it's all over, technology -- not regulators, negotiations, or court battles -- may be their best strategy for getting past the Baby Bells, as Voice over Internet Protocol (VoIP) technologies gain momentum, experts say.

The war of attrition between the Bells and the long-distance carriers began when the 1996 Telecom Act required the Bells to lease their network to long-distance and other carriers to enable them to jumpstart competitive local-calling businesses in the Bells' old monopoly market. The Bells repeatedly challenged the rules in court. Since the D.C. Circuit's March decision, the largest Bells -- BellSouth, SBC, and Verizon -- have struck deals with just a handful of small competitors, but none with long-distance giants AT&T and MCI.

"As long as the government holds out the hope of preserving the status quo, it's disappointing but hardly surprising that AT&T and MCI would delay concluding commercial agreements," says Tom Tauke, executive vice-president of public affairs at Verizon.

HOPE DWINDLES. The impact of failed telecom talks falls hardest on consumers in the swing states of Michigan, Florida, Pennsylvania, and Ohio. That's where the long-distance companies have set up successful lower-cost local phone services, which are now at risk.

Usually, local phone rates don't rank in the panoply of issues closest to voters' hearts as they cast their ballots. But in such a close race, even several thousand votes in a key state could swing the outcome of the election. Thanks to the 1996 Act, Michigan is the state with the highest percentage of customers with non-Bell local phone service. Pennsylvania, Ohio, and Florida also rank high. "It's in the realm of possibility that this issue could swing 20,000 voters in a pivotal state," says Blair Levin, a telecom regulatory analyst at Legg Mason Wood Walker.

The Bush Administration is still holding out hope that the private sector will go back to the negotiating table and begin to cut some deals. "It's a tough problem. We're going to continue to work on it, but it's up to [the companies]," FCC Chairman Powell told reporters on June 3.

Yet this untenable telecom issue comes back to the doorstep of the White House at the worst possible time. And at some point, the President will no longer be able to walk the tightrope between the powerful Bells and the long-distance carriers, as they continue to try to gain access to the more lucrative local market. Yang writes for BusinessWeek in the Washington bureau

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