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Next Step in Phone Deal: P.R.
Lobbyists Face a Tough Road Amid Changes in Telecom Law, FCC
By Amy Schatz and Anne Marie Squeo
The Wall Street Journal
Tuesday, March 7, 2006

WASHINGTON -- As AT&T Inc. and BellSouth Corp. make the case for their $67 billion merger, they'll be counting on their vaunted lobbying clout to win over skeptical lawmakers and regulators.

Their efforts could be complicated by two factors:  The changing makeup of the Federal Communications Commission and a push to rewrite the landmark 1996 telecommunications law.

In a statement yesterday, FCC Chairman Kevin Martin said the agency would "carefully weigh" the deal.  Regulatory experts say that given Mr. Martin's push last year to impose minimal conditions on SBC Communications Inc.'s purchase of AT&T Corp. and Verizon Communications Inc.'s acquisition of MCI, it would be surprising if he reversed his stance.

Mr. Martin, though, represents just one vote on a five-member commission.  The two Democrats likely will cast a skeptical eye toward such a transaction, especially given talk by phone companies to charge technology companies extra to guarantee speedy delivery on their networks.  And the Bells may not be able to count on Mr. Martin's two Republican colleagues because of a shift in the makeup of the commission.

Deborah Taylor Tate is a Republican commissioner sworn in earlier this year.  Ms. Tate is a former Tennessee regulator who remains largely an unknown figure in Washington.  Ms. Tate, whose term expires in June 2007, has kept her home in Tennessee and is expected to return there and possibly run for office, so she may not want to adopt a position that is perceived as anticonsumer.

The other Republican seat is vacant.  President Bush has nominated veteran telecommunications attorney Robert McDowell to fill that slot.  Mr. McDowell is assistant general counsel for Comptel, a group that represents small phone companies that have fought pitched battles with the Bells over access rates and interconnection issues.

It would be unwise to assume Mr. McDowell might automatically side with small companies while considering conditions for the merger, says Earl Comstock, chief executive at Comptel.  "He's good at representing his client."

Mr. McDowell faces a confirmation hearing Thursday in the Senate and is expected to be questioned by senators about his thoughts on competition and the need for some sort of "Internet neutrality" legislation, which says consumers can use the Internet as they choose and network owners can't slow or discriminate against rivals' data traffic.  If his confirmation drags on and the commission is deadlocked, it can't approve the AT&T-BellSouth transaction.

Another element muddying the waters is the looming rewrite of the nation's telecommunications law.  The current laws were written in 1996 when most consumers relied on traditional telephones for local and long-distance calling.  Now, wireless phone and Internet phones are taking up a greater share of the market, which has led phone companies to seek new revenue streams, notably pay-TV service, to replace that lost business.

There are all kinds of new issues on the table because of increased reliance on the Internet. The phone companies were looking to Congress to make it easier to launch video services across the country by adopting a national video franchising requirement, which would allow phone companies to avoid seeking permission from local authorities to offer pay-TV services.

Former Rep. Thomas Bliley, one of the key authors of the 1996 Telecom Act, sees competition among traditional phone, wireless and cable as the future.  "But right now, the only meaningful choice other than the Verizons and AT&Ts, especially for business customers," are small phone companies, he said.  "Many of these companies are spending billions to build their own networks.  And if we move too fast, these companies could get shut out and business and residential customers would have less choice."

Business customers protested last year's big deals, saying they would further consolidate the industry and result in higher prices for high-volume data lines.  "When I'm at home, I have choices.  At least it's a duopoly of phone and cable.  In the enterprise market, we don't have any choices," said Brian Moir, a Washington attorney who represents large corporate users of telecom services and wants regulators to impose conditions, as part of the deal, to protect business customers.

Sen. Daniel Inouye (D., Hawaii), the top Democrat on the Senate Commerce Committee yesterday said that the proposed recombination "will call into question our commitment to promote competition in the communications marketplace and to preserve fair rules that guarantee nondiscriminatory access to new services."

In a statement, he said that "coming only 125 days after the FCC's approval of the SBC-AT&T merger, AT&T's proposal to purchase BellSouth would remove yet another potential competitor from the communications marketplace and calls into question whether the future of communications policy will be marked by strategies to promote vigorous competition or by further efforts to facilitate new mergers."

Philip Verveer, who filed the lawsuit that led to the 1984 breakup of the Bell System monopoly, said he doesn't expect the Justice Department to block the deal.  "This is a reassembly of many of the pieces we worked to take apart, but the circumstances are completely different today," said Mr. Verveer, now a partner at Willkie Farr & Gallagher in Washington.

Mr. Verveer, though, said he expects the FCC to require that AT&T agree to accept the "net neutrality" nondiscrimination principles pledged to the FCC last fall as a condition of the SBC-AT&T deal.

In the end much will depend on AT&T's government-relations executives.  Indeed, lobbyists in town frequently remark that one of the best elements of SBC's purchase of AT&T was its inheritance of AT&T's lobbying shop, which has deep relationships with Republicans and Democrats.

Jim Cicconi, a Texan with close ties to President Bush, was the head of AT&T's Washington office before its acquisition.  Afterward, he bypassed SBC's team to become the senior executive vice president of external and legislative affairs for the combined company.  He served in both the Reagan and first Bush administrations and is close to James Baker and former President George H.W. Bush.

BellSouth's Washington operation isn't too shabby either.  Led by Herschel Abbott Jr., who has been with the company since 1991, BellSouth has been a force in key issues in the telecom industry.  Mr. Abbott played a critical role in persuading the White House in mid-2004 not to appeal a court ruling about fees the Bells charged others to lease access to their local-phone networks.  Recently, BellSouth tried to persuade lawmakers to launch a narrowly focused telecom rewrite that only addressed the video franchising issue.

--John R. Wilke contributed to this article.

Write to Amy Schatz at Amy.Schatz@wsj.com and Anne Marie Squeo at annemarie.squeo@wsj.com

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