The Federal Communications Commission’s latest attempt to overhaul rules governing competition for telephone and internet services was supposed to herald a new era of clarity in the turbulent telecommunications industry. Instead, analysts say, the FCC’s Feb. 20 decisions reveal discord within the agency itself and spell even more uncertainty for schools and other consumers.

The nation’s four regional Bell companies—BellSouth Corp., SBC Comm-unications, Verizon Communications, and Qwest Communications—complained that the FCC failed to drop outdated rules that let competitors use local Bell networks at discounted prices. Consumer groups praised the decision because it preserves the ability of long-distance carriers such as AT&T Corp. and WorldCom Inc. to offer local telephone service.

But consumer groups also complained that the Bells won dangerous power over the future of broadband internet access, closing out smaller providers and guaranteeing higher prices and fewer choices for residential users.

For now, all that is certain is that the future of communications in America will be played out, once again, in the courts. Congress could step in, but many observers say that appears unlikely anytime soon with so many other issues dominating Washington these days.

“The surprise is not so much that we did not achieve what we hoped to on so many issues,” said Thomas Tauke, top lobbyist at Verizon Communications, the nation’s largest phone company. “The surprise is the disarray within the FCC and the resulting lack of a coherent legal and policy philosophy.”

Competition for local phone service

The FCC was faced with an extraordinarily complex task: to reconsider, by a court-ordered deadline, its enforcement of the 1996 Telecommunications Act. Two earlier sets of rules had been rejected by federal judges.

One major ruling Feb. 20 was that state regulators will decide where, and at what price, Bells must make parts of their networks available to rivals to ensure local telephone competition. In its 3-2 decision, the FCC rejected arguments from the Bells that existing federal competition rules should be eliminated altogether.

Behind the commission’s divided ruling is a requirement that the Bells lease parts of their local networks to competitors such as AT&T and WorldCom at discount rates. The policy was adopted seven years ago to encourage companies to compete in the Bells’ markets while giving the Bells the chance to offer long-distance service in their regions.

Consumers could benefit from the decision to shift authority to states because local regulators tend to focus more than the FCC on keeping phone bills low, said Kathie Hackler, an analyst with Gartner Dataquest.

“States have more of a capability to deal directly with consumer issues,” she said.

The Bells say the leasing rules allow competitors to use their networks at artificially low prices.

James C. Smith, an SBC senior vice president, called the decision “a pipe dream of people who have spent no time working in the real world.” Smith and officials from other phone companies said they would increase lobbying of Congress and state regulators and appeal the FCC decision in the courts.

The vote marked an unusual defeat for FCC Chairman Michael Powell, who advocated eliminating the network-sharing requirements altogether. Powell agrees with the Bells that competition for local phone service is vibrant in many forms, including wireless phones, eMail, and cable and internet technologies. But Republican Kevin Martin, a former campaign aide to President Bush, sided with the commission’s two Democrats for a 3-2 majority.

Telecom analyst Phil Jacobson of Network Conceptions LLC said he was surprised that Powell, son of Secretary of State Colin Powell, wouldn’t compromise on a position that probably was politically untenable, considering that the existing rules let Bell rivals provide local service on 10 million phone lines.

“It hurts his credibility for really being able to accomplish much,” Jacobson said. “It shows that he doesn’t just have a self-righteous attitude—he has a self-righteous attitude even when he’s not right.”

Other observers called Martin’s approach a cop-out.

“We’re going to have this hodgepodge of 50 different regulatory fiefdoms, unless the courts strike this all down,” said Adam Thierer, director of telecommunications studies at the Cato Institute, a libertarian think tank.

Martin acknowledged Feb. 21 that the process had been difficult for the FCC and himself personally. He said no matter how the FCC had voted, it would have been challenged in court.

“If everyone is mad at you, maybe you got it right,” he told a Georgetown University conference. “That definitely feels like that’s true today.”

Future of broadband services in question

In another split 3-2 decision, the FCC did free the Bells from having to make new high-speed fiber-optic lines available to competitors at regulated prices. The Bells had long sought this bit of deregulation, saying it was vital for them to compete better with cable modems and get broadband internet access to more homes. They also said they would have no incentive to invest in costly new networks if competitors were to profit from them.

“Their bluff was called,” said Joan Marsh, AT&T’s director of federal government affairs. “It’s time for them to put their money where their mouth has been for a number of years.”

Bell executives countered that because the FCC didn’t do enough to keep their basic landline phone business from shrinking, they won’t have the money to invest in new fiber networks.

Chairman Powell reacted sharply to those statements from the Bells, saying, “Here is a lot of crying crybaby reaction to the decision.” The Bells’ announcements were more like “public affairs reactions” than like reasoned management decisions, Powell said, adding that he was getting tired of the “passion play between billion-dollar self-interested actors.”

Some analysts said the Bells were given an enormous opportunity to confirm their lock on the “last mile” of wiring to individual homes and schools. Indeed, Covad Communications Co., which leases Bell lines to provide digital subscriber line (DSL) high-speed internet access, said it might abandon selling to consumers and concentrate only on businesses.

Although emerging wireless technologies can get around the last-mile bottleneck, those have nowhere near the power of fiber-optic lines.

“If the [phone companies] were to play their cards right, we’d get a lot of new services but we’d have to pay through the nose,” said independent telecom consultant David Isenberg. “It would become a robber baron-type scenario.”

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Federal Communications Commission
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