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Verizon exemption could make businesses pay

Broadband deregulation could cause higher prices for Verizon's business customers and eliminate competition, say critics.

Broadband deregulation in the business market has arrived, whether anyone wants it or not.

Earlier this week, the Federal Communications Commission acknowledged at a conference in San Diego that Verizon Communications had been exempted from regulation on its business-broadband service.

Verizon had filed a petition in December 2004 asking the FCC to free it of all regulation. The FCC was split on the issue and didn't actually vote on the petition, but the measure was granted because the commission failed to deny or accept it before a deadline last week. According to the law, if the petition had not been denied within a set period of time, it would be granted.

The exemption essentially gives Verizon the power to charge its business customers and competitive carriers, who use Verizon's local access network to connect to businesses, any price it likes for using the network. It also frees the phone company from making contributions to the Universal Service Fund.

For Verizon and possibly other local phone companies like AT&T, which also plans to file a petition, the inaction of the FCC and the eventual granting of the exemption is great news. Verizon has effectively succeeded in freeing itself from regulation that required it to share its network with competitive carriers and dictated prices it could charge customers.

But for business customers, which buy services directly from Verizon, and competitive carriers, such as Level 3, Sprint Nextel and Qwest communications, which use Verizon's local network to sell services to business customers, prices for the use of this network could rise significantly, say critics.

"The chairman's action represents the height of irresponsibility by a federal official," Earl Comstock, president and CEO of Comptel, an association representing Verizon's competitors, said in a statement. "Competition and consumers are now at the mercy of Verizon's financial self-interest. If history is any guide, there will be predictable adverse results."

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But Verizon argues that being freed of these regulations will actually lead to more competitive pricing and allow it more flexibility in serving customers.

"We are appreciative that supporting commissioners recognized changes in technology and the marketplace," Susanne Guyer, Verizon senior vice president for federal regulatory affairs, said in a statement. "The end result will be greater innovation, more-competitive pricing and more-flexible arrangements tailored to meet the needs of our business customers."

Though the exemption was granted only to Verizon, it's likely other phone companies will soon file their own petitions. At the TelecomNext trade show in Las Vegas on Tuesday, Edward Whitacre, CEO of AT&T told reporters his company plans to file a petition as well.

"I think it will be pretty close to what Verizon did," Whitacre told Reuters. "I'm sure if Verizon has it, we'll get it too."

FCC chairman Kevin Martin, who also attended TelecomNext, said he couldn't comment on whether AT&T's petition would be granted, but he reiterated his position that regulations should not reach too far and impede on the phone companies' ability to make back their investment in infrastructure.

"We need to make sure that we provide a regulatory environment that allows network operators to recoup their investments," he said.

But industry groups, such as Comptel, which represents the competitive local exchange carriers, or CLECs, worry that a deregulated business broadband market is a death knell for competition and will ultimately lead to higher prices for business customers.

The reason is simple. Unlike the consumer market, there are few companies offering connections into a business. On the consumer side, local phone companies compete against cable operators, which own their own pipes into homes. But in the business market, customers either buy services directly from the local phone company or from a competitive carrier that uses the phone companies' infrastructure.

Previous regulations guaranteed these competitive operators access to this infrastructure, and it also guaranteed prices, both for companies buying wholesale service and businesses buying service retail from the local phone company.

The deregulation of Verizon's broadband business services is just the latest chapter in an ongoing effort by the phone companies to deregulate their businesses. This latest move now puts Verizon's business broadband services on equal footing with the company's consumer DSL business.

Back in August, the FCC voted to reclassify DSL broadband service, which subsequently freed Verizon and other local phone companies such as AT&T and BellSouth, from regulations that had required them to share their infrastructure with Internet service providers, such as EarthLink.

The latest move by the FCC is likely to face challenges from competitive carriers, say experts. But some analysts say these protests are just sour grapes, since the deregulation of business broadband is a necessary step in developing a mature, market-oriented broadband market.

"The standalone CLEC business is fading," said Jeff Kagan, an independent telecommunications analyst based in Atlanta. "This isn't the same industry that it was in the 1990s and the 1980s. There is much more competition. The CLECs complaining are likely the ones that haven't evolved to change with the maturing market."