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Bell tolling for DSL?

Legal rulings taking effect this week remove regulations controlling how local phone carriers rent their networks to rivals.

The suspension this week of rules regarding local phone competition could play havoc with fast-growing broadband services, experts said, bolstering the position of the Bells at the expense of smaller players and of consumers.

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What's new:
Legal rulings took effect Tuesday that for now remove key conditions that had previously regulated the terms and prices local phone monopolies can demand from rivals seeking to rent parts of their networks.

Bottom line:
Many predict the regulatory vacuum will drive some competitors out of the local phone business, a trend that could potentially lead to price increases down the road. And the impact on broadband could be even more sudden and severe.

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Legal rulings took effect Tuesday that for now remove key conditions that had previously regulated the terms and prices local phone monopolies can demand from rivals seeking to rent parts of their networks. Such rules have generally been considered crucial for ensuring an even playing field among companies seeking to offer phone and broadband service over local telephone wires and switches owned by the Bells.

Many predict the regulatory vacuum will drive some competitors out of the local phone business, a trend that could potentially lead to price hikes down the road. According to reports, AT&T and MCI already plan to wind down local phone service in some markets.

Experts said the impact on broadband could be even more sudden and severe.

"It is ridiculous to expect the Bells to openly embrace cutting fair deals with their competition," said telecommunications analyst Pete Wilson of telephone consulting company Telwares. "If the U.S. wants competitive local services and the innovation that brings, it needs to be a fair fight. It cannot be if the Bells lobby wins this battle, which appears all but certain."

The collapse of local phone rules comes as DSL (digital subscriber line) services--broadband technology that runs over telephone wires--is growing at a record-breaking pace. During the period ending March 31, 2004, providers of DSL Internet access added a net total of 1.17 million new subscribers, beating their previous record by 300,000, according to a study by Leichtman Research Group.

Even with such growth, the Bells argue they need a freer hand to compete with cable broadband providers, which are far ahead in the broadband field, with 62 percent market share. Total broadband additions, including cable, reached 2.34 million, bringing the U.S. broadband population to 26.9 million.

Indeed, the Bells are grappling with unprecedented competition, not only in new markets such as broadband but in their core local phone business. With incursions from local phone rivals, cell phone providers and Net-based, or VoIP (voice over Internet Protocol), phone services, the total number of local lines serviced by the Bells dropped from 187 million in 2000 to 172 million in 2002--a decline of about 8 percent--according to a report this year from the Federal Communications Commission.

The Bell operating companies have for years fought competition rules enacted in the Telecommunications Act of 1996, arguing that they could not profitably lease lines to competitors at government-mandated rates.

The FCC has sought to create detailed new rules for competition at least three times, but it has been rebuffed each time by the courts. The last attempt was blocked in March by the U.S. Court of Appeals in Washington, D.C. On Monday, the U.S. Supreme Court declined to grant a stay of that decision, effectively freeing the Bells to raise the rates it charges to lease its lines.

The FCC will draft new rules to replace the old ones, a process that could take months. In the interim, the commission is counting on hastily written interim measures, due in a couple of weeks, expected to bring "certainty to the market and (ensure) appropriate investment incentives," FCC Commissioner Kathleen Abernathy said.

FCC Chairman Michael Powell is pressuring the Bell operating companies to negotiate agreements. So far, there has been just one agreement negotiated between a Bell and a long-distance phone company, despite several marathon negotiation sessions.

"Commercial agreements remain the best way for all parties to control their destiny," Powell said.

Competitors mull options
Covad and other DSL providers competing with the Bells are bracing for the changes, which will force them to spend more on their services than ever before. That could trigger consolidation as weaker companies buckle under the new financial pressures or increase prices to make do.

Signs are gathering that the Bells may capitalize on the situation to bolster their DSL businesses. Bellsouth said last week that expiration of the FCC's rules frees it from a court order that for now requires it to sell broadband service separately from local phone service.

"Anytime you whittle away the laws, it makes it that much harder to compete," Covad Senior Vice President Jim Kirkland said.

The Bell operating companies, not surprisingly, welcome the positive impact on their broadband businesses, and dismiss any anticompetitive concerns. Representatives say it's time that they got a break from regulations after so many years of being forced to lease their lines so companies such as AT&T and MCI could resell local phone service at prices below theirs.

They promise to be responsible even though they are no longer under much government restraint.

"Please don't listen to Chicken Little," said Bellsouth spokesman Bill McCloskey. "The sky is not falling. Those are just cicadas falling."

Broadband providers are looking at the thicket of FCC network-sharing rules for options that would allow them to tap into the Bell networks at rates they can afford.

With the suspension of the current rules, known as UNE-P (unbundled network elements platform), rivals will be forced to build their own switches connecting the Bells' lines to the Internet and the national phone network. But they can still rent the Bells' lines under a separate arrangement known as UNE-L (unbundled network element line) that is unaffected by the appeals court decision.

UNE-P was seen as a big boost to DSL competition, because competitors under that framework could rent DSL switches supplied by the Bells, rather than build their own. The Bells vociferously opposed this requirement, arguing that they would be forced to shoulder substantial investment expenses and rent out equipment to rivals at rates that would make it difficult to justify the costs.

Companies that specialize in DSL, such as Covad, have used UNE-L rules for years, renting just the Bells' lines while building out their own DSL switches, or DSLAMs. Covad believes it's among the best positioned of the Bells' DSL competitors, with 166,000 UNE-L lines in service, by far the largest of any DSL provider.

In the next six months, Covad plans to roll out a Net phone service through recent acquisition GoBeam that will allow it to sell conventional voice services, Covad's Kirkland said.

Deep-pocket local phone competitors such as AT&T have also turned to UNE-L to take on the Bells.