Vote Could Roil Phone Market

A climactic showdown over the ground rules for local phone competition is scheduled for today at the Federal Communications Commission.

The five commissioners are expected to vote on whether to continue requiring the regional Bell companies to lease their networks to rivals at deeply discounted rates. The FCC also will decide whether to deregulate the emerging market for ultra-high-speed data services.

How the commissioners vote will shape the future of the $100-billion local phone business, but the issues are complicated. With that in mind, here is a primer on the action at the FCC:

Question: What is the fight all about?

Answer: The main battle is over what parts of the local Bell networks must be made available to competitors at relatively cheap, regulated rates under the Telecommunications Act of 1996. Local phone companies such as SBC Communications Inc., the dominant carrier in California, can enter the long-distance market in exchange for opening up their local markets to competitors.

Policy wonks and lobbyists characterize the debate over phone competition as one over the unbundled network elements platform, or UNE-P. These elements, such as phone switches and the local loop to homes and businesses, form the building blocks for offering local phone service. The Baby Bells are required to lease these elements to competitors at a discount, which allows telecommunications providers that lack their own facilities to deliver phone service without having to run new cable.

The fight also involves a states’ rights issue: Should state officials play a meaningful role in deciding whether there is sufficient competition to justify lifting the regulated rates? The FCC says it wants to make “granular” analysis of competition, and the states maintain that they are closest to the markets and thus best able to perform such a nitty-gritty review.

Q: What arguments are the companies making?

A: SBC and the other Bells say they should not be forced to lease elements of their networks -- particularly the equipment that gives competitors the platform needed to provide dial tone -- at prices below their costs. Such pricing lowers their earnings, puts a damper on their stocks and can’t be sustained in the long term, they say.

The Bells say they have enough competition from wireless and cable TV companies to warrant the elimination of UNE-P. They say their main wire-line competitors, AT&T; Corp. and WorldCom Inc.’s MCI unit, can buy their own switches and other elements, except possibly for the local loop that connects central phone facilities to homes. The Bells say they shouldn’t be forced to subsidize competitors, which then have no incentive to invest in their own network gear under the current setup.

But the Bells’ rivals say the low-priced UNE-P is the only mechanism that encourages competition today. They point out that local residential competition is only starting to take hold in many parts of the nation, and the Bells remain monopolies in more than a dozen states.

Competitors also note that the rules are meant to be in place only until they can gain enough market share to warrant installing their own equipment. AT&T;, in particular, already has its own switches for business customers but says it doesn’t have enough local customers in any one market to warrant separate switches for them.

And they contend that the Bells are more than making up for any losses with their entry into long-distance markets, where they are grabbing far more customers than they are losing on the local side.

Q: Are the phone companies really losing money leasing their facilities to rivals?

A: One study published this month by Yankee Group estimates that the annual UNE-P loss to the Bells in New York alone is $110 million a year. Yet other experts say it is far from clear the Bells lose money on a network that phone subscribers paid to build under the old monopoly system.

The math is further clouded by the fact that eight years ago, several of the nation’s largest states, including California, Texas and New York, changed the way they calculate phone companies’ profits, switching from a “rate of return” model to “price caps.” Price caps allow phone companies to charge a consistent monthly fee instead of periodically giving phone subscribers rate cuts when profits rise above a certain level.

The change has helped the Bells that dramatically slashed costs through job cuts and new technology. As a result, the Bells generally enjoy robust profits amid a slumping tech economy.

Q: Why is resolution of this battle important?

A: It could potentially result in huge economic and technological benefits for private and business customers. By reexamining the rules of local phone competition, policymakers are aiming to duplicate the wave of competition and innovation that swept the long-distance phone business two decades ago when a federal judge broke up AT&T.;

After the breakup, long-distance rates fell more than 40%, fueled by the rise of competitors such as MCI, Sprint Corp. and WorldCom. And those companies, along with AT&T;, were the principal builders of the massive data trunk lines that helped the Internet grow exponentially over the last decade.

Q: So what is the FCC going to order?

A: The specifics won’t be known until the commission meets today. Chairman Michael K. Powell has proposed eliminating the UNE-P arrangement and other elements to spur AT&T;, MCI and other competitors to install their own local phone equipment and compete in a way ultimately envisioned by Congress. He would set up a basic national test to determine if competition is sufficient to end wholesale leasing of the Bells’ elements. The states would have little say in the process.

But a majority of commissioners -- Kevin J. Martin, Michael J. Copps and Jonathan S. Adelstein -- would keep UNE-P in place for voice communications and for data communications on existing networks up to speeds now generally available. They would, however, lift any restrictions on new cable that provides advanced services. The majority also would ask states to monitor competition to decide when to remove any restrictions.

Q: What’s all this mean for consumers?

A: Assuming the commissioners essentially leave the current rules intact, AT&T;, WorldCom and other Bell rivals -- which already control about 12 million local phone lines -- are likely to continue to lure Bell customers with cheaper rates.

Q: What’s next after today’s meeting?

A: Any of the affected companies could challenge the rules in court -- and some probably will.