- The Washington Times - Tuesday, January 14, 2003

Federal Communications Commission Chairman Michael Powell has reportedly drafted a deregulatory plan for local telephony that, if adopted, would lift disincentives for innovation. If Mr. Powell can get the Republican commissioners, Kathleen Abernathy and Kevin Martin, at the FCC to back his proposals, the commission soon will formally announce the plan and the battle will just begin. Mr. Powell's deregulatory proposal will be hotly contested in the courts by state regulators (not to mention the rivals of the four regional Bell companies), which favor the status quo. These parties could stymie reform for quite some time.
Mr. Powell would like to phase out over two years existing rules that require the Baby Bells to lease their networks to rivals at government-set prices. FCC commissioners will vote on Mr. Powell's recommendations early next month. If adopted, deregulation will clear the way for network modernization, since the Baby Bells (Verizon, SBC, BellSouth and Qwest) will finally have full rights to their own property. And companies such as AT&T; and WorldCom will have to build their own lines and switches, or rent them at market-set prices from the Baby Bells. That would be a welcome change, since the current scheme is generating an oversupply.
Unfortunately, some key analysts aren't betting on Mr. Powell, at least for the time being. The shares of Baby Bell companies took a dive on Wednesday, after John Hodulik, an analyst at UBS Warburg, downgraded the telecom companies to reduce from hold. "We do not believe the [FCC review] will have a significant impact on retail lines loss in 2003 and that it will therefore be a disappointment for Bell investors at current levels," Mr. Hodulik said, since the legal battles would likely be protracted.
The competitors are currently leasing about 7 percent of the Baby Bells' lines. Line leasing could grow to 19 percent over the next four years, if the regulatory framework isn't altered, according to UBS Warburg. Meanwhile, the Baby Bells increasingly face competition from wireless phones, cable companies and Internet service.
The Baby Bells and other telecom companies can't expect Internet use to make up for lackluster performances in local telephony. Limitations on Internet content from copyright interpretations to virtual-surfing restrictions set by the Internet service providers have put a damper on demand and prevented telecom and cable companies from being able to aggressively expand broadband, or fast-service Internet. Despite Mr. Powell's plan to review broadband regulations, we urge Commissioners Abernathy and Martin to support Commissioner Powell's reform effort, so that the painfully slow process of unshackling an overregulated telecommunications industry can at least begin.

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