Posted on 09/17/2002 4:49:34 PM PDT by HAL9000
WASHINGTON -(Dow Jones)- The local telephone industry's financial woes have become a tool in an intense lobbying campaign for deregulation.The fix being sought by the industry: Elimination of rules that require companies like SBC Communications Inc. to lease elements of their networks at deep discounts to competitors that are entering the local telephone service market, like AT&T Corp. or WorldCom Inc. .
But regulation isn't the sole cause of SBC's decline in net income last quarter, says David Loomis, an economist at Illinois State University who previously worked for Bell Atlantic, now Verizon. Regulation isn't the only reason for BellSouth Corp.'s drop in projected earnings or Verizon Communications' pessimistic financial targets either, he said.
The rules were the same when the companies were booming, Loomis says. If the rules are so tilted against Bell companies, then why aren't their competitors doing well? he asks.
"It's more the economy than regulation," he says. "I don't think you're going to fix the problems through deregulation. You have to wait for the overall economy to rebound."
Nevertheless, Walter McCormick, head of the local phone industry's trade association, the United States Telecom Association, says the White House and Federal Communications Commission are sympathetic.
"Throughout government, throughout our industry, throughout this country, there is increasingly concern about the state of this industry and the state of the nation's economy," he told reporters in a recent meeting.
At issue is the FCC's policy regarding so-called "unbundled network elements," or UNEs. UNEs include the Bell's "last-mile" telephone line to the home, central office switches, operations support systems and other components of local telephone service. The 1996 Telecommunications Act required that dominant local phone companies, in exchange for deregulation, help jump-start competition by allowing competitors to lease network elements at deep discounts.
The UNE discount is deeper than the 20% reduction offered to competitors who simply resell the Bell networks in one piece. To the dismay of the Bells, the FCC also required the Bells to reassemble those elements into a working " platform," a concept called UNE-P.
That policy allowed competitors to essentially resell the Bell lines at 40% to 50% discount, rather than 20%.
Until recently, competitive use of UNEs wasn't much of a threat to dominant local telephone companies. As of December, only 4.8% of the nation's telephone lines relied on UNEs, according to the FCC.
But since then, many states have cut UNE prices dramatically. WorldCom and AT& T Corp. quickly launched local service using UNE-P, enabling them to offer attractive packages of local and long-distance service.
"The state regulators wanted to bring competition to residential areas," says Blair Levin, a telecommunications and media analyst with Legg Mason Wood Walker Inc. Reducing the price of the UNE platform "was the best way to do it."
Only 6.6% of the nation's residential and small-business customers were served by competitive local companies at the beginning of this year, according to the FCC.
UNE-P entry is a special threat to SBC, which has yet to receive permission from regulators to offer long-distance service to customers in its Ameritech region in the Midwest, Levin says.
Letter Urges 'Quick And Decisive' Action
On Monday SBC forwarded reporters a letter from about 100 members of Congress urging FCC Chairman Michael Powell to take "quick and decisive" action to reverse the agency's UNE policy.
Lead signers of the letter were Reps. Billy Tauzin, R-La., and John Dingell, D-Mich. They are the authors of a bill that would deregulate Bell broadband services, a bill that was also the subject of an intense lobbying campaign.
The so-called Tauzin-Dingell bill is stalled in the Senate.
"The grave situation confronting the telecommunications industry grows more severe with each passing day," the lawmakers said.
While the Bells may be overstating their case, analysts agree that the UNE policy has an impact.
"I do think UNE-P is detrimental" to the financials of dominant local carriers, says Anna-Marie Kovacs, a telecommunications analyst with Commerce Capital Markets. "But obviously, there are other factors."
Those factors include the poor economy, competition from cable modems and cable telephony, and the Bell companies' own Internet service using high-speed DSL modems, eliminating the need for customers to buy a second telephone line.
But the push by the Bells to cut off UNE-P now that local residential competition is finally emerging outrages consumer groups.
"The Bells want to get rid of UNE-P and have an unregulated monopoly," says Mark Cooper of the Consumer Federation of America. "If they want to say they are a utility and they need a commitment from the government so they can maintain their infrastructure, then they should be regulated as a utility."
He adds "How can you have competition without exchanges of market share?"
In the end, a May decision by the U.S. Court of Appeals may speed change more quickly than the Bell lobbyists. The court told the FCC it had no authority to mandate cut-rate network elements that are available on the market.
As it happens, the FCC was already heading in that direction in its own review of UNEs. Illinois State University's Loomis notes that some change to the policy is warranted to ensure that competitors innovate by building some or most of their own networks.
But the USTA is pushing for outright elimination of the UNE-P policy. We can't stay in business, McCormick says, "if we have to offer up out networks below our costs."
Analyst Levin believes the FCC will take a more nuanced approach to complying with the court order. Inevitably, any policy change will be challenged in court.
"The Bells won't have any real clarity on the issue" for some time, Levin says.
No, the best way to bring competition to residential areas is structural separation of the Bell monopolies into wholesale and retail units. This will allow the Bell wholesale units to operate profitably by charging a uniform rate for the platform to all of the retailers - including the Bell retail units - and permit a competitive environment that will encourage investment and growth.
Corporate bureaucracy, unions, antiquated equipment, overpriced equipment, lousy network design, etc.
The prices would be similar, but the service would improve. The retail companies would offer free enhancements to gain marketshare. Company A would include free Caller ID, Company B would include free dial-up Internet, Company C would include 60 free minutes of intrastate long distance per month, etc.
SBC can sell local service in New Jersey.
Verizon can sell local service in Louisiana.
It will open new retail markets for them, while they maintain their wholesale natural monopolies.
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