The Bush administration is being forced to take sides in one of the longest-running and most consumer-sensitive feuds in corporate America, between long-distance telephone companies such as AT&T and MCI and regional phone giants, including Verizon, BellSouth and SBC Communications.
At stake is whether local phone rates will go up for 19 million people -- which in turn could have consequences in the presidential campaign -- and what companies will dominate the highly volatile telecommunications industry.
Solicitor General Theodore B. Olson has a June 15 deadline to decide whether to appeal a federal court ruling that would void regulations that govern the commercial interaction between phone companies. The U.S. Court of Appeals for the D.C. Circuit ruled in March that the regional firms can no longer be forced by the federal government to allow long-distance and other telephone firms to lease their lines at discounted rates.
If Olson appeals -- siding in effect with the long-distance carriers -- phone rates will probably remain unchanged for many months, certainly through the November elections. But if Olson doesn't appeal, AT&T and other long-distance carriers have threatened to raise their rates to pass along any higher charges they incur or to abandon the local phone business altogether.
The trade group CompTel/Ascent, which represents competitors to local phone companies, has prepared political commercials against President Bush for allowing that to happen and has threatened to run those ads in states that are pivotal to his reelection campaign.
"It would be painful [to Bush] because people view telephone service as a basic right. It could potentially cause a problem [for Bush] because at the same time you see rate increases in gas and other commodities," said H. Russell Frisby Jr. chief executive of CompTel/Ascent.
No one knows what Olson will do. Traditionally the administration defends federal policies all the way to the Supreme Court, which is the next stop for this litigation. On the other hand, the regulations at issue, which were first produced during the presidency of Bill Clinton, have already been struck down twice in federal courts and are opposed by the Republican chairman of the Federal Communications Commission, Michael K. Powell. However, three of the FCC's five members favor keeping the rules in place.
Senior executives of both the long-distance and regional phone companies have been lobbying high-ranking officials in the White House and the Commerce Department, hoping to influence Olson's decision. The pressure has been so intense that the Bush administration has decided that it would rather not decide.
In an attempt to avoid having to choose, Powell called the chief executives of the warring companies together over Memorial Day weekend and pressed them to negotiate a payment schedule to replace the federal mandates. One deal was cut earlier -- between MCI and Qwest Communications International, a regional phone company based in Denver. But the biggest players, notably Verizon and AT&T, haven't agreed despite extraordinary private meetings held at a Washington hotel this week.
So Olson must make a move. His first decision will be whether to ask Chief Justice William H. Rehnquist to stay the lower-court ruling and allow the federally imposed discounting to continue. Olson would be unlikely to make that request if he didn't intend to appeal the case. A spokesman for Olson at the Justice Department declined to comment. White House spokeswoman Claire Buchan said: "Our view continues to be that commercial agreements are preferable to litigation and we continue to urge the parties to resolve their differences."
The regulations at the center of the battle are a byproduct of the Telecommunications Act of 1996, Congress's effort to inject competition into the monopolistic telephone industry. By the time the legislation passed, the long-distance industry already was rife with competition. But the local-phone business remained the province of the big phone companies, each of which dominates its region. Companies that wanted to break into the local-phone business were stymied by the huge expense associated with building a network in those regions.
To infuse competition into the local markets, the FCC ordered Verizon, SBC and other regional companies to lease parts of their networks to rivals at discounted rates. The regional companies have spent the past several years fighting the FCC's rules in court, claiming that the mandated rates are too low and unfairly forced them to subsidize their competitors.
Olson's decision could well be the beginning of the end of the festering dispute. If the Supreme Court were to rule, or if the lower court decision were upheld, little short of an entire new telecommunications act from Congress could change the outcome. Lawmakers are making noises about trying to rewrite the act, but not until next year at the earliest.
Therefore, the outcome of the case is expected to have a huge impact on the $200 billion phone industry, which has been mired in a three-year downturn. The long-distance companies claim that unless the appeals court ruling is appealed, they will be forced to raise rates for customers by at least $2 a month and begin backing out of a business that has provided 19 million homes with phone service for years. AT&T and MCI also say that it would be virtually impossible for them to compete in their core long-distance business if they were pushed out of the local phone business.
Long-distance companies reason that they won't be able to compete for residential long-distance consumers without the ability to bundle that service with local calling. Such combining of services for the convenience of customers is an important trend in the industry.
The regional firms say AT&T and MCI are crying wolf. While Verizon plans to raise the rates it charges AT&T, it says there is no requirement that the long-distance company pass on rate increases to customers.
The regional companies are doing a booming business in long-distance services. Verizon is the nation's third-largest long-distance company, with 17 million customers, and is quickly gaining on MCI, which has 20 million customers.
Still, the FCC regulations on discounted rates have hurt the local giants. In recent years the number of telephone lines served by the local phone companies has declined while the number of lines used by customers of other companies such as AT&T and MCI have increased. During the first three months of the year, AT&T took a total of 1 million customers from Verizon, BellSouth, Qwest and SBC.
The local and long-distance companies have squabbled since 1984 when, for antitrust reasons, AT&T was broken up by a court order that split the local phone businesses from the long-distance division. The dynamics of those businesses have changed dramatically in the intervening 20 years. The regional spinoffs are now much larger and financially healthier than AT&T. MCI, which was founded in Washington in the early 1980s, was acquired by WorldCom Inc., which only recently emerged from bankruptcy protection and took the MCI name.
The discount-rate issue has been intensely lobbied on both sides. Telecommunications companies, which are heavily regulated, have poured millions of dollars into public lobbying -- such as TV commercials and newspaper advertisements -- and private lobbying by hundreds of professional lobbyists over the years. The long-distance companies even created a special organization to plead their case in ads, called Voices for Choices. The regional companies use a group called the Future . . . Faster, which is part of their trade association, the United States Telecom Association.
The latest round of lobbying has been tightly focused on the Bush administration. Each side has encouraged sympathetic members of Congress to write letters and make phone calls to executive branch officials on the topic. And summaries of each side's arguments have found their way to the desks of senior White House aides.
Some of the biggest names in the Republican Party are lobbying for one side or the other. James W. Cicconi, who was White House deputy chief of staff under President George H.W. Bush, heads the AT&T efforts in Washington. Former attorney general William P. Barr leads Verizon's efforts here.
Both sides are major contributors to Republican causes. Verizon Chairman Ivan G. Seidenberg and SBC Communications Chairman Edward E. Whitacre Jr. are among the Bush campaign's biggest fundraisers, having pledged to raise at least $100,000 and $200,000, respectively.
Cicconi is a board member of a group called Progress for America, which is the leading vehicle for soft-money contributions to aid Bush's reelection. Thomas J. Synhorst, a key adviser to Progress for America, is a partner in a firm that provides lobbying-related services to AT&T and has major contracts for voter-contact operations with the Bush-Cheney campaign and the Republican National Committee.