Heavy-Handed or Hollow?

Posted: 5/2003

Heavy-Handed or Hollow?
Regulator Says Enforcement a Priority; Competitors Cry Foul

By Josh Long

Last year the FCC fined SBC Communications Inc. $6 million for violating a condition of its merger with Ameritech, the largest forfeiture in the history of the agency.

The federal regulator says that fine is symbolic of its no-nonsense approach to enforcement. David Solomon, chief of the FCC Enforcement Bureau, told state regulators in February his agency is more proactive than it has been in the past, levying more than $10 million in local competition enforcement actions in fiscal year 2002. The funds go to the U.S. Treasury.

Quoting FCC Chairman Michael K. Powell, Solomon said, "If you cheat, we will hurt you and hurt you bad."

Critics say the declaration is hollow once you do the math: SBC, the No. 2 local phone company, had to shell out nearly $9.8 million in the wake of enforcement actions in the last fiscal year -- far more than any other regional Bell operating company. But SBC is a Fortune 500 company that posted $43.1 billion in 2002 annual revenue on a reported basis.

"Six million to this ILEC is lunch money," consumer-advocate Kathleen O'Reilly said, following Solomon's remarks at a Washington D.C. conference hosted by the National Association of Regulatory Utility Commissioners (NARUC).

To be fair, regulators and others say the enforcement actions are not designed to run the Bells into the ground. One Bell lawyer uses this analogy: It makes no sense to fine one jaywalker more than another based on their earnings.

Furthermore, some state regulators say the fines are meaningful. Public utility commissions have implemented penalties that hold a Bell liable for a portion of its net income in that particular state. In Massachusetts, for example, Verizon Communications Inc. is liable for up to $142 million annually under the so-called performance assurance plan, which represented 36 percent of its 1999 net income in the Bay State, says a Massachusetts regulator.

Observers also point out the incumbent phone companies have been forced into a precarious position for the last seven years: They must appease their investors with cash flow while honoring wholesale arrangements that fly in the face of a laissez-faire business relationship. Consequently, some observers allege, the Bells constantly are testing the boundaries of the law.

Those promoting local phone competition worry the phone giants have less incentive to obey the law now that regulators have granted them long-distance authority in many states within their incumbent territories.

Mike Isenberg, director of the telecommunications division for the [Massachusetts] Department of Tele-communications and Energy, disagrees. He points to statistics that show Verizon Communications Inc. is issuing fewer bill credits to rivals for falling short of performance measurements that went into effect April 2001 -- the month Verizon received long-distance approval. Verizon owed about $6.2 billion in credits from April 2001 through November 2002.

The performance metrics cover ordering, provisioning, maintenance and repair, and network performance. Verizon issued the largest credits for missing performance metrics in April and June 2001 -- about $1.25 million and $2.12 million, respectively.

"Early on after Verizon got into the long- distance market and the performance insurance plan became operable, we saw that they were paying a fair amount of bill credits for the first couple of months, and then things gradually have improved quite a bit where over the last five months, six months or so they really have paid out very little," Isenberg says.

Jonathan Banks, general counsel in the Washington D.C. office of BellSouth Corp., says, "I think there is a deep culture ... of trying to obey the law regardless of whether there are fines or not.

"It looks bad to consumers, and it doesn't help with your business with consumers or regulators," he adds.

Andrew Isar, who represents competitive phone companies on behalf of the Association of Communications Enterprises, says he believes state and federal regulators are "doing the best job they can given the resource constraints they have and the myriad different considerations they have." But Isar longs for a way to limit the seemingly endless appeals proceedings. Lobbyists and attorneys say enforcement must be swift in order to adequately compensate the aggrieved party. Federal and state regulators say they are working hard to achieve that goal.

In a January presentation at a NARUC conference, the FCC Enforcement Bureau reported that it only had two formal common carrier complaints pending for more than a year during fiscal year 2002, down from 10 the previous year and more than 150 when it formed three years ago. The bureau also settled through mediation about 40 of 60 cases over wholesale provisioning and other competitive issues such as special access and OSS, Solomon said.

State regulators also say they have implemented processes to expedite the resolution of a complaint. Massachusetts, for instance, has put in place a so-called "rocket docket" to negotiate disputes within three months. The regulator has used the rocket docket to resolve disputes between Verizon and a competitor or between two local competitors.

"Just having the process worked to force the carriers to resolve informally the dispute," says Isenberg. The rocket-docket process can facilitate a resolution about 50 percent to 100 percent faster than through formal adjudication, he says. Before the rocket-docket days, a formal complaint could drag on for six months or more, and "usually more," adds Isenberg.

Many disputes, including those holding ramifications for the broader industry, can go on for years. Some people supporting the Bells' rivals say the drawn-out regulatory proceedings can stymie competition. In other cases involving specific allegations of a Bell company obstructing competition, the injured phone provider rarely is compensated for its losses, some people say.

But the U.S. Supreme Court may open up a new avenue for recovering those alleged losses. The high court will review an appeals court ruling that found a New York lawyer, Curtis V. Trinko, had the right to sue Verizon based on antitrust legislation. Trinko used AT&T Corp. as its local phone company, but old Ma Bell's supplier was Verizon, formerly Bell Atlantic.

The nine justices could hear arguments in October and issue a decision late this year or by June of 2004, lawyers involved in the case say.

If the Supreme Court upholds the appeals court decision in Bell Atlantic vs. Trinko, that could allow dozens of antitrust cases to proceed and "send a message" to the Bells that "they have to obey the law and let people compete with them," says 46-year antitrust veteran Maxwell Blecher, a partner for Blecher & Collins. Ever since Congress passed the Telecommunications Act of 1996, the incumbents have jerked competitors "around until they basically ran out of capital, went out of business," says Blecher.

A Verizon attorney says such criticism is unwarranted. "Verizon has done more than any other telephone company to open its local markets to competition," says John Thorne, senior vice president and deputy general counsel.

Daniel Berninger, managing director of watchdog organization pulver.com, says the Bells could go bankrupt if the Supreme Court upholds the Trinko decision. Retorts to this point from the Bells and other sources range from "debatable," to a "long shot," or "virtually impossible."

This much seems clear: If the Supreme Court upholds Trinko, the ensuing antitrust litigation is likely to resemble the Enforcement Bureau's 1999 complaints in at least one respect: pending for a long time.

The Bill

The FCC says it is taking a no-nonsense approach to enforcement. The regulator levied $28.5 million in fines and other monetary penalties in fiscal year 2002. That included $15 million in consumer protection enforcement actions, $10 million in local competition actions and $3.5 million in public safety actions. The following is an accounting of the local competition actions:

Jan. 19, 2002: The FCC proposes to fine SBC for failing to adequately provide rivals shared transport, consequently violating a condition of its merger with Ameritech Corp. The regulator fined the phone company $6 million in October, the largest penalty in its history. SBC "willfully and repeatedly violated the clear requirements of the merger order, thereby causing delays in the availability of shared transport, and forcing competing carriers unnecessarily to expend time and resources in state proceedings to enforce their rights," the FCC said in its order.

Feb. 25, 2002: FCC imposes $84,000 forfeiture, penalizing SBC for violating rules requiring incumbent local exchange carriers to "promptly" post on the Internet a notice of facilities that have run out of colocation space.

April 15, 2002: Regulator imposes $100,000 forfeiture, penalizing SBC for violating an Enforcement Bureau order requiring that a response to a letter of inquiry include a sworn statement affirming its accuracy.

May 28, 2002: SBC enters a $3.6 million consent decree, closing two investigations into potential violations of FCC rules regarding the submission of inaccurate affidavits in section 271 proceedings.

July 24, 2002: Qwest enters $96,000 consent decree, closing an investigation into possible violations of the rules requiring incumbents to "promptly" post on the Internet a notice of facilities that have run out of colocation space.

Aug. 20, 2002: Verizon enters a $260,000 consent decree, closing an investigation into compliance with required performance reporting conditions in connection with the merger of Bell Atlantic and GTE.