CHANGE OF SEASON

Posted 09/01/2001

CHANGE OF SEASON
Hollings' Leadership Turns Tide on 'Bell-Friendly' Legislation

By Kim Sunderland

The pro-competition forces got a boost when Sen. Ernest "Fritz" Hollings (D-S.C.) was named chairman of the powerful Senate Commerce Committee. And contrary to pro-incumbent legislation that has dominated Capitol Hill, the long-time Bell company adversary introduced legislation that would require the BOCs to structurally separate into distinct wholesale and retail operations, a policy for which competitive carriers already are lobbying in individual states.

Based closely on the "functional separation" requirements that the Pennsylvania Public Utility Commission bestowed on Verizon Communications, Hollings' "Telecommunications Competition Enforcement Act of 2001" aims to force BOCs to place its retail service in a separate division from its wholesale operations within one year of the enactment of the law. The bill also strengthens the FCC's authority to enforce violations of the Telecommunications Act of 1996, setting a penalty of $10 million for each BOC violation with an additional $2 million tacked on for each day of each violation.

With the virtual stoppage of telecom financing on Wall Street and the sinking national economy, such legislation could have an impact on the telecom policy climate in Washington and the investment community.

But a Hollings proposed his legislation to spur competition, some members of Congress continue to push H.R. 1542, the Internet Freedom and Broadband Deployment Act, a.k.a. the Tauzin-Dingell bill, which calls for deregulating competitive data services for the Bell companies.

"These two events will bring together the diametrically opposed positions of the competitors of the RBOC seeking to gain a competitive advantage through more restrictive legislation, and the RBOCs themselves seeking regulatory relief," says Ron Cowles, principal analyst for the telecom and networking group of Dataquest Inc., a unit of Gartner Inc.

"There is a lot at stake and the debates will be intense," Cowles says. "During the course of deciding some very important issues, policymakers should not be drawn away from the main objective, which is providing ubiquitous advanced broadband telecommunications services for consumers and increasing competition."

How to attain those goals is what the policy debate is about. Wall Street, in turn, is watching closely.

Hollings isn't shying away from the attention. During this past summer, he conducted hearings looking for an answer as to why competition hasn't increased in the local phone markets since the Telecommunications Act of 1996 became law. His theory is that the problem has been with the Bells, not with the law.

"Some have questioned whether there are problems with the [Telecom] Act," Hollings said in mid-June. "What we will find as we explore the record ... however, is that the problems arise, not from the act, but from the efforts by the Bells to avoid the requirements of the act and enter the long-distance and broadband markets while simultaneously preserving their local monopolies."

The commerce committee chairman is determined to have the Telecom Act's market opening provisions implemented in the way he believes Congress intended when it passed the act and sent it to President Clinton for his signature.

"The one thing that this committee will not do is function at the dictates of Bell companies," Hollings said. "This is what is happening in the marketplace and is the crux of the difficulties we are experiencing today in the telecommunications industry."

The senator added that the telecom industry is critical to the entire infrastructure of the nation's economy. He cited U.S. Commerce Department statistics that show telecom accounts for nearly 10 percent of total U.S. economic output.

"All of America's industries--and American consumers in general--have a crucial stake in the structure of our telecommunications industry," Hollings said. "If it's competitive, our costs are cheaper and services better. If it is not competitive, costs will be higher and quality of service will suffer. It all begins with telecommunications."

Many industry observers are convinced that local competition would flourish if the BOCs were forced to split their businesses into two parts.

"Adopting a structural incentive plan is a simple solution to a complex problem," says Maureen Flood, director of regulatory and state affairs for the Competitive Telecommunications Association (CompTel). The association has been at the forefront in promoting structural separation of the Bell companies.

"Structural incentives, once implemented, require far less regulatory oversight and should largely be self-enforcing," Flood explains. "Because inefficient provisioning systems would harm its own retail operation, an incumbent's wholesale affiliate should proactively seek efficient practices, while its retail operations could be regulated like any other competitor. The same powerful incentives that today frustrate regulators would be harnessed to promote competition instead."

Maybe the idea's time has come. It's likely the concept could be a catalyst for changing the way telecom policy is approached in Washington. Since Hollings assumed control of the Commerce Committeer--after Vermont Sen. Jim Jeffords abandoned the Republican Party to become an Independent--the new mindset is that competition must thrive more quickly.

Scott Cleland, founder and CEO of the independent research firm The Precursor Group, says that most people are "missing the importance of the legislative debate, thinking it is just about legislation and whether it passes."

"What's really going on is a debate on telecom policy overall and whether the failed Telecom Act-voice-resale-competition experiment should be repeated for data or not," Cleland says.

The experiment already is under way, and it is slowing DSL deployment, he says.

"The question is if the experiment will continue until it reaches the same level of failure that voice policy has," Cleland says.

Hollings, one of the original architects of the Telecom Act, says it's irrelevant whether the debate is over voice or data.

"I have heard that the Bells would like to make this a debate solely about broadband, but the fact of the matter is that this is not a debate about broadband," Hollings says. "This is a debate about how to ensure competition in local telephone markets, whether it is the provision of local or broadband service."

His bluntness and feisty demeanor likely won't win over the Bells, but it has made some members of Congress notice.

In the House, support for H.R. 1542, introduced by Reps. W.J. "Billy" Tauzin (R-La.) and John D. Dingell (D-Mich.), has weakened.

"One of the great questions we have regarding whether or not we schedule [Tauzin-Dingell] in the House is 'Will the Senate take up that work?" Republican Majority Leader Richard K. Armey of Texas announced in July.

Armey said he wasn't thrilled with placing a more pertinent piece of legislation on the back burner "to schedule something that is voted in the House [and] that will never see the light of day in the Senate."

Hollings' Senate Commerce Committee has made it clear that it won't take up H.R. 1542, but it might consider alternative legislation that could include tax credits for deployment of high-speed Internet service in rural areas.

If Congress can agree on a course for telecom policy, the result should send a more positive message to Wall Street investors.

"What happens here [on Capitol Hill] definitely affects what happens on Wall Street," says Celeste Powers, spokeswoman for the Assocation of Communications Enterprises (ASCENT).

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