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As the new chairman of the Federal Communications Commission, Michael Powell will referee a critical, bitter battle among the country’s telecommunications companies. The fight is over access to the local telecommunications customer, both residential and business, a market the FCC itself expects to reach $111.8 billion in revenues this year. The disputes will be fought in the coming months in Congress as well as the FCC, but what Powell decides will go a long way in determining whether many of the newer telecoms survive or go bankrupt and whether the nation’s largest local providers — the former Baby Bells — become even larger. Judging from Powell’s first, well-covered news conference Feb. 6, he favors abandoning the Clinton administration’s policy of using the 1996 Telecommunications Act to force the nation’s four regional Bell operating companies, or RBOCs, to make room for the industry’s newer companies, competitive local exchange carriers, known as CLECs. It also appears likely that Powell is not worried about mergers among telecom providers — perhaps even the largest. During his tenure as a commissioner, he indicated that he would not prevent an RBOC buying a CLEC as a means of developing local broadband networks. With CLECs sputtering and RBOCs gaining strength, the much-anticipated consolidation of the sector may soon begin. Other differences also are stark. Former FCC Chairman William Kennard consistently argued that the federal government had a role in making sure newer, smaller companies offering telephone and Internet service had access to the phone lines owned by the four RBOCs. Powell, 37, has held true to the Bush administration credo that government intervention hinders rather than helps create competition. “I do not believe deregulation is like the dessert that you serve after people have fed on their vegetables,” Powell said. “I believe deregulation is instead a critical ingredient for facilitating competition.” HOUSE SUPPORT Powell’s position has key support in Congress. Bush’s point man in Congress for telecoms, Rep. W.J. (Billy) Tauzin, R-La., chairman of the House Energy and Commerce Committee, wrote a bill last session that would give Verizon, SBC, BellSouth Corp. and Qwest Communications International Inc. a much smoother path to winning state-by-state approval to offer long-distance service to its local customers. The CLEC industry saw the bill, co-sponsored by the panel’s ranking Democrat, Michigan Rep. John Dingell, as running counter to the spirit of the ’96 Telecommunications Act. The Act required RBOCs to allow their CLEC competitors to gain access to a host of network systems and information that historically had been the former Bell companies’ private domain. (Tauzin is expected to submit a similar bill this session.) Developing a kind of carrot-and-stick policy, the Act drew up a list of criteria — referred to as the Section 271 process — that the RBOCs must satisfy on a state-by-state basis before they can offer long-distance service. The thinking was that the attraction of the long-distance market would motivate the Bells to allow the CLECs access to the “local loop,” the end piece of telephone wire leading into residences and businesses. Just how well the Baby Bells have complied with Section 271 is the crux of today’s telecom battle. Since passage of the ’96 Act, CLEC’s handle just 6 percent of the nation’s local telephone market; in many states, the presence of non-RBOC providers is less than 2 percent. At the same time, Verizon and SBC have been given 271 approval for New York and Texas, and each has moved quickly to take long-distance customers away from the industry’s main providers, AT&T, WorldCom Inc. and Sprint Corp. In the past nine months, Verizon has added 1.2 million long-distance customers in New York, and SBC has grabbed 1 million customers in Texas. The slow pace of competition at the local level is the result of concerted obstructionism by Verizon, SBC, BellSouth and Qwest, says H. Russell Frisby Jr., president of the CLEC industry association, Competitive Local Telecommunications Association. To remedy the situation, Frisby has called for giving the FCC greater enforcement powers. He would like the FCC to be able to impose penalties — as high as $1 million a day — on RBOCs that fail to provide clients access to their networks. “I am very concerned that the RBOCs are trying to separate opening local markets from deregulation,” Frisby said. “Deregulation is our end goal, but we don’t think you can have effective deregulation until you have open local markets.” CLAMPING DOWN There is little chance of such new powers for the FCC being given or used. Powell has said punitive measures against the RBOCs would be counterproductive charges and that they would likely be passed on to consumers. Still, the CLECs aren’t the only ones pushing Powell to clamp down on the RBOCs. On Feb. 7, a day after the Powell press conference, C. Michael Armstrong, the chairman and CEO of AT&T, railed against the RBOCs, warning a National Press Club gathering that U.S. telecommunications is moving toward a highly concentrated industry largely controlled by just four players. Armstrong repeated his call for legislation that would split Verizon’s local business into retail and wholesale units, thereby forcing Verizon’s own retail operations to compete with other local service providers. “The record of the past five years shows a steady march toward the re-monopolization of the industry,” Armstrong said. “It’s a march that needs to be stopped in its tracks. The Telecom Act provides the way. Now it’s up to the state and federal regulators to provide the will.” Such strong words decrying monopolistic business practices from the head of AT&T may seem ironic, if not hypocritical. For decades, AT&T grew and prospered by what the Supreme Court eventually concluded was a monopoly. But AT&T’s long-distance business has been badly hit in recent years, and its efforts to reach the local customer have been hampered by the high cost of establishing a cable-based local business. AT&T wants the FCC to loosen restrictions on rules that limit the concentration of cable TV assets. Unless the FCC comes to its defense, Armstrong says AT&T will pull out of local service in New York and Texas, a move that would follow Sprint Corp.’s recent decision to withdraw its local offerings from four Midwestern states. How do RBOCs such as Verizon respond? That FCC rules forced them to pay roughly $1 billion in so-called “reciprocal compensation” fees in 2000. Verizon’s Deputy General Counsel Michael Glover anticipates the FCC will roll back many of the fees RBOCs are required to pay CLECs for bringing traffic on to their lines. In addition, he looks for Powell to relax rules that force the RBOCs to open parts of their local networks that competitor companies are building themselves. “It’s fair to say that some of the obligations that were imposed on us in the previous administration probably went a bit too far,” he said. FREE-MARKET FORCES Those obligations, argues Tom Nolle, an industry consultant with CIMI Corp. in Voorhees, N.J., who works for many of the industry’s largest telecom equipment manufacturers, slowed the RBOCs from making capital investments in services such as DSL deployment. Nolle anticipates that Powell will favorably address RBOC complaints that many CLECs do little more than resell local services by piggy-backing on the RBOC networks. “I think what Michael Powell is saying is that he believes in letting free-market forces decide the future of local telecommunications,” Nolle said. “Poor businesses die, and the good businesses grow, and Powell is not in favor of propping up a non-competitive sector.” In trying to anticipate how Powell might handle the local-access question, CLEC officials have diplomatically voiced optimism that he has firmly supported enforcement of the ’96 Act. Pam Arluk, regulatory counsel for Chicago-based Focal Communications, points out that in Kennard’s final year, when the FCC completed the protocols for its newly designed enforcement bureau, Powell was closely involved in its development. Arluk adds that Powell’s preference to make the commission more a judicial body than a legislative one is a hopeful sign that industry rules will stay the same while enforcement is upgraded. “I think we have some more hope under Powell to reform the FCC — that we can possibly get quicker resolutions from the FCC,” Arluk said. “Kennard was great about issuing new rules, but enforcement complaints would just sit there.” Just how long Powell intends to stay at the FCC is also a subject of industry chitchat. Prior to being appointed to the FCC in 1997 as a Republican designee, Powell was chief of staff to Joel Klein, head of the Justice Department’s antitrust office. Talk is that Powell would like to return to Justice, possibly to head up the antitrust office itself. TRANSITION STAGE Powell’s departure would make room for Patrick Wood, head of the Texas Public Utility Commission, a hands-on favorite to be appointed to one of the seats being vacated. Wood is generally well respected by both sides in the telecom battle, having consistently stood up to San Antonio-based SBC during its 271 approval process in Texas. Many believe Wood will not accept a seat on the commission unless he knew he would eventually be appointed its chairman. Political maneuvering and ideology aside, many CLECs worry that for the next six months the FCC will languish in a transition stage, formulating its new chains of commands, and will be slow to enforce the dictates of the ’96 Act. A hands-off commission, says one CLEC executive, could have a particularly adverse effect on a number of telecoms whose existence may depend on the ability to collect fees owed to them by the RBOCs or gain access to their local networks. Matters could worsen if legislation out of Tauzin’s committee — whatever its chances of passing both houses of Congress — could send a signal to the capital markets and private equity firms that the CLEC model may be a failing one. “My greatest concern is keeping the current laws enforced and keeping the pressure on the RBOCs to live up to their legal responsibility,” said Gerry Salemme, regulatory affairs director at XO Communications. “I don’t need a commission to be intrusively regulatory to open new ground, but I need an FCC that is going to insure that the FCC and the RBOCs do not skirt their mandatory responsibilities.” Copyright (c)2001 TDD, LLC. All rights reserved.

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