Senate bill calls for federal structural separation

A bill introduced in the U.S. Senate would force incumbent local exchange carriers (ILECs) to split their wholesale and retail operations into separate divisions within one year of the bill’s enactment. In addition, the bill (S 1364) would give the Federal Communications Commission (FCC) broader powers to punish ILECs that are found in violation of the Telecommunications Act of 1996.

Dubbed the “Telecommunications Fair Competition Enforcement Act of 2001,” the bill is co-sponsored by Ernest Hollings (D-S.C.), Ted Stevens (R-Alaska) and Daniel Inouye (D-Hawaii). Hollings—who chairs the Senate Commerce Committee—recently criticized the pro-ILEC Tauzin-Dingell bill, which would allow incumbents into data long-distance before satisfying Section 271 requirements.

In introducing the bill, Hollings expressed his concern for the future survival of competitive local exchange carriers. He also pointed to the inadequacy of the FCC’s fining authority, which is capped at $1.2 million for each violation. Hollings stated that incumbents BellSouth, Qwest, SBC Communications and Verizon Communications collectively were fined $487.4 million by the FCC for local-competition violations between December 1999 and April 2001. In the same period those companies racked up revenues of $160.4 billion.

“While these fines may be substantial to most businesses, many in the industry believe that they simply represent the cost of doing business for the Bell companies,” he said.

Consequently, S 1364 increases the FCC’s fining authority to $10 million per violation, and gives the commission the authority to treble damages for repeat violators. In addition, it calls for extending the statute of limitations for each violation beyond the current one year.

Robert Saunders, senior analyst with The Eastern Management Group, said the bill would do consumers more harm than good due to “diseconomies” of scale that will occur if incumbents are forced to split.

“The incumbents’ revenues aren’t going to increase, but the cost of separation will,” he said. “There are going to be extra buildings, extra software, and extra IT, and we believe these costs are going to be passed on to the consumer over time, one way or another.”

Saunders added that while the proposed bill would give FCC Chairman Michael Powell the increased fining authority he requested back in May, Powell likely will not embrace the structural separation requirement that is at the heart of the legislation.

“Powell doesn’t believe in structural separation on the federal level,” he said. “He’s also expressed that it’s not a good idea on the state level, but he doesn’t want to step on the toes of the PUCs (public utility commissions), because of the tense relationship that already exists between state and federal regulators.”