FCC to let states decide competition rules for phone, Net

WASHINGTON -- The Federal Communications Commission on Thursday overhauled rules governing competition for telephone and Internet services, creating uncertainty for consumers as companies, observers and regulators disagreed over how the changes will affect prices and choices.

The FCC voted 3-2 Thursday to let states decide whether to spur competition between the regional Bell phone companies and their rivals, rejecting arguments from agency Chairman Michael Powell and the Bells that existing federal competition rules should be eliminated altogether.

Another split decision eased requirements that the Bells provide rivals discount access to fiber-optic lines for the high-speed Internet access called broadband. The Bells have complained they have no incentive to invest in costly new networks if competitors profit.

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.

But Powell, in his first dissenting opinion as chairman, said the decision "could prove quite harmful to consumers."

'Too chaotic'

"This decision will prove too chaotic for an already fragile telecom sector," he said. He said having states evaluate the rules will take years and the process will be plagued by lawsuits.

Behind the commission's divided ruling 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 -- say the rules allow competitors to use their networks at artificially low prices. The Bells said Thursday they were disappointed with the FCC ruling.

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.

Bell rivals say the competition requirements allow them to offer alternative service and prevent the Bells from having an overwhelming advantage.

Jim Cicconi, general counsel for AT&T, praised the commissioners who voted for more state authority, saying that they "rejected radical proposals that would have killed local competition."

"Consumers will see lower prices and more choices in the marketplace," he said.

Shares in the Bell companies all were hit hard on the New York Stock Exchange. Qwest stock plunged 14.1 percent, while SBC stock lost 7.5 percent, BellSouth fell 7.0 percent and Verizon sank 5.0 percent.

Among key rivals, AT&T shares dropped 1.7 percent, but shares in Sprint's landline division gained 1.2 percent. Shares of DSL provider Covad Communications Co., which leases access to Bell networks, tumbled 43 percent in over-the-counter trading.

Mark Cooper, research director of the Consumer Federation of America, echoed the FCC's Democratic commissioners, saying the agency decision would maintain local phone competition, but lifting broadband restrictions would mean higher prices and fewer choices for high-speed Internet access.

Powell took the opposite view. He applauded the broadband decision as promoting investment in new networks, but called the phone competition ruling a "molten morass of regulatory activity" filled with legal errors that will ultimately doom the measure.

Courts have rejected the agency's previous two attempts to revise the rules, saying they failed to meet the requirements of a 1996 telecommunications law.

Republican commissioner Kevin Martin, who voted with the panel's two Democrats to shift authority from the federal government to the states, was the only commissioner happy with both that change and the broadband decision.

Republican commissioner Kathleen Abernathy, who joined Powell in voting against the phone rule change, said dealing with different rules in different states "will be a nightmare for anyone to carry out a business."

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