FCC Weighs New Rules for Local Phone Service

The Federal Communications Commission is considering rolling back or eliminating rules that require SBC Communications Inc. and the other regional Bell phone companies to rent their networks to rivals at deeply discounted rates, sources said Monday.

The proposed rule changes, the biggest for the heavily regulated industry since a sweeping reform measure was passed by Congress in 1996, could result in higher prices for consumers, critics of the plan contend. The Baby Bells, for their part, hate the current rules.

The changes, first reported Monday by the Wall Street Journal, would require long-distance companies such as AT&T; Corp. and WorldCom Inc. to own more of the equipment necessary to sell local phone service.

Specifically, the FCC’s staff is considering proposals that would curtail or eliminate heavily discounted access to the building blocks of the local telephone network -- switches that route phone calls. Instead, the agency would require companies to spend $1 million to $3 million in each local market to buy and maintain a refrigerator-sized switch that can offer consumers a dial tone.

Currently, rivals to the Baby Bells can provide local phone service in one of three ways. They can:

* Resell Bell phone service at a discount in the same way that many smaller operators resell long-distance service provided by AT&T; and other carriers.

* Build their own facilities, as Sprint Corp. and some cable companies have done.

* Lease the Bells’ equipment at discounted rates and underprice the Bells.

The FCC rule change would eliminate the third option, which rivals have used to lure nearly 8 million local phone subscribers away from the Bells.

The proposed changes could have a significant effect in California, the nation’s largest and most lucrative local phone market, which SBC serves. Under the current FCC rules, SBC says, it is losing 12,000 local phone customers a day to rivals throughout its 13-state service area. The company did not break out figures for California.

“The current system amounts to artificial arbitrage and hurts investment,” said George Reed Dellinger, a critic of the FCC rules and a telecommunications analyst at the research firm HSBC Washington Analysis. “To provide local service requires a huge fixed-rate investment,” and the FCC, he added, wants to encourage more competitors to invest in phone facilities instead of simply reselling discounted service.

News of the proposed changes boosted the share prices of local phone companies and equipment providers.

FCC staff proposals often are modified before they are voted on by the agency’s five commissioners. Industry sources say the FCC staff probably will recommend phasing out discounted access to phone equipment in urban centers but maintaining the rules for a longer time in rural areas, which are unlikely to draw much new competition because building phone facilities in sparsely populated areas is costly.

The staff also is said to be considering applying its rule changes only to future local phone offerings and allowing customers who already get their local phone service from an alternative provider to keep it. A vote could come by next month.

FCC Chairman Michael K. Powell has long championed a “facilities-based” approach to foster the development of a competitive local phone market. Powell has been persuaded by the Baby Bells that owners of communications networks cannot be expected to invest in new technology and infrastructure if they are forced to share their facilities with competitors.

SBC Chairman Ed Whitacre told The Times late last year that the current rules are “like McDonald’s cooking a hamburger and Burger King being able to buy it for a nickel and putting their name on it. It’s exactly the same thing. No business, no matter how large, can do that for very long.”

But Powell faces opposition from commissioners Jonathan Steven Adelstein and Michael Copps, the two Democrats on the FCC. Powell also may face resistance from fellow Republican Kevin J. Martin, who is said to be concerned about the potential effect a rule change would have on states’ ability to regulate local phone service.

Critics say the FCC’s plans would increase local phone rates and derail the growing competition for local phone service, which has heated up over the last two years. During that time, AT&T;, WorldCom and several of the nation’s big cable companies have captured about 12% of the local phone market -- nearly 10 million customers.

“The problem with using your own facilities is that you cannot connect the wires in an economic or efficient way” to the Bells’ network, said Leonard J. Cali, director of government relations at AT&T;, which opposes the change.

FCC staffers believe their plan can help reinvigorate the telephone equipment market and perhaps jump-start new technologies such as using the Internet to handle voice calls.

“Carriers for the most part are still relying on traditional technologies to handle voice traffic,” said Chris Nicoll, a vice president at Current Analysis, a Dulles, Va.-based technology research firm. But businesses, he noted, are moving to voice over the Internet, “and this could accelerate that trend.”

The Bells already have seen their bread-and-butter local phone business struggle amid the nation’s economic woes.

Congress believed it had laid the foundation for robust local phone competition in 1996 when it passed the landmark Telecommunications Act. Among other things, the measure required the Baby Bells to open their networks to competitors that would provide local phone service and high-speed Internet access.

But the Bells spent years fighting the law in court and lobbying the FCC and state utility regulators to ease compliance.

Shares of SBC rose $2.31 to $31.19 and BellSouth Corp. climbed $2.13 to $29.25. Qwest Communications International Inc., which also has a local network, rose 55 cents to $5.93. Verizon Communications Inc., the biggest local phone company in the country, gained $3.62 to $44.07. AT&T; fell 18 cents to $27.48. All trade on the New York Stock Exchange.

Lucent Technologies Inc., the largest U.S. maker of telephone equipment, rose 9 cents to $1.54, and Nortel Networks rose 17 cents to $2.02, both on the NYSE. Cisco Systems Inc. rose 29 cents to $14.20 on Nasdaq.