Bell Networks Open to Rivals, FCC Rules

In a setback for Chairman Michael K. Powell, the Federal Communications Commission approved new rules Thursday requiring the regional Bell phone companies to continue renting their local networks to rivals at discounted rates.

But the commission also freed the Bells from sharing new, high-speed data lines with competitors -- a key concession demanded by Powell.

The FCC’s 3-2 vote was a victory for AT&T; Corp., WorldCom Inc. and other carriers that have wrested more than 10 million local-phone customers -- about 2% of the market -- from SBC Communications Inc. and the other Baby Bells.

The Bells are required to lease part of their local networks to other carriers at relatively low prices to spur competition. In exchange, the Bells can offer long-distance service.

Although the outcome of Thursday’s vote had been expected for several days, it undercut Powell’s bid to execute the biggest overhaul of phone regulations since the 1996 Telecommunications Act and highlighted an ideological schism between the chairman and the majority of his commission.

In a rare move for an FCC chairman, Powell issued a blistering dissent, saying the majority’s decision was “confusing” and “legally suspect” and would prove harmful to consumers and the nation’s struggling economy.

“I fear we will see more job losses as carriers cut their capital expenditures and refuse to move forward with new investment” in telecommunications equipment, a grim-faced Powell said. “The regulatory arbitrage bubble expands ever more perilously ... and is sure to eventually pop, like dot-coms of old.”

But Commissioner Kevin J. Martin, who brokered the majority compromise, said the decision “achieves a principled, balanced approach” that ensures both competition and deregulation and gives the states a strong role in the process. The Republican said the new rules were “consistent with the statute and the rulings of the courts.”

Nearly three years in the making, the FCC’s decision on local-phone competition rules left many unhappy and had some questioning the leadership of Powell, the son of Secretary of State Colin L. Powell.

Telecommunications analyst Vik Grover of Kaufman Bros. said Powell has shown “poor leadership.”

“He blew his chance to fix the telecom sector; his dissenting opinion shows his lack of understanding of the marketplace,” Grover said. “He should resign. He is a lame duck now betting the farm on the judicial system to bail him out.”

Indeed, the final written version of Thursday’s order is likely to be appealed to the federal courts both by the Bells and by those relying on Bell networks to compete.

Under the FCC’s order, the Baby Bells would continue to be required to offer access to local-phone switching to rivals serving consumers and small businesses. But the FCC eliminated the requirement for rivals serving corporate customers with high-capacity lines. State regulators would maintain their role overseeing the leasing of phone facilities in local markets.

The Baby Bells long have complained that the regulated lease rates are too low -- in effect forcing them to subsidize the success of their competitors. SBC, the dominant local carrier in California, said Thursday’s decision ignores the “new world” of telecommunications, in which competition comes from cellular telephones, the Internet and cable telephony.

“Instead of acknowledging this new reality and freeing telecom companies to invest and bring new services to consumers, today’s decision preserves the status quo of lost jobs, corporate subsidies, illegal rules and diminished investment,” said William Daley, SBC’s president. “It is a loss for American consumers, telecom employees and advocates of real reform.”

Daley said the ruling allows AT&T; and WorldCom’s MCI unit to “continue cherry-picking the highest-margin customer without providing any benefits to the average consumer” and gives competitors guaranteed profits for exploiting their failed business models.

At the same time, the Bells won a key concession from the FCC. The agency plans to phase out over three years the requirement that the Bells share the part of their copper lines that can be used for high-speed Internet access known as digital subscriber lines, or DSL. Instead, high-speed Internet service providers such as Santa Clara, Calif.-based Covad Communications Group Inc. would have to pay higher lease fees.

The FCC also gave the Bells freedom to exploit the emerging market for ultra-high-speed access lines, which carry data 1,000 times faster than today’s analog computer modems. But most experts, and some of the Baby Bells themselves, said they were unlikely to invest in new fiber-optic cable anytime soon.

AT&T; and MCI applauded the continuation of rules on voice communication but decried the decision to exclude them from the Bells’ ultra-high-speed data networks. The decision “grants the incumbent monopolies far more deregulation than warranted,” said AT&T; general counsel James W. Cicconi. MCI Mass Markets President Wayne E. Huyard said rivals would be relegated to an “inferior method of broadband delivery.”

Critics complain that Powell held off for a year on issuing a 400-page proposal for overhauling telephone competition rules until a month before a vote was due. Commissioner Michael J. Copps, a Democrat, said at Thursday’s meeting that the tactic left little time to negotiate.

Powell, who staked out a clear deregulatory position, also was outmaneuvered by fellow Republican Martin. Martin successfully sought to preserve a greater local-phone oversight role for the states.

The relationship between the two men soured in recent weeks amid private grousing by Martin that Powell is autocratic and does not respect the views of his fellow commissioners. But Powell supporters say it is Martin who has been belligerent.

Powell and Martin made an attempt at detente Thursday. The two men patted each other on the back and shook hands before the meeting. Powell later described the FCC’s deliberations as a tough proceeding.

It may get tougher. On Capitol Hill, at least one lawmaker called for legislation to address local-phone competition.

Rep. W.J. “Billy” Tauzin (R-La.), chairman of the House Energy and Commerce Committee, which oversees the FCC, blasted the decision as “a low point” for the agency and singled out Martin as a “renegade Republican.” In recent weeks, Tauzin has twice summoned Martin to his office in an effort to persuade him to compromise with Powell.

Sources said Powell was hurt by the opposition of a wide array of traditional Republican backers, including conservative and small-business groups.

“Anytime you’ve got a regulatory body that has so many deep splits between the membership, it makes it difficult to lead that body,” said David Bergman of the National Assn. of State Utility Consumer Advocates.