US won't appeal phone ruling

WASHINGTON -- Rules that govern how telephone companies compete for local customers will expire next week under a decision detailed yesterday by the Bush administration, throwing into question how much residents and small businesses will pay for future service and what choices they will have.

The Justice Department said that it would not appeal a federal court's decision that rejected government rules requiring local phone giants to lease their networks to rivals at a discount. The rules are now set to be taken off the books June 15.

The Justice Department's decision is a huge blow to already struggling long-distance firms such as AT&T Corp. and MCI Inc. that have used the rules to launch their own brand of local service. And it adds confusion to an industry already being roiled by technological changes, as wireless phones take off and Internet calling becomes a reality.

Approximately 19 million telephone lines or about 14 percent of the local phone market is served by companies that relied on the government regulations to compete for customers. AT&T said yesterday that the decision could lead it to raise rates and possibly abandon local service in some markets.

"Failure to appeal this case could do lasting damage to the entire competitive telecom industry -- and will lead inevitably to higher prices and fewer choices for Americans," said James Cicconi, AT&T's general counsel, in a prepared statement yesterday.

The Justice Department declined to comment on its decision, which followed months of intense lobbying by the nation's largest telecommunications companies. Sources on both sides of the issue say the senior White House staff was divided.

The political staff, lead by senior adviser Karl Rove, raised concerns that rising telephone rates could hurt President Bush in the upcoming presidential election. The policy staff opposed an appeal, saying the rules run counter to Bush's efforts to reduce business regulation.

The White House had hoped to avoid a decision by calling on the firms to reach voluntary agreements with one another. However, those talks, including a recent round hosted by Federal Communications Commission chairman Michael Powell, failed.

The rules at the center of yesterday's decision are the byproduct of the Telecommunications Act of 1996, an effort by Congress to introduce competition into the market. At the time, the industry was largely shaped by a court decision that broke up AT&T into several companies. The regional giants, such as Verizon Communications Inc. and SBC Communications, were given the local phone business while AT&T was handed the long-distance market. The Telecommunications Act allowed the regional giants, known as Baby Bells, into the long-distance market and AT&T and other long-distance carriers into the local market in the hopes that they would compete with one another. But the local companies have fared much better than their rivals in the last eight years.

Verizon is now the nation's largest local phone company with a territory that stretches from Maine to Virginia. It is also one of the nation's largest long-distance providers with more than 17 million customers. In some states such as New York, it is the largest provider of long-distance service. Verizon and other regional players have been able to successfully invade the long-distance market by bundling local and long-distance together.

While Verizon is growing its long-distance business, AT&T and MCI are regularly reporting double-digit declines in their core consumer business. AT&T and MCI claim that without the ability to offer local phone service at competitive rates, they may be forced out of the residential market.