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Hold the line

October 26, 2005

STATE REGULATORS DREW THE WRATH of consumer advocates last week when they tentatively endorsed two mergers of telecommunications giants -- SBC acquiring AT&T and Verizon snapping up MCI. California Public Utilities Commission members Susan P. Kennedy and Michael R. Peevey wrote draft decisions blessing the mergers with minimal conditions, rejecting the notion that either company should have to share with California customers any of the savings generated by the mergers. Their view differed sharply from that of an administrative law judge, who would have required SBC to fork over $330 million to customers over six years. The Utility Reform Network, a consumer advocacy group in San Francisco, had called for about $1 billion in rebates.

That demand was clearly excessive, and the PUC was right to reject it. But to argue about the size of a rebate is to frame this issue too narrowly. In reviewing mergers of telecommunications firms, federal regulators assess whether or not they pose a threat to the competitive landscape. State regulators should then use their oversight to promote local competition.

Arguably, SBC and Verizon have the muscle to buy their erstwhile competitors in part because of the profits they've amassed from California customers. And neither company is about to be fitted for a halo.

But in this case, AT&T and MCI are being acquired because they can hardly thrive on their own. Meanwhile, the proliferation of new communications services -- cable phone service, Internet calling, wireless and so on -- promises to spur competition in many markets, even as the regional former Bell companies gain power by acquiring long-distance carriers.

It's also hard to see how the acquisitions will make it less expensive for SBC or Verizon to serve their existing local phone customers. Instead, the buyouts seem most likely to help the companies gain large corporate and overseas clients, markets where the AT&T and MCI brands were strongest.

The big money for phone companies has always come from that segment of the market. And, increasingly, their business is less about providing phone service than it is about supplying high-speed data connections, hosting websites and supporting computer networks. That's why SBC and Verizon have been losing business not just to data-oriented telecommunications companies but also to so-called systems integrators such as Lockheed Martin and EDS.

Yes, the PUC and other policymakers need to promote competition in the local phone markets. They also need to use existing regulatory tools to deter price-gouging and anti-competitive behavior by the Bells. The PUC has already prodded electric utilities to provide high-speed Internet connections through power lines, which could supply phone and data services.

In addition, Kennedy's and Peevey's proposals would require SBC and Verizon to offer high-speed Internet service without also charging for a local phone line -- an overdue step to protect consumers who no longer need or want a wired phone.

The most potent protection for phone customers isn't likely to come from state regulators, however. It will come from the competition that is slowly emerging among phone, cable and wireless companies, particularly in the field of unregulated Internet-based services. And for business customers, at least, the SBC-AT&T and Verizon-MCI deals should finally push SBC and Verizon to compete vigorously with each other, just as AT&T and MCI have done for years.

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