Senate Votes to Let Baby Bells Manufacture : Telecommunications: The bill would let the regional phone firms compete with AT&T; by letting them make equipment.

The Senate overwhelmingly approved legislation on Wednesday that would allow the nation’s seven regional Baby Bell telephone companies to research, design and manufacture telecommunications equipment in competition with their former parent, American Telephone & Telegraph.

The legislation, approved on a 71-24 vote, would lift one of the major restrictions imposed on the phone companies seven years ago. Last-minute lobbying by the Bush Administration and the threat of a presidential veto, however, failed to induce the Senate to delete a provision that would have required the companies to manufacture all of their equipment in the United States.

The White House strongly supported the effort to lift manufacturing restrictions placed on the Baby Bells, formed in 1984 after the court-ordered breakup of AT&T.; But the Administration is strongly opposed to the domestic content provision that it says is a violation of free-trade principles, and the President has threatened to veto the bill if that provision is not removed.

However, keeping a compact with labor, the Senate defeated on a 64-32 vote an attempt to delete the provision that was offered by Sen. Phil Gramm (R-Tex.).

With a veto threat hanging over the bill, prospects for the legislation remain uncertain. Two similar bills have been introduced in the House, but only one contains the domestic content provision of the Senate legislation.

Although Administration allies in the Senate knew they did not have enough votes to strip the provision from the bill, they had hoped to demonstrate that they at least had enough support to sustain a presidential veto, thus making it easier to take the provision out when the bill is reconciled with the House version of the legislation.

But the vote on the Gramm amendment left the Republicans two senators short of the number they would need to sustain a veto--an outcome that leaves an eventual showdown over the domestic content in doubt. Of the four senators who did not vote Wednesday, only Sen. John H. Chafee of Rhode Island is a Republican.

The bill passed by the Senate represents a major victory for the Baby Bells, which have been fighting to relax operating restrictions imposed on them after the breakup of AT&T.; The seven companies, each of which serves as a holding company for several smaller operating firms, have been allowed to retain their monopolies over local phone services. But to prevent possible antitrust abuse, they were barred from offering long-distance services or from entering the manufacturing and information services markets.

The legislation passed Wednesday would lift the restrictions that apply to manufacturing. A U.S. District Court in Washington may soon decide whether to lift the information services ban, at least in part.

For proponents of the bill--including organized labor, the Bush Administration and the phone companies--allowing the Baby Bells to manufacture telephone equipment is a long overdue step toward increasing domestic competitiveness in high-tech telecommunications, which has been increasingly taken over by foreign companies since the AT&T; divestiture.

“This legislation is essential to the future competitiveness and economic security of the United States,” Sen. Ernest F. Hollings (D-S.C.), chairman of the Senate Commerce Committee, said earlier this week in introducing the bill.

Richard R. Roll, a spokesman for Pacific Telesis, a Baby Bell and San Francisco-based holding company for Pacific Bell, said the company is “very pleased” with the vote and that it indicates that the “Senate is concerned about the competitiveness of U.S. industry.”

However, he added that because the bill must still pass muster with the House and the White House, “we’re a long way from complete freedom.”

Should the legislation clear those remaining hurdles, he said, Pacific Bell would see opportunities in helping to design and develop the basic underlying telephone network. Among other things, Pacific Bell could make software modifications in existing switching equipment to meet customers’ specific needs, and it could join forces with small manufacturers interested in partnerships.

Making home telephone equipment would not be appealing because that field already is so competitive, Roll added.

Opponents, however--including AT&T;, several consumer groups and large media organizations--said the bill represents the first opening of a door that eventually could be thrown wide open to deregulation of the telephone industry, with adverse consequences for consumers and others who provide information-related services.

The opponents said they fear that the Baby Bells will be tempted to pass along their manufacturing costs to consumers by raising phone rates. Others argue that it would allow them to expand their monopolies by buying only from themselves, thus repeating the antitrust abuses that AT&T;’s divestiture was supposed to have eliminated.

Supporters of the measure countered by saying these concerns are groundless, since a number of safeguards are included in the legislation. Among them are provisions prohibiting the Baby Bells from manufacturing in conjunction with each other; requiring them to manufacture only through separate affiliates, which in turn would have to make their products available to other local phone companies on a non-preferential basis, and requiring that the Federal Communications Commission issue rules obligating the manufacturing affiliates to make public their financial information.

The bill gained support from some lawmakers who were angry because AT&T; has moved thousands of manufacturing jobs overseas since its divestiture.

And what began as an argument over competitiveness soon shifted into an emotional debate about protectionism. Gramm led the Administration’s unsuccessful charge against the bill’s domestic content provision that, in addition to requiring all manufacturing to be done in the United States, also requires at least 60% of the components to be made in this country.

“This provision does not belong in this bill. It flies in the face of everything we are trying to do in trade policy. . . . It is protectionism, pure and simple,” Gramm said. “We cannot be the fundamental force in the world in trying to promote trade openness and at the same time promote protectionist measures in this country.”

Protectionism, Hollings retorted, “built Europe and built Japan and the Pacific Rim.” He said the best way to persuade other countries to abandon protectionist trade barriers is to react tit-for-tat.

“If you raise a barrier against a barrier, then you can remove them both,” he said.

Phone Deregulation at a Glance Major provisions of the bill passed by the Senate on Wednesday to allow the seven regional Bell telephone companies to compete with American Telephone & Telegraph in manufacturing telephone equipment:

The regional companies must make all their products inside the United States. AT&T; could continue its overseas manufacturing.

All products made and sold by the regional Bell companies must contain at least 60% American-made parts.

Bell companies could not jointly manufacture with each other, but could run joint manufacturing operations with other companies based in the United States. They could not enter manufacturing agreements with foreign companies.

Manufacturing subsidiaries set up by the regional Bell companies would be subject to federal and state audits.

Bell companies would have to sell their equipment to small independent local phone companies. Once the smaller companies purchased equipment, the Bell companies would have to continue selling them software as long as they could make a profit from doing so.

Times staff writer Martha Groves in San Francisco contributed to this story.