NY Times A Regulatory Maze Ahead for a Recast F.C.C.

[David Farber <dave () farber net>]

February 15, 2005
NEWS ANALYSIS 

A Regulatory Maze Ahead for a Recast F.C.C.
 By STEPHEN LABATON
 

 ASHINGTON, Feb. 14 - The deals have been forged on Wall Street, but their
final shape may depend on Washington.

 Most people expect the huge telecommunications mergers recently announced
to be approved in the current political climate, but the deals could prompt
a considerable fine-tuning of existing rules.

 The consolidations, a natural outgrowth of the deregulatory agenda of the
Federal Communications Commission under Michael K. Powell, will present the
next chairman with a crucial opportunity to rewrite the rules governing the
industry.

The conditions set - or brushed aside - by regulators in deciding whether to
approve each of the three big deals announced in the last few weeks will be
among the most significant policy decisions for the industry since Congress
rewrote telecommunications rules nine years ago.

Verizon Communications' announcement that it will buy  MCI follows the
proposed acquisition of AT&T by  SBC Communications and  Sprint's purchase
of Nextel.

If the regulators respond by attaching important conditions to approval of
the mergers, they may relieve significant pressure on Congress to conduct a
quick overhaul of the Telecommunications Act of 1996. One thing is certain:
the proposed deals will remove AT&T and MCI, the two major adversaries of
the regional Bell companies, from political lobbying.

 "This is definitely a case of Michael Powell getting what he asked for in
every conceivable way," said Reed E. Hundt, a former chairman of the agency
in the first years of President Bill Clinton's administration. "Ironically,
Michael has also made his successor the potentially most powerful F.C.C.
chairman in history."

Mr. Powell has long argued that there is a need for consolidation in the
telephone industry and has pursued deregulatory policies that put tremendous
financial pressure on the long-distance carriers and other rivals to the
regional Bell companies.

 Over the last four years, the commission has moved away from trying to
manage competition among the phone companies by repealing or watering down
rules that were intended to encourage - and subsidize - smaller rivals to
the Bell companies. Mr. Powell has maintained that the regulations were no
longer necessary and that enough new competition to the Bells is coming from
cable and wireless businesses.

But Mr. Powell's critics say that in moving to deregulate the industry, the
F.C.C. has ignored the needs of many customers who want only low-cost local
and long-distance phone service.

Perhaps the most important of the deregulatory changes were ones issued last
year that eliminated the relatively inexpensive access that long-distance
companies had to the networks owned by the regional Bell carriers. The
elimination of low access rates led to significant financial pressure on
both AT&T and MCI. In AT&T's case, the change ultimately caused it to move
toward withdrawal from the residential telephone business. MCI has also
reduced its residential business.

 Mr. Powell has announced his intention to leave the agency by March. His
successor, to be nominated soon by President Bush, will lead the F.C.C.
through the yearlong process of reviewing the proposed mergers. The five
commissioners are not likely to focus extensively on the deals until the end
of the year, after they have been fully analyzed by staff members of the
commission.

 Industry analysts, executives and government officials said they expected
that the F.C.C. and the Justice Department would approve the deals even
though consumer groups have expressed fear that further consolidation in the
industry will mean higher prices and reductions in service.

> From a regulatory perspective, such mergers were inconceivable less than a
decade ago. But the assumption now is that they will not be blocked, given
changes in the industry and the conservative and largely deregulatory
climate in Washington.

 Still, important issues will remain - and any conditions imposed on the
deals could, in effect, serve as the primary regulations for the entire
industry.

"These conditions will, in effect, be the rewrite of the telecom act," Mr.
Hundt said.

 Some analysts said they expected few significant conditions to be imposed
in light of the regulators' approval of the acquisition of AT&T Wireless by
Cingular with few constraints.

 "This is the end of the era of managed competition," said Scott C. Cleland,
a telecommunications analyst at the Precursor Group. Referring to Mr. Hundt
and his successor as F.C.C. chairman, he added: "When Reed and Bill Kennard
were looking at mergers, they were in the middle of a fight over competitive
rules and mergers were a very appetizing lever to use to extract cooperation
on the managed-competition goals. Things have changed."

In particular, Mr. Cleland said, the F.C.C. had already moved away from the
idea of managed competition and the administration has generally not imposed
significant obstacles to major mergers.

Others predicted that officials in some states would seek pricing and other
concessions to sign off on the deals.

"I expect that New York, New Jersey and Massachusetts in particular will be
seeking concessions," said Jessica Zufolo, an analyst with Medley Global
Advisers, who talked about the Verizon deal with state regulators on Monday
at a conference here of the National Association of Regulatory Utility
Commissioners.

 "They will be looking at the impact of the deal on the mass market and how
pricing could potentially be regressive and the potential the deal would
have on the ability of consumers to get low-cost service."

Mr. Hundt said the proposed mergers raised several important policy issues
that would have to be addressed. Whether the regulators will require the
companies to expand broadband services - or create new incentives for
expansion - is one issue. Another is how regulators will handle
cross-subsidies between the local and long-distance services, and whether
they will require the merged companies to offer long distance as a separate
service.

 Still another question is what conditions will be imposed on access fees
that the companies are allowed to charge others to connect to their
networks. Finally, regulators will be expected to decide if they need to
force the surviving companies to compete against one another in the
corporate-business market.

The answers to these questions will be supplied by Mr. Powell's successor.
The prospective candidate most often mentioned is Kevin J. Martin, who in
nearly four years as an F.C.C. commissioner has ruled both for and against
the Bell companies.

 Should Mr. Martin be nominated and approved for the chairman's job, he
would face a delicate job navigating between the telecommunications
companies and state regulators. As a commissioner, he has been an important
ally of the state officials as Mr. Powell sought to reduce their role in
regulation.

 The new chairman will face increasing appeals from the phone companies to
limit the reach of the states, particularly in light of the moves toward
consolidation.


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