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The Baby Bells' Mighty Muscles

By Catherine Yang If at first you don't succeed, try, try again. That's the motto that the Baby Bells have lived by ever since a landmark telecommunications law passed in 1996. They never liked requirements under the new law that made them lease their networks to rivals at discounts to stoke competition in local-phone service. And the Baby Bells waged an eight-year legal and lobbying battle to kill the regulations, even as rival long-distance carriers fought back mightily, investing to get into the local-phone market all the way.

On June 9, the doggedness of Verizon (VZ), SBC (SBC), BellSouth (BLS), and Qwest Communications (Q)paid off big-time. The Bush Administration declined to intervene in an appeals court ruling gutting the local-service leasing requirements. In effect, the Bells will now be able to raise the prices they charge such rivals as AT&T (T), MCI (MCIA), and other carriers to compete in the local-service market (see BW Online, 6/10/04, "Finally, a Free Market for Telecom"). While "the long-distance companies battled it out in the marketplace, the Bells battled in the courtroom and won," says Ken McGee, a Gartner Group telecom analyst.

BIG SPENDERS. Now another front is about to open. The Bells will shift their campaign to state legislatures to try to prevent them from laying down stringent local-service rules aimed at fostering competition. But the happy ending for the Bells in the Washington saga underscores their growing power and influence at the state and local levels, too. These deep-pocketed companies are essentially local-service monopolies with strong ties to the communities they serve, and they employ battalions of lobbyists and lawyers across the country.

Few industries can match the Bell's deep-touch approach, where company reps identify promising young politicians and support them as they rise. For example, BellSouth befriended Senator John Breaux (D-La.) and former House Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.) when they were mere tadpoles in the swamps of the Louisiana legislature. Both lawmakers, retiring this year, became powerhouses in Congress.

Bell reps are so rooted in their communities that many of their employees run for local office. SBC, for one, encourages it. SBC's Larry Brown served as mayor of Stillwater, Okla., from 1997 until 2003 and helped get key state lawmakers to back pro-Bell bills. Brown adds that lawmakers make their own decisions on the bills they introduce. But he say he's happy SBC wants its employees to contribute to public service. "The company has always put great value on being a local citizen," he says. "Through our employee-based effort in the community, we make a difference to the issues that are important to our customers and that can protect our employees."

ATTACK, ATTACK, ATTACK. The Bells are also major campaign contributors. No one is suggesting that their money buys decisions like the crucial U.S. Solicitor General ruling of June 9. But by spreading around largesse, the Bells make sure that their voice is heard in Washington and state capitals.

For example, the four Bells have given candidates for the White House, Senate, and House a total of $4 million in contributions so far in the 2004 election cycle, four times as much as the three big long-distance carriers combined, according to the Center for Responsive Politics. "There is probably no more powerful lobbying group than the Bell operating companies," says Larry Irving, a former top Clinton Administration telecom official.

The Bells' strategy in the leasing case was to attack, and attack, and attack again. No sooner had the ink dried on the 1996 act than the Bells filed their first legal challenge against the Federal Communications Commission's newly written leasing rules. The Supreme Court sent back a few of the new FCC regs for redrafting. But the Bells challenged the new versions, and the D.C. Circuit agreed, overturning them again in 2001.

"PREPOSTEROUS." While the Bells waged their crusade in the courtroom, they sought a faster victory through Congress. There they had a powerful ally in Tauzin. In February, 2002, the House passed Tauzin's bill relieving the Bells' broadband businesses of the FCC's leasing requirements. A month later, SBC whisked off 25 congressional aides for a long weekend at the Hotel Del Coronado in San Diego.

Bell opponents quickly labeled the telecom seminar as a special thanks to staffers whose bosses backed that legislation. SBC says it has taken congressional staffers to California, a showcase for phone competition, every year since 2001. And such industry-sponsored trips are common. "The idea that it's a 'thank you' is preposterous and insulting," says SBC spokesman Selim Bingol. "There's nothing nefarious about it."

Tauzin's bill was blocked in the Senate by the allies of rivals. So, the Bells turned to the FCC. There they found a sympathetic ear in Republican Chairman Michael K. Powell, who had to rewrite the third version of the Bell leasing rules to satisfy the court. At first, Powell suffered a defeat. Fellow GOP FCC Commissioner Kevin J. Martin led a 3-to-2 majority to stick with the FCC's leasing rules. But the Bells, undeterred, challenged the decision in court, which led to the current D.C. Circuit ruling.

PARTIAL VICTORY. The Bush Administration, which had tried to avoid taking sides in an election year, ultimately agreed with the Bells. On June 9, the Justice Dept. declined to appeal the D.C. court decision without explaining why. The Bells agreed not to raise consumers' rates until next year. Opponents say they did so to assure the White House that rates wouldn't rise before the election.

The Bells says the election is irrelevant. "There's no deal with the White House," says SBC's Bingol. The Bells are giving their rivals time to negotiate new leasing rates.

With attention now turning to the states, SBC already has chalked up a partial victory in Illinois. Regulators there recently raised the rates for leasing lines to rivals -- but not as high as SBC had wanted. Ohio and Indiana have also raised rates.

Some think the Bells have won a major battle in Washington but ultimately face a much tougher war against a new crop of rivals trying to sell cheap phone service via the Internet and other technologies. The legions of the Bells are everywhere, however. Their gutting of a key provision of the 1996 telecom law will likely go down in industry annals as one of the biggest wins ever. In the realms of politics and policymaking, as in life, perseverance can pay off. With Roger Crockett in Chicago

Yang is a correspondent in BusinessWeek's Washington bureau

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