Baby Bells Are Bawling

They mean to stall the telecom act in court

When the Telecommunications Act of 1996 was signed by President Clinton last February, it looked as if the era of full and free competition in the nation's telecom markets had finally arrived. But as soon as the Federal Communications Commission began rolling out rules for the new competitive world, some local phone companies ran to the courts seeking to halt the process. On Oct. 15, they persuaded a federal court to delay the new regulations. "The FCC was trying to accelerate competition," says Scott Cleland, a consultant at Washington Research Group. "Consumers may not have seen benefits for a couple of years, and now it may take longer."

This is just the first of many legal brawls sure to be ignited by the telecom act. Like the Baby Bells, cable operators and long-distance carriers are certain to fight FCC rules easing entry into their markets. Cable companies are suing the FCC for more flexibility for themselves while at the same time lobbying for tight oversight of phone companies that enter video markets. Long-distance companies, trying to enter local markets, are constantly sparring with locals and are being forced into arbitration to settle their differences.

COSTLY DELAY. Make no mistake: Telecommunications competition is still going to happen. While the Baby Bells and others may be able to delay the implementation of this or that provision of the act, the law is on the books. FCC bureaucrats will eventually be able to draft rules that the courts will approve. But companies may be able to stall any meaningful competition for a few years, which could be worth billions.

The frontal assault by local phone monopolies gives a peek into how tenaciously the players will fight to protect their traditional turf. For the locals, the lightning-rod issue was the FCC's rules setting out how much new competitors must pay them to lease all or part of their existing phone service at wholesale prices and then resell it to consumers. The FCC wanted these rates to reflect the low prices that would exist in an already competitive marketplace, not where rates had been in the past.

But the court found that the FCC may have overstepped its authority to set rates. The FCC plans to appeal the stay to the Supreme Court, in addition to arguing for their rules in the U.S. Court of Appeals in St. Louis in January. But for now, state regulators will continue to set most local resale rates. That's fine with the locals, since in many states, they have long-standing relationships with public-utility commissioners. Already, Connecticut has moved to set some prices well above FCC levels, arguing that some consumers' rates are below cost. In the state's rural areas, for example, the local carrier can charge resellers $16.87 a month, while it charges customers only $10.53.

The ugliest legal feud, though, still looms: over subsidies for what's known as universal service. Currently, local phone bills, particularly in rural areas, are kept artificially low through a variety of subsidies. In most regions, for example, businesses pay higher rates than residential customers, even though there is little difference in the cost of providing service. One of the largest subsidies designed to keep local calling charges low is the $30 billion in "access charges" paid annually by long-distance carriers to local phone companies.

All sides agree that access charges should be replaced with a new system. How that will be done, though, is shaping up as one of the most contentious issues in telecom. The two sides can't even agree on the amount of subsidies needed. Local phone companies put the figure at about $20 billion, while long-distance rivals estimate it at about $6 billion. The Clinton Administration is complicating things further by calling for free access to the Internet for all the nation's schools, which could add billions of dollars to the tab.

One thing is clear: Change can't come fast enough for the long-distance carriers--or slow enough for their local counterparts, who want access charges cut gradually. Because the telecom act was vague on the details of universal service, a battle could brew over state and federal oversight roles. Nine state utility commissions and the National Association of Regulatory Utility Commissioners have filed motions opposing FCC pricing rules, claiming it trampled their authority. "You've got a conflict between the FCC and the states that seems to be rising in intensity," warns James R. Young, Bell Atlantic Corp.'s general counsel.

SAME NUMBERS? While much of this legal wrangling doesn't immediately affect consumers, there is one issue that will. The telecom act calls for rules to ensure that consumers can keep their phone numbers, if they switch local carriers. Sounds simple. But ensuring that the system works as people sign up with new competitors requires significant re-engineering of telephone switches and complex databases to help route calls. Once again, local and long-distance companies are squabbling over who will pay for the new system and how much it will cost--anywhere from $1.9 billion to $4 billion, depending on whom you ask.

Given the high stakes, it's safe to assume that no matter how the number-portability rules are structured, someone will go to court. And it won't stop there. Even as long-distance companies fight for the chance to compete in local markets, they could turn to the courts to protect their own turf once local phone companies seek approval to carry toll calls. Open telecom markets may ultimately save consumers money, but in the short term, the main beneficiaries are some very busy telecom lawyers.

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