Telecom Bills Stalled, at Least Temporarily

Posted 11/01/2001

Telecom Bills Stalled, at Least Temporarily
Meanwhile, BOCs Weigh Impact of Structural Separation

By Kim Sunderland

Word on Capitol Hill is that there will likely be no action this year on pending legislation regarding the Bell operating companies (BOCs) because Congress has to deal with more pressing national matters following the September 11 terrorist attacks on New York City and Washington, D.C.

A bill proposing the structural separation of the BOCs, introduced by Senate Commerce Committee Chairman Ernest "Fritz" Hollings (D-S.C.), sits idle. So does the controversial plan introduced by Congressmen W.J. "Billy" Tauzin (R-La.) and John D. Dingell (D-Mich.) that would remove barriers preventing incumbent carriers, especially the BOCs, from entering the long-distance data markets.

A staff member in Hollings' office says neither bill probably will see action this year, as the country is consumed by national security issues and eradicating international terrorism.

"Both proposals are on the back burner for now," the spokesman said.

The main thrust of the Hollings' bill is a forced break-up of the Bell telephone companies into separate retail and wholesale units. Such a split, argues James Gattuso, vice president of policy for the Competitive Enterprise Institute (CEI) ultimately would increase the cost and complexity of providing telecom service, while doing nothing to help consumers.

In plain terms, the BOCs explain that if they were forced to separate operations, implementing structural separation would present operational, financial and technical challenges for them. This eventually would delay the BOCs' entry into long-distance by two to three years, and potentially dash their hopes of providing advanced, broadband services nationwide, sources say.

Structural separation is "a solution looking for a problem," laments Margaret H. Greene, executive vice president of regulatory and external affairs for BellSouth Corp. "And there's zero-added benefit for competitors."

Under Hollings' bill (S. 1364), one Bell division would own the facilities used for telecommunications transmission, maintaining the basic infrastructure of wires, switches, and other equipment. The other would use this basic network to provide telecom services to the public in competition with other firms.

"The general idea is to ensure fair and level competition among rival retail telecom firms," Gattuso says. "The idea sounds simple on paper, but only on paper. The task of divvying up assets and responsibilities is itself a daunting one. [For example] who should own this piece of equipment or that? Is that photocopy machine used for infrastructure or retail service?"

On a BOC's operations side, there also would be duplication, which means a loss of efficiency that in turn introduces cost problems, Bill Smith, president of interconnection and carrier services, and chief technology officer for BellSouth, tells xchange.

For instance, there would have to be double collection and billing capabilities for both units, as well as additional invoices, supplier payments and regulations for each unit, Smith explains.

"And the information systems and technologies also become a huge issue," he says.

The challenges to disintegrate and rebuild the backend software systems would be extremely difficult and costly, says Link Hoewing, assistant vice president for technology policy at Verizon Communications Inc..

The operations systems and processes, Hoewing says, all are done on an integrated basis; they're all centralized. To split up into wholesale and retail units would mean halving backend systems and then, for example, attempting to go through millions of customer records at the same time.

Structural separation is a process that could take years and cost billions, agrees Gattuso. Verizon estimates that such a plan would cost it $800 million to $1 billion in Pennsylvania alone.

Gattuso says the long-term costs of a forced breakup are even more important than these transition costs.

"Though overused in management theory circles, synergies can be very real. It actually could be more cost-effective, and thus better for consumers, to provide both basic infrastructure and retail services from the same companies. In fact, the search for synergies is a driving force in most other high-tech fields," he says. The Hollings bill also "could be a deathblow to hopes of providing advanced, broadband service nationwide," Gattuso says.

The intended result of separation is a highly regulated wholesale telecom company that provides a regulated amount of capacity at regulator-defined rates to retail providers, he says. "Think of your local water company: stable, predictable and probably fair. But hardly a company with the incentive to invest in new technology."

Building advanced broadband networks likely would require billions of new investment dollars to be put at risk. But with the opportunity to profit from that investment curtailed, that investment is unlikely to be made, according to Gattuso.

Rather than expand regulation, he suggests that policymakers move in the opposite direction, and lighten the regulatory load. One of biggest impediments to local competition now is a subsidized, low residential rate, he says. The rate is less than $10 per month in some states.

"Stop those subsidies and watch competitors flow in," Gattuso notes. "For advanced services, give local companies more freedom, not less. Reduce--rather than expand--forced access rules, letting them reap the returns from broadband investment."

The Tauzin-Dingell bill, (H.R. 1542,) a.k.a. the Internet Freedom and Broadband Deployment Act of 2001, goes somewhat in this direction by proposing to eliminate some of the unbundling restrictions on the BOCs.

The bill is caught up in the U.S. House of Representatives where it's pretty much been all year. A floor vote was expected in September, but that was before terrorist attacks changed legislators' focus.

Members of the competitive industry hope the bill will die there. The industry has worked hard to be heard in Congress where it seeks the total defeat of Tauzin-Dingell.

Even if H.R. 1542 does pass in the House, Hollings still claims that Tauzin-Dingell will be dead on arrival in the Senate.