Baby Bell Mergers Provoke Debate on 1996 Telecom Act

Impatience over the Telecommunications Act of 1996 erupted last week among consumers and some lawmakers who blame the law for triggering another telephone mega-merger while failing to produce new telephone competition.

Since the landmark federal law was enacted two years ago, key members of the original Bell monopoly have reentered partnerships, and little in the way of new competition or lower phone rates is apparent.

Bell Atlantic Corp. and Nynex Corp., two Baby Bells, merged in a $22-billion deal about one year after the enactment of the law. And last week, Ameritech Corp. and SBC Communications Inc.--the parent company of Pacific Bell--announced a merger that would reunite three more of the original seven Baby Bells that were spawned by the 1984 breakup of AT&T; Corp.

“The 1996 Telecom Act unintentionally, but quite effectively, stymies competition,” said Sen. John McCain (R-Ariz.), who is chairman of the Senate Commerce Committee and voted against the legislation.

But proponents of the Telecommunications Act say that much of the criticism represents a rush to judgment. Legal and technological impediments to competition are still being worked out, including pricing issues and integrating the equipment of new competitors with the existing network.

Officials at the Justice Department and the Federal Communications Commission continue to insist that the sweeping measure can work.

Although local telephone rivals of the Baby Bells currently serve only 5.5% of the market, they are growing at a torrid pace and posting annual revenue gains of 100% to 150%, said Daniel Ernst, a telephone analyst at Strategis Group Inc. in Washington, D.C.

“It took 26 years for AT&T; to lose 40% of its long-distance market share” to new competitors like MCI Communications Inc. and Sprint Corp., Ernst noted. “We are only in our second year of telecom reform. I don’t think we need to mess with the Telecom Act. We just need to give the law time to work.”

That view is echoed by the head of the antitrust division of the Justice Department and by officials at the FCC, the federal agency largely responsible for implementing rules to carry out the Telecommunications Act.

Joel I. Klein, the antitrust chief who drew fire for declining to block the merger of Bell Atlantic and Nynex, recently said in an interview: “I believe competition is emerging in the telephone industry.” Klein described the Telecommunications Act as a good law that must be given time to work.

“The act is fundamentally sound if properly implemented and properly interpreted,” said John Nakahata, chief of staff for FCC Chairman William E. Kennard.

Nakahata said the main problem with telecommunications reform is that the law has never been fully implemented. He said key provisions that could jump-start competition are either tied up in court or being rolled out slowly because it takes time to build new telephone infrastructure and deploy enabling technology.

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Soon after the FCC set new ground rules for local telephone competition in August 1996, for example, the agency was promptly sued in federal court by disgruntled local phone companies that accused it of forcing them to offer rivals access to their telephone networks at unreasonably low prices.

The dispute has made its way through the federal court system during the last two years and is now pending before the Supreme Court. If the issue is resolved so that new competitors get the discounts they want, competition could accelerate.

A separate dispute involves efforts by the Baby Bells to enter the long-distance market before satisfying the law’s requirement to open their own local phone markets. Long-distance giants AT&T; and MCI have filed lawsuits against Ameritech and US West Communications Inc., challenging agreements the Baby Bells have made to allow Qwest CommunicationsInc. to provide long-distance service to the two companies’ customers.

Meanwhile, telephone carriers still have not completed a multibillion-dollar overhaul of the telephone network that will enable customers to keep their existing telephone numbers when they switch phone companies.

Until that massive upgrade is finished sometime in the middle of next year, there is little incentive for new competition to develop, since no large company and few residential users want to incur the inconvenience and expense of switching phone numbers.

“It has been a painfully slow process,” said David C. McCourt, chairman of RCN Corp., a local phone company that is competing against Bell Atlantic in the Northeast. “Mergers are the typical reaction of big monopolies that don’t want to compete.”

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Jube Shiver Jr. covers telecommunications from The Times’ Washington bureau. He can be reached at jube.shiver@latimes.com.