Push for Sell-Off of Bells’ Network Operations Gains Speed

In proposals reminiscent of the landmark 1984 breakup of AT&T;, two long-distance companies have asked federal regulators to consider splitting up parts of the Baby Bell phone companies to break the competitive logjam in the residential market.

MCI Communications filed paperwork with the Federal Communications Commission last week suggesting that the regional Bells should be required to sell off their network operations.

In late January, LCI International, another big long-distance carrier, floated a similar proposal.

The idea, though somewhat drastic, comes at an opportune time since both federal and state regulators are puzzling over why the 2-year-old Telecom Act has failed to draw new rivals into the consumer local phone market.

Much to the dismay of the local phone companies, which flatly reject the concept, some regulators are at least willing to consider the arguments.

LCI’s plan is under review by the FCC, as well as by state regulators in Illinois and Oklahoma.

At a recent hearing held by California regulators, LCI urged the state to consider its plan.

“My experience in attempting to pry open local markets for LCI has convinced me that we need a new approach if we are to see broad-based local competition develop,” Anne Bingaman, a former Justice Department antitrust chief and president of LCI’s local phone division, said during the California Public Utilities Commission hearing late last month.

Under LCI’s plan, Pacific Bell would create one unit (nicknamed “ServCo”) for selling phone service to customers, and a separate unit (“NetCo”) for selling access to its lines to rival phone companies.

The units would operate separately but remain under common ownership until being sold off, according to LCI’s plan. Any Bell company that adopted the separation concept would win fast-track entry into the long-distance market if other requirements were met.

MCI’s proposal is more aggressive. It requires the local phone companies to immediately sell off their network business to ensure the elimination of any conflicts of interest.

“I’m proposing a complete divestiture,” said Michael Pelcovits, chief economist for MCI. “I agree that it’s radical, but so was the divestiture in the early 1980s, and the result of that was a tremendous amount of customer benefit in competition in long-distance.”

Both companies say that breaking up the Bells would resolve one of the biggest sticking points in deregulation: how to guarantee equal access to the priceless phone networks that connect Pacific Bell and its sister Bell companies to homes and businesses throughout their regions.

Rivals can get around the problem by installing their own phone lines to the home, but that kind of massive network project is too costly to pay off in the consumer market. Only cable companies and others with existing lines into homes have even attempted that route.

Many companies, therefore, have focused on offering local phone service as a reseller. Under that strategy, competitors buy access to the existing lines through discount wholesale agreements with the incumbent Bell company.

But long-distance carriers have long questioned the viability of a wholesale plan that requires Baby Bells to cooperate with rivals and sell them access to their networks, and at the same time compete with them for phone customers.

Bingaman noted that the inherent conflict of interest creates an incentive for each Bell “to block the ability of those carrier-customers . . . to take away their near-monopoly hold on the local telephone market.”

Not surprisingly, the response from the Bells has been less than enthusiastic.

“The RBOCs don’t seem to be in favor of it,” MCI spokeswoman Barbara Gibson deadpanned.

Pacific Bell spokesman Steve Getzug declined to comment on the plans, except to say, “We believe the process that’s in place is going well.”

Elizabeth Douglass can be reached via e-mail at elizabeth.douglass@latimes.com