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Bell, CLEC Interests Clash Over New 'Separation' Bill

A bill introduced by Sen. Ernest "Fritz" Hollings (D-S.C.) — which would separate Bell companies' retail and wholesale businesses and levy massive fines for violating interconnection rules — has put an entirely new twist on an already-complicated debate over how best to spur more broadband and local-loop competition.

Before Hollings introduced the Telecommunications Fair Competition Enforcement Act of 2001 earlier this month, most eyes were focused on a House Bell deregulation bill co-sponsored by Rep. W.J. "Billy" Tauzin (R-La.) and Rep. John Dingell (D-Mich.).

Tauzin had cobbled together just enough votes to win passage in the House when Hollings sprung his measure in the Senate, setting the stage for a political battle.

"It's a visible conflict between two different views of how competition should develop," said Owen Kurtin, co-chairman of the technology, media, and telecom group of Salans, an international telecommunications-law firm.

This is a tale of two bills, and these competing measures are backed by either the powerful Commerce Committee chairman in the House (Tauzin) or Senate (Hollings) — and are almost polar opposites.

"What you have here are two very savvy and wily politicians," said Tauzin spokesman Ken Johnson. "I think they have positioned themselves in a way that will lay the groundwork for a compromise down the road."

The ultimate compromise (assuming the bills make that far) will greatly affect the entire broadband and local-telephone marketplace. The only question: Is a compromise on such divergent bills is possible and, if so, would the egos involved will be able to share credit (or blame) for something that falls between strict regulation and major deregulation — especially on the eve of an election year?

"I would be surprised if either of these bills are enacted in the next two years," said Rick Brecher, co-chair of the national telecommunications practice of Greenberg Taurig, a Washington law firm. "They're too far apart."

Added Effros Communications president Stephen Effros: "It's highly unlikely that [the Hollings bill] is going to go anywhere just as it's unlikely that the Tauzin-Dingell bill will go anywhere."

The Hollings bill is nothing if not bold. While Tauzin's bill would allow Bell companies to offer long-distance data services without proving they have opened their local loops to competitors (thus enabling them to more easily deploy digital subscriber line service), Hollings would require the Bells to turn their businesses upside down.

Specifically, it would force them to completely separate the retail operations that offer services directly to end-users from wholesale operations, which lease lines and equipment to resellers who then proffer the services to consumers.

The idea: Take away the supposed incentive Bell companies now have to favor their own affiliates over other competitors.

Under Hollings's proposal, retail and wholesale units couldn't share employees or office space, jointly own equipment or facilities or team to market services. A Bell company would also have to fulfill service requests for resellers as quickly as for their retail customers.

A NEW CONCEPT

Structural separation is largely an untested idea. While a few states are considering it, only a small number have actually implemented such a plan. For example, Connecticut imposed it upon Southern New England Telecommunications Corp. (SNET) in 1997; SBC Communications Inc has since acquired the company.

Wanda Montano, vice president of regulatory affairs for Charlotte, N.C.-based US LEC, had worked at cable-owned CLEC Teleport Communications Group. She said SNET's structural separation made a huge difference.

"There was a difference in attitude," she recalled. "And SNET did a great job with compliance."

But others question whether splitting the Bell companies into separate units really does much good.

"I think the intent is a good one, but I'm not satisfied in my own mind that structural separation works," said Greenberg Taurig's Brecher. He said employees of both the retail and wholesale units can find ways to help each other.

"These divisions are run by people who answer to the same shareholders," he said.

Just the same, Brecher said cable operators would at least benefit indirectly from the Hollings approach.

"Hollings's bill would tighten the screws a bit on telephone companies," he said. "That would make it easier for cable companies to go to the capital markets for upgrades."

OPEN-ACCESS QUESTION

Cable operators might quietly revel in the thought of regulations that render the Bell companies hamstrung. But structural separation could also bolster the case of "open access" proponents who want cable operators to take on common carrier-like responsibilities.

The Bells could argue that it's unfair to force them to split off without making cable operators do the same — especially since cable operators don't even have to lease lines to competitors, as the Bells are required to do. But most find that scenario unlikely.

"Theoretically, you could call for the structural separation of cable companies, but then you would have to take the position that it's a common carrier, which it's not," said Effros. "We're not a utility. We're not a common carrier."

That mantra is seen by many in cable as a way to bolster a Fourth-Amendment "takings" argument if the government ever tries to impose such rules on the industry.

"Being a cable service, it wouldn't be subject to similar regulations on DSL provided by Bell companies," said Phil Kantor, a lawyer at Miami-based Bienstock Law Firm, which represented Comcast Corp. in last year's successful bid to overturn Broward County, Fla.'s open-access ordinance.

In any event, the Hollings bill addresses more than structural separation. It would also require the Bells to pay massive penalties for noncompliance with the 1996 Act, including fines of up to $10 million per violation and $2 million per day until each breach is remedied.

In addition, half of each fine would go to the CLECs harmed by the violation. The bill also leaves the door open for punitive damages and allows the states and FCC to petition each other to levy fines.

Bell companies are rallying against the Hollings bill, calling it a gift to cable operators. SBC vice president of federal relations Timothy McKone said the bill "would do nothing but heighten the competitive advantages already enjoyed by cable companies at the expense of consumers."

He suggested that any lack of local-loop competition is more the result of cable operators' unwillingness to enter phone markets than Bell-company intransigence.

"The Telecom Act gave cable companies regulatory relief in exchange for promises to compete in local phone markets — promises they have not fulfilled," McKone said.

Of course, not all the Bell companies are focusing on the cable industry's supposed advantages. But they acknowledge that the Hollings approach would appear to help cable by distracting the Bells.

"It keeps us from trying to compete in broadband," said BellSouth Corp. vice president of government affairs Herschel Abbott.

BellSouth has devoted 3,000 employees and spent $1.6 billion to forage interconnection agreements with competitors, Abbott said. In addition, he said BellSouth runs 2,200 tests per month for each CLEC to ensure everything is running smoothly.

"Every aspect of the business is included in these tests," he said. "It's hard for me to imagine how anyone would be better off with structural separation than with these tests.

"Have there been mess-ups from time to time? Of course. It's a complex process. But that's what the 2,200 tests are about."

The bill's penalty provisions are "terribly unfair" and would do nothing but create a new revenue stream for competitive local-exchange carriers (CLECs), which would get half of the money, Herschel said.

"This allows the CLECs to get into a whole new line of business, which is suing the Bells," he said.

Of course, the CLECs insist that beefier fines are the only way to get the attention of the dominant incumbents and force them to comply with rules that, by their very nature, threaten their monopoly power.

"We believe that the ILECs see the current fine structure as the cost of doing business," said US LEC's Montano. "They just shrug them off and pay them."

CABLE LOBBYISTS WATCH

Except for AT&T Corp., the cable industry has mostly stayed out of the debate. The National Cable & Telecommunications Association has taken no official position on either bill.

So as cable watches and waits, the fight over how to treat the Bells in the post-1996 Act era is shaping up as a battle between the Bells and the CLECs, which pushed for the Hollings bill and aren't likely to support significant changes that would water down its tough enforcement provisions.

"Then it wouldn't be worth the paper it was written on," Montano said.

Competitive Telecommunications Association (CompTel) president H. Russell Frisby praised the bill earlier this month and called structural separation "the only way to ensure that the Bells give up their local phone monopolies."

In a CompTel-sponsored white paper, the group charged that "if nondiscriminatory access were a reality, then there would be little reason for these ILECs to merge to gain access to each other's networks."

The CLECs' strong support for the Hollings bill creates a powerful lobbying counterweight to the Bells' backing of the Tauzin-Dingell bill. And when two giant lobbying forces face off, it usually means a protracted battle in which neither side will ultimately get what they want.

In extreme cases, such controversy creates the kind of gridlock that delayed passage of the 1996 Act until years after proponents first proposed amending national telecom policy.

"The Democrats taking over the Senate was a pretty big blow to the Tauzin-Dingell bill," said Salans's Kurtin.

But Tauzin spokesman Ken Johnson said changes are already planned to promote a strong win in the House — in part to send a message to the Senate.

"If we address some of the concerns of members, there's a possibility of passing this by a wide margin," he said. "We're going for the jugular."