Hollings bill is a disaster-in-waiting

Incumbents vehemently oppose Congress' latest attempt
at telecom reform legislation

Should a long-shot bill introduced into the Senate calling for federally mandated structural separation make it into law, the result will be higher dial-tone rates, a decimated local loop, unscrupulous behavior by competitive carriers and more trouble for beleaguered equipment vendors, according to the incumbent carriers that are the target of the legislation.

The bill, co-sponsored by Sens. Ernest “Fritz” Hollings, D-S.C., Ted Stevens, R-Alaska, and Daniel Inouye, D-Hawaii, also would increase FCC Chairman Michael Powell's fining authority for local competition violations up to $10 million per incident from the current $1.2 million.

“There is a need for stiffer penalties,” said Courtney Quinn, senior analyst with The Yankee Group. “When Powell says the incumbents look at the fines as a cost of doing business, he's absolutely right, (see figure).

A fine plan Congress doesn't think fines have been high enough based on what ILECs have been paying vs. total revenue (numbers are in millions, period from Dec. 1999-April 2001)
Company	Revenue generated	Fines Paid
BellSouth	$25,600	$0.8
Qwest	$18,300	$78.6
SBC	$50,100	$175.0
Verizon	$66,400	$233.0
Source: Sen Ernest Hollings

The bill also would require the FCC to turn over 50% of any fines collected to any carrier that prevailed in a suit against an RBOC, a move that only gives competitive local exchange carriers (CLECs) greater incentive to finagle the system, said Herschel Abbott, vice president of governmental affairs for BellSouth. “There is significant evidence that many CLECs have existed on the basis of leveraging the arbitrage inconsistencies of the regulatory process,” he said. “If this bill is enacted, the CLECs' primary business plans will be to sue the ILECs.

'If this bill is enacted, the CLECs' primary business plans will be to sue the ILECs.' --Herschel Abbott, BellSouth

While the increase in fining authority has its detractors among the incumbents, it is the structural separation provisions that are sending a chill through and raising the ire of the RBOCs. Under the Hollings bill, all incumbents would be required to functionally separate their retail and wholesale operations within one year of the bill's enactment. After two years, any incumbent found guilty of violating a competition provision of the Telecom Act would be forced to fully separate.

It all makes perfect sense to Dick Metzger, vice president of regulatory affairs for Focal Communications. “Having the retail operations of an incumbent stand in the same place as a CLEC when they get wholesale services makes discrimination easier to detect and easier to punish,” he said.

Though it's “no sure bet” the Hollings bill will be enacted, said Ethan Cohen, research director of energy and communications for Aberdeen Group, there is precedent for structural separation on the state level. In March, the Pennsylvania Public Utility Commission ruled that Verizon Communications must functionally separate its wholesale and retail units. And more bad news for the incumbents may be coming petitions for structural separation have been filed in 12 states and legislation introduced in four states.

But critics say the cost of structural separation is too high. “The aggregated costs of structural separation will be in the millions and, in some regions, billions of dollars, and these costs will ultimately be passed on to residential and business customers,” Cohen said. Worse yet, structural separation will create service providers unable to generate profits, which would have a “devastating” effect on telecom infrastructures, said Tom Tauke, senior vice president of public policy and external affairs for Verizon.

“The wholesale division would have to sell services to its retail division and any other players at total element long-run incremental costs pricing, and TELRIC pricing by definition says you don't recover your costs,” he said.

Service providers require “massive investment,” and that would be a big problem should this scenario play out, he added.

“Verizon this year will invest $12 billion in the local loop,” Tauke said. “Who's going to invest in a company that isn't able to recover its costs? Certainly the banks and financial institutions won't, and no private investor with any financial skill at all is going to. [The networks] are going to starve.”

Equipment companies will starve with them.

“The Lucents and the Nortels of the world are on the edge already,” he said. “What happens when that investment is turned off? It will be a total disaster.”