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BellSouth drops suit on phone subsidies

In a move that may take some pressure off regulators, BellSouth withdraws from a lawsuit challenging the way federal telephone subsidies are governed.

In a move that may take some pressure off beleaguered Washington regulators, BellSouth said today it would withdraw from a lawsuit challenging the way federal telephone subsidies are governed.

The baby Bell company, along with SBC Communications and GTE, took the Federal Communications Commission to court last year over the implementation of the federal Universal Service program, which subsidizes phone service for rural and low-income areas.

But today, BellSouth officials said the FCC had made a series of changes to the program, with more on the way. These changes have addressed many of the questions company executives had about the law, they said.

"This is still an ongoing process, and we'll wait to see what happens," said John Schneidawind, a BellSouth spokesman. "But they've made the fund more targeted to people who truly deserve the funding. [FCC Chairman William] Kennard has done a good job."

The company's partners in the lawsuit said they would continue without BellSouth.

"The fact that they've pulled out doesn't affect our position, or the merits of our case," said Bob Bishop, director of media relations for GTE.

Universal Service killed competition?
Congress updated the federal universal service program, which provides subsidies for rural telephone service, rural health care, and Internet connections for schools and libraries, as part of its 1996 Telecommunications Act.

The law has been controversial. A joint federal-state advisory panel submitted a host of recommendations for revising the program yesterday, looking to protect rural and low-income callers' service as competition in phone markets heats up.

GOP members of Congress targeted the school and libraries subsidies earlier this year, forcing the FCC to scale back the program. The first round of funding for these groups was released yesterday.

But the local Bell telephone companies' complaints run deeper. They say the whole subsidy structure, which goes beyond the federal fund, is unfair and may be undermining the core of the Telecommunications Act.

"We feel that this is the primary issue behind the failure of competition to reach residential customers," GTE's Bishop said.

The logic behind the lawsuit is such: The FCC has allowed new companies to compete in the local telephone markets. But at the same time, regulators force the dominant local companies to serve rural and residential lines at prices near or below cost. Some of the slack is taken up by federal and state subsidies, but the rest is made up as the companies sell more profitable services, largely to business customers.

But as competitors cherry-pick the business customers away, the baby Bells and other dominant phone companies say they will be left with the increasingly unsustainable business of serving residential customers.

Hence the lawsuit. GTE and SBC say the FCC must revise the way it forces them to subsidize high-cost and low-income customers. Their suit would simply overturn the FCC's existing orders on the program. But the baby Bells also want regulators to force competitors to pay a share in residential and rural subsidies, or else let the big local companies change the way they do their billing.

If regulators forced competitors to play by the same subsidy rules as the big local companies, competition would finally grow beyond the high-profit business service sector, Bishop said.

Long distance companies and smaller local companies dismiss this spin on deregulation's failures. The baby Bells are making it difficult for competitors to enter local markets, they say. So far regulators have agreed with this line of thought, giving consistently low grades to baby Bell companies' efforts to open markets.

The case against the FCC will be heard in federal appeals court in New Orleans on Dec. 1.