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Feds take Baby Bells on roller-coaster ride

In a matter of hours, federal officials manage to send Baby Bell executives into a funk, then on an emotional high, then back into a funk.

WASHINGTON--In a matter of hours, federal officials managed to send Baby Bell executives into a funk, then on an emotional high, then back into a funk.

The U.S. Supreme Court on Monday agreed to review the pricing mechanism used when competitive local exchange carriers (CLECs) connect with incumbent Baby Bell networks, a blow for Bells that had seen a structure they thought unfair from the Federal Communications Commission overturned in an appeals court.

Then SBC Communications learned it had received permission to provide long-distance service in Kansas and Oklahoma, doubling the number of states served by Bells in that market. Hours later, however, the FCC issued a long-awaited order that mandates line-splitting, a procedure that should make it easier for DSL providers such as WorldCom and Rhythms to provide residential service in competition with Bells.

The roller-coaster day left many in Washington noting that politicians, regulators and courts are still very much involved in the telecom sector as the five-year mark of the Telecom Act's passage approaches.

"Politicians and regulators are getting impatient" for deregulated competition, said James Fisher of Sprint's Washington lobbying office.

CLECs clinging to court case
The High Court said it won't hear arguments in the case concerning the pricing mechanism used for CLECs to connect with incumbent networks until its 2001-2002 term that begins in October, meaning a decision is at least a year away.

The core issue is that the FCC wanted competitors to be charged a fair price when connecting to Bell networks, an essential part of competition if the competitor can't build its own network facilities end-to-end, including into homes. The Commission developed a pricing methodology that looked only at costs the Bells would incur in the future, not costs the companies incurred in building their networks.

As it is, many CLECs are struggling to raise capital and are falling prey to the high cost of staying in business, with some facing the prospect of running out of cash within months. Staying in legal limbo for a year won't help, but it's better than the alternative--losing the case.

Bell companies, on the other hand, argue that they're being asked to subsidize their competitors and that the extra cost of building and maintaining the phone network will have to be passed on to consumers. It's a position with which the FCC disagrees.

Bells ring in long-distance
SBC's entry into long-distance in Kansas and Oklahoma is in addition to its service in Texas. Verizon Communications is in the New York long-distance market and resubmitted its application for Massachusetts last week.

Competitors continue to lobby against the applications--"They still haven't fixed their unfair pricing problems," WorldCom Vice President for Public Policy Mary Brown said of Verizon's latest Massachusetts application--but the local and federal approvals are becoming more routine.

Meanwhile, the rapid success of Bells in the state markets they are entering is contributing to a decline in revenues in that sector, the very decline that led AT&T, WorldCom and Sprint last fall to refocus their efforts in other areas.

"Long-distance prices have destabilized and are sliding rapidly," said BlueStone Capital analyst Susan Kalla. She predicted price drops of 40 percent to 50 percent on high-capacity routes this year, the same percentage-range drop seen last year.

FCC orders Bells to split lines
The FCC on Monday required that Bells permit something called line-splitting, in which a competitive phone provider or a competitor partnering with a non-Bell DSL provider seeks to provide voice and high-speed data over the same line. In some areas, Bell companies have blocked competitors from provisioning lines in consumers' homes, even when the Bell wasn't the subscriber of the line.

The order expanded on an earlier line-sharing mandate issued by the FCC that said a competitor could provide DSL service on a voice line maintained by a Bell, so the customer wouldn't have to acquire a second line for DSL service.

The issue of line-splitting hasn't been as prominent as others relating to Bells, but competitors said the FCC's decision could help spur high-speed Internet access. Line-splitting "is going to be very important for competition down the road," said Keith Seat, senior counsel with WorldCom.

There is every possibility, however, that the order could find itself in the courts, as have many other rulings from the FCC that affect the Bells.