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Amid Twists at FCC Review, AT&T Hurdles Loom
Republican Panel Member Abstains in BellSouth Vote; Odds of Concessions Rise
The Wall Street Journal

By Amy Schatz
Tuesday, December 19, 2006

WASHINGTON -- AT&T Inc.'s $86 billion bid to buy BellSouth Corp. could face a variety of unwanted conditions after a Federal Communications Commission member said he won't vote on the deal because of ethical concerns.

The decision yesterday by Robert McDowell, a telecommunications lawyer, to abstain from voting was an unwelcome development for the companies, which had been counting on the Republican to break the impasse that has paralyzed the agency's review of the deal.

The FCC's review had broken down during the past few weeks amid partisan bickering, with the two Democrats on the five-member commission pushing for certain conditions and the two remaining Republicans opposing them.  Mr. McDowell's decision to step aside increases the likelihood that AT&T will be forced to accept some conditions involving "net neutrality," or the idea that all Internet traffic should be treated equally.  However, it also sweeps away uncertainty about who will vote, which has slowed negotiations on merger conditions.

Mr. McDowell has expressed concern about whether he could vote since the merger was announced in March, shortly after he was nominated for the FCC job.  Mr. McDowell previously lobbied on behalf of CompTel, a trade group that represents smaller phone companies and has energetically opposed the deal.  Mr. McDowell must abstain from voting on matters that involve the group for a year.

Even without Mr. McDowell's vote, there is little question the FCC will approve the deal.  But his abstention will change what conditions might be imposed.

The FCC's two Democrats are demanding that AT&T abide by net-neutrality conditions, which would require the company to treat all Internet traffic equally.  The FCC's two Republican members, notably Chairman Kevin Martin, agree with AT&T that such a condition would hinder its ability to manage its network and roll out new services for consumers.  Mr. McDowell had publicly sided with his Republican colleagues on the net-neutrality issue, which is one reason he was being pressed to vote on the deal.

Democrats want nondiscrimination rules to apply on AT&T's lines all the way to the company's Internet backbone.  AT&T has so far been willing to agree to apply those rules to portions of the network, but not all of it.

Another potential merger condition will center on the pricing of wholesale high-volume data lines used by corporate customers.  Wireless phone companies and corporate customers have complained that consolidation of those high-volume lines will lead to significantly higher prices.  Similar concerns were raised during the merger of SBC Communications Inc. and AT&T Corp. and Verizon Communications Inc.'s acquisition of MCI Corp.  In those mergers, the Justice Department required limited divestitures in some cities, and the FCC required limited price caps for those lines.

The Justice Department approved the AT&T-BellSouth transaction in October without any conditions.

Mr. McDowell's decision ended a week of drama and hand-wringing about whether he should vote.  The angst began about 10 days ago, when the FCC's general counsel, in a memo, gave legal justification for Mr. McDowell's participation.  It didn't make as strong a case as many thought it would.  Instead, it detailed concerns by the head of the Office of Government Ethics, who suggested Mr. McDowell shouldn't vote.

"While I expected the legal equivalent of body armor, I was handed Swiss cheese," Mr. McDowell said yesterday.  The Virginia Bar Association, of which Mr. McDowell is a member, also cautioned him on voting on the deal.  "They did not encourage me to go forward," he said.

For a week, Mr. McDowell remained quiet about his intentions, while privately pressing his colleagues to jump-start the merger talks in hopes of their reaching a deal.  Those efforts proved fruitless, however, and Mr. McDowell decided to step aside now, an FCC official said, rather than get involved in the merger talks and either vote or abstain at the last minute.

Congressional Democrats immediately applauded Mr. McDowell's decision.  Democratic FCC Commissioner Michael Copps said it provided clarity that "should give some juice to our ongoing discussions."

Washington politicians' recent debate about propriety and ethics -- which helped Democrats retake Congress -- appears to have played a role in Mr. McDowell's decision.  Mr. McDowell's concerns about protecting his integrity -- and avoiding becoming a punching bag for Democrats on Capitol Hill for the next two years -- appear to have won out over merger proponents who wanted the deal approved with minimal conditions.

One reason for the FCC's delay in approving the merger has been the continued uncertainty about whether Mr. McDowell would participate.  FCC board members negotiated but never came close to cutting a deal while Mr. McDowell's involvement remained an option.  Negotiations ended about two weeks ago, FCC sources say, when Mr. Martin suggested that he was only willing to go so far on the net-neutrality issue.

"The chairman has continued to be committed to working with his colleagues and acting on the merger.  But the sticking points are still very sticky," said an FCC official close to the negotiations.  "We're not sure how quickly this merger can be approved."

In a statement, AT&T said it would continue to work with the FCC to get the deal approved.  "We will -- as we have always done -- do our part to bring the merger review to a bipartisan completion as quickly as possible," said an AT&T spokesman.

Write to  Amy Schatz at Amy.Schatz@wsj.com

http://online.wsj.com/article_print/SB116647879048553707.html