A fine suggestion

Former President Teddy Roosevelt once suggested that the way to achieve success and respect is to speak softly and carry a big stick.

FCC Chairman Michael Powell last week provided an axiom for addressing competition issues in telecommunications: If the stick you have isn't big enough to get the job done, get a bigger stick.

In a letter sent to the Senate and House Commerce Committees, Powell asked Congress to give him that stick by increasing the limit on fines imposed on carriers that violate local competition provisions of the Telecommunications Act of 1996 from the current $1.2 million to at least $10 million per incident.

In his letter to Congress, Powell reiterated recent statements that incumbent carriers view the current level of fines as merely a cost of doing business that they are more than willing to pay to maintain their dominance in local markets.

‘The FCC has virtually no ability to impose a fine on a Bell company that has any meaningful impact.’
— Bob Taylor, Focal Communications

“Given the vast resources of many of the nation's ILECs, this amount [$1.2 million] is insufficient to punish and deter violations in many instances,” he said. “Congress should consider increasing the forfeiture amount to at least $10 million in order to enhance the deterrent effect of commission fines.”

Predictably, Bob Taylor, president and CEO of CLEC Focal Communications, agreed with Powell.

“The FCC has virtually no ability to impose a fine on a Bell company that has any meaningful impact,” he said. “Rules without enforcement are merely suggestions, and it's clear that [the ILECs] are not taking the suggestions. The reason that there isn't as much competition as everyone expected is because of the inability to enforce the Telecom Act to the fullest extent.”

Taylor said a $10 million fine might not be enough to get the incumbents' attention, given the vast amount of income they generate (see figure).

“It's a paltry amount unless it can be escalated by the number of offenses,” he said. “Until you have a Bell potentially paying $100 million or more in fines, they are going to look at it as a cost of doing business.”

Indeed, a $20 million minimum would be more appropriate, according to Richard White, research analyst of emerging broadband technologies for the Aberdeen Group. “We're talking about [ILECs] that have millions and millions of dollars in revenues, so even $10 million isn't going to put a huge dent in their bottom line,” he said.

Not surprisingly, a Verizon Communications spokesman claimed Powell's latest effort to turn up the heat on the ILECs is unnecessary.

“Competitors currently control 20% of the lines in New York and 16% of the lines in Massachusetts, and we're continuing to lose market share in those states,” he said. “In the states that we have been allowed to enter, we have demonstrated that we have opened our local markets to competition and we're committed to opening our other markets. It's just not happening as fast as some people would like.”

But that's the point, according to Powell.

“Investors who were previously optimistic about the business plans of certain CLECs have… turned cold on those plans at the very time that they have begun to bear fruit,” he said in the letter. “Although there are examples of CLECs with workable plans… in some cases, CLECs may have been stymied by practices of incumbent local exchange carriers that appear designed to slow the development of local competition.”

If Powell gets what he wants from Congress, stiffer penalties will mean nothing unless the FCC uses them — an area in which the FCC has been lax since the passage of the Telecom Act, Taylor said.

“There certainly hasn't been a lot of enforcement, and it's not clear why,” he said. “You can give them great fighting authority, but if they never use it then it's like a policeman who never pulls someone over for speeding. You've got to pull a few people over before they realize they have to start behaving correctly.”

Drop in the bucket

2000 operating income for the ILECs far outpaced the noncompliance fines they paid over a comparable period (in millions)

Company	Income	Fines1
SBC	$10,743	$6.192
Verizon3	$16,758	$5.70
Qwest	$1823	$0.00
BellSouth	$6884	$0.75
1. Covers period from November 1999 to December 2000 and includes actions of $25,000 or more
2. Includes $6.1 million voluntary incentive payment related to merger with Ameritech
3. Fines were incurred by Bell Atlantic and GTE, which merged to form Verizon
Source: FCC, annual reports