FCC Gives States Authority to Regulate Phone Competition

WASHINGTON – Federal regulators agreed Thursday to let states decide whether to spur competition between the regional Bell phone companies and their rivals, in a move that drew sharp criticism from Federal Communications Commission Chairman Michael Powell.

The panel's 3-2 vote "could prove quite harmful to consumers," Powell said in his first dissenting opinion as chairman.

The FCC voted to grant states that authority as a compromise between ensuring competition and deregulation, despite arguments from Powell and the Bells that existing federal competition rules should be eliminated all together.

The Bells did score a victory, however, when the commission, in another split vote, eased restrictions requiring the Bells to provide rivals discount access to fiber-optic lines for broadband, the high-speed Internet access that quickly delivers large amounts of data. The Bells have complained for years that they have no incentive to invest in costly new fiber-optic networks if competitors can share the benefits.

Republican commissioner Kevin Martin, who voted with the panel's two Democrats to shift authority from the federal government to the states, said the decisions "will have a direct impact on consumers."

Martin added that the ruling would preserve lower, competitive phone rates and boost the availability of high-speed Internet access.

But Powell said that in the majority decision, "one looks in vain to find a clear or coherent federal policy."

In a long, sharply critical statement, Powell said the decision "could prove quite harmful to consumers" and will "prove too chaotic for an already fragile telecom sector."

He applauded the broadband decision but called the phone competition ruling a "molten morass of regulatory activity."

It is unusual for a chairman of the agency to dissent on such a large matter, said Blair Levin, chief of staff for former FCC Chairman Reed Hundt and now an analyst with the Legg Mason investment firm.

Behind the commission's divided vote is a requirement that the regional Bell companies lease parts of their local networks to competitors such as AT&T Corp. and WorldCom Inc. 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.

The Bell companies -- BellSouth Corp., SBC Communications, Verizon Communications and Qwest Communications -- have said say they are at a disadvantage because the rules allow competitors to undercut their prices.

AT&T and other companies say the competition requirements allow them to offer alternative service and prevent the Bells from having an overwhelming advantage.

The issue had sparked an intense lobbying campaign by these major telecommunications companies.

In early afternoon trading on Wall Street, shares of Qwest were off 10.6 percent, while SBC stock was down 6.9 percent, BellSouth was down 5.8 percent; Verizon had dropped 4.2 percent. AT&T shares, however, also dropped 2.3 percent, but shares in Sprint's landline division were up slightly.

Democratic commissioner Michael Copps said the FCC decision will "preserve voice competition in the local markets and allow it to grow."

Copps said he opposed the broadband changes because they would harm competition and result in higher prices for Internet access.

Republican commissioner Kathleen Abernathy, who joined Powell in voting against the competition rule change, said the decision will not stand up under legal challenges and dealing with different rules in different states "will be a nightmare for anyone to carry out a business."

Gene Kimmelman, co-director of Consumers Union in Washington, said shifting authority to the states is "just putting a little patch on an enormous problem." He said that to create lasting competition, Bell rivals eventually will have to build their own networks.

Kimmelman said the alternative sought by Powell would have wiped out competition consumers have begun seeing in telephone and high-speed Internet services.

Many state regulators want to retain the leasing rules to boost and maintain the competition that has reduced phone rates, Levin said. He said requirements may relax over time, but it will not be the immediate, nationwide relief the Bells had sought.

The vote was the commission's last chance to meet a court-ordered deadline to rewrite the policy before existing rules are struck down. Courts have rejected the agency's last two attempts to revise the rules, saying they failed to meet the requirements of a 1996 telecommunications law.