Decision 2004: Will Telecom Be A Winner?

THE OUTCOME OF THE PRESIDENTIAL ELECTION WILL INFLUENCE THE MAKEUP OF THE FCC AT A TIME WHEN GOVERNMENT OFFICIALS ARE STRUGGLING TO IMPLEMENT TELECOMMUNICATIONS RULES THAT PROMOTE SOCIAL GOALS, SUCH AS MAINTAINING AFFORDABLE PHONE SERVICE AND ADVANCING HIGH-SPEED INTERNET COVERAGE, WHILE NOT HAMPERING INVESTMENT.

The FCC likely will change

no matter which candidate prevails Nov. 2, but a Republican-led commission under a second Bush administration could be expected to continue advocating deregulation of century-old networks, according to industry watchers. In contrast, industry executives, think tanks and other sources in Washington, D.C., predict Massachusetts Sen.

John Kerry, along with a chairman he would appoint to the FCC, would support more regulations than the current administration.

President Bush and Kerry, who sits on the U.S. Senate Committee on Science, Commerce & Transportation, both have advocated promoting high-speed Internet access, but telecom reform has not been a centerpiece of either of their platforms.

The Bush administration largely has avoided telecommunications battles raging over the last four years, leaving Congress, the courts and the FCC to oversee the complex policies, according to sources. PHONE+ contacted the White House for comment, but a representative was not available for an interview.

“[Former] Vice President Al Gore had a big interest in telecom,” says Scott Cleland, CEO of the Precursor Group based in Washington, D.C.

“Neither Bush nor [Vice President Dick] Cheney has a big interest in telecom.” Says Sonia Arrison, director of technology studies with the Pacific Research Institute in San Francisco: “Telecom is sort of down on the list of priorities or it has been much to the chagrin of people who care about getting high-speed [Internet] access to people.”

However, with an increasing number of politicians calling for reform of the Telecommunications Act of 1996, telecom squabbles are more likely to draw the attention of the next administration.

Senators and congressmen have voiced support for reforming a law they say no longer reflects advances in technology, such as Internet phone service.

Brad Ramsay, general counsel of the National Association of Regulatory Utility Commissioners (NARUC), says the next administration will have to take a position on major telecom policies because Congress is gearing up for a major overhaul of telecommunications law. “Whoever is president in the next two years will have to have some public view on telecommunications policy and the rewrite of the act,” Ramsay says. “You can’t be neutral on this.”

Kerry is not known for leading telecommunications reform, making it difficult to predict how the presidential candidate would influence rules and laws that are crucial to the nation’s telephone and Internet companies, such as an overhaul of the 1996 Telecom Act. “For the most part, the vast majority of Congress, including Kerry, have very little to say on most technology or telecommunications policy issues and, therefore, it makes evaluating his record quite difficult because even a vote ona given bill doesn’t necessarily indicate his true underlying beliefs on a variety of issues,” says Adam Thierer, director of telecommunications studies with the Cato Institute.

Kyle Dixon, a senior fellow at the Progress & Freedom Foundation and a former FCC official, says not all commissioners operate alike based on their party, but in recent years Democrats “have tended to directly or indirectly favor approaches that will more likely lead to regulation.”

A source with a large incumbent local phone company, who spoke on condition of anonymity, warns against putting too much stock in a party affiliation to predict the direction of telecom policies.

“We sometimes put too much emphasis on parties. Our issues traditionally have been very bipartisan,” he says. “We have some friends and not-so-close friends on both sides of the aisle.”

Early this summer, the Bush administration sided with FCC Chairman Michael Powell when the Office of the Solicitor General declined to ask the U.S. Supreme Court to review leasing regulations designed to open up the biggest local phone networks to competition. The decision was viewed by some analysts and executives as a major blow to rivals of the biggest local phone companies, particularly in the local residential phone market.

John Windhausen, president of the Association for Local Telecommunications Services, a group representing McLeodUSA Inc., XO Communications Inc. and other service providers competing with the incumbent local phone companies, says he expects “a more balanced view of the telecom issues in a Kerry- Edwards administration.”

“I guess in contrast, in the last four years … we’ve seen a steady erosion of the telecom act,” he says.

At least one veteran telecommunications attorney says another four years under President Bush would not result in major changes in telecom policies. “I guess the bottom line to me - without knowing who the next [FCC] chairman is going to be but [assuming] it will be Republican - there will probably be some changes, but they will not be huge,” says Danny Adams, a partner with Kelley, Drye & Warren LLP.

The fate of the nation’s biggest telecom regulator, however, will be in the hands of either Bush or Kerry. The next president will be responsible for nominating new commissioners to the FCC if there is turnover at the government agency as anticipated. The president likely would make his selections next spring after nominating officials within the cabinet, such as at the U.S. Department of Education, says Windhausen, a former senior counsel on the Senate Commerce Committee responsible for advising Democrats on telecom matters. Many analysts, lawyers and other experts in Washington expect Powell to leave the agency next year even if Bush is re-elected.

Andy Regitsky, the president of Reston, Va.- based regulatory consulting firm, Regitsky & Associates, anticipates a new FCC regardless of who wins the election. He says the arrival of new commissioners could delay when the FCC takes action on such critical matters as Internet phone regulation, intercarrier compensation reform and so-called UNE rules governing wholesale access to the biggest local phone networks.

“Traditionally when there is significant turnover at the commission it takes time for the new commissioners to come up to speed,” Regitsky says.

Powell is likely to leave the commission in January if Kerry wins the November election.

Under a second Bush term, the chairman “will work with the administration to determine how he can best serve the president,” says his chief of staff Bryan Tramont. Powell’s term does not expire until June 30, 2007.

Powell likely would want to complete someproceedings under his watch, including issuing final rules governing wholesale access to the biggest local phone networks and declaring under whose jurisdiction Internet phone service can be regulated, says NARUC’s Ramsay, who adds, “I wouldn’t expect him to stay past next June.”

FCC commissioner Jonathan Adelstein must leave the agency this year after Congress adjourns unless he is re-nominated by the president. During his stint at the commission, Adelstein, a former senior legislative aide to U.S. Senate Minority Leader Tom Daschle (D-S.D.), has been viewed as an advocate for rural America.

Sen. Byron Dorgan (D-N.D.) has organized some letters from senators asking Bush to renominate Adelstein, says Dorgan’s communications director Barry Piatt. “Senator Daschle sent commissioner Adelstein’s name to the White House in February 2003, but the White House has not sent his nomination to the Senate,” reads an Aug. 5 letter addressed to Bush, signed by U.S. senators.

“Absent renomination he must leave the commission at the end of the current congressional session, leaving an open seat at the fivecommissioner agency.”

FCC commissioner Kathleen Abernathy, a Republican who often has supported Powell, does not intend to make any plans about her future until after the election, say people on her staff. Her term officially expired June 30, but she could remain in office without a new term until Congress adjourns at the end of its 2005 session.

A Kerry administration likely means FCC commissioner Michael Copps would serve as interim chairman, industry executives and analysts speculate.

Copps, a Democrat, has been a staunch advocate of regulations launched under the Telecommunications Act of 1996. He frequently has opposed efforts by some of his fellow commissioners to deregulate the phone and Internet markets. “There is no need to mince words. The current commission is on track to butcher the pro-competitive vision of the 1996 Act,” Copps said in a statement after the commission released interim rules late this summer governing wholesale access to the biggest local phone networks. “And it is sticking consumers with higher telephone rates and fewer choices.” Copps also has opposed media consolidation, calling into question whether the former U.S. Department of Commerce official would resist mergers of telephone behemoths like AT&T Corp. and Verizon Communications Inc. Last year Kerry also opposed the FCC’s vote to relax media ownership rules. The “wrongheaded vote by the Republican members of the FCC to loosen media ownership rules shows a dangerous indifference to the consolidation of power in the hands of a few large entities rather than promoting diversity and independence at the local level,” Kerry said in a statement.

“I think mergers in the communications field would probably [be] given a great deal more scrutiny and probably not happen in a Kerry-Copps administration,” says one veteran telecom attorney in Washington, D.C.

Needham & Co. analyst Vik Grover says he does not think either administration would oppose a merger between a regional Bell and a big long-distance company because the market has changed fundamentally. For example, Grover says AT&T no longer dominates the long-distance market. “Any administration would be hard pressed to say no to a Bell plus IXC combination,” Grover says.

Observers have radically different views about whether Copps would make for a competent chairman. Larry Spiwak, the president of the Phoenix Center for Advanced Legal & Economic Policy Studies, would welcome Copps as the next FCC chairman. Spiwak is a critic of the current chairman’s telecom policies.

“I think if Commissioner Copps were to become chairman, I think he would be a great chairman,” he says.

The Cato Institute’s Thierer, who supports deregulation of phone and Internet networks, could not disagree more. “His [Copps’] radicalism might ultimately cost him the job and I certainly hope it does,” he says. “I think Michael Copps is the Darth Vader of telecommunications policy, and if he gains control of the FCC, he will turn it into his regulatory Death Star.”

Beyond Copps, other names have surfaced as potential candidates to replace Powell should Kerry move into the White House. Gregg Rothschild, minority counsel to the House Committee on Energy and Commerce, is among those mentioned. Rothschild, a former legislative director for Kerry, declined to comment on the senator’s telecommunications record, referring inquiries to Kerry’s press office. Kerry spokesman Andy Davis did not respond to requests for comment.

The rumor mill has produced a number of potential candidates as the next FCC chief presuming a Bush victory. The names range from congressional candidate and former Public Utilities Commission of Texas Chairman Becky Klein, as reported in The New York Times, to FCC commissioner Kevin Martin, who worked on the first Bush campaign.

Legg Mason analyst Blair Levin, a former FCC chief of staff, says it is simply too premature to speculate over who will become the next chairman. He says no one was talking about Reed Hundt and William Kennard in September 2002, yet they went on to become FCC chairmen. “We almost always are wrong when we speculate,” says a 30-year telecom veteran, who spoke on background.

If Kerry does prevail Nov. 2, the administration should have no problem finding a qualified individual to lead the FCC. The Democrats have a “very deep bench when it comes to telecom,” Levin says.

Overall, the 2004 presidential election stands to affect the flow of investment in an industry where bankers, venture capitalists and financers often make decisions based on laws and regulations. Cleland, of the Precursor Group, says Wall Street has perceived the biggest local phone companies as benefiting from some deregulation under the Bush Administration. “Generally Republicans tend to be more free market and less government intervention, and the Democrats [are] the opposite,” he says. “Wall Street would probably [view] the Bells at more risk under a Kerry administration.”