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The co-called Baby Bells celebrated a federal judge's decision to allow the regional telephone companies to enter the long distance market.

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PHIL PONCE: The five regional Bell telephone companies are cheering a federal judge’s decision that could let them enter the long distance market. Late yesterday a U.S. district judge in Texas ruled as unconstitutional portions of a law keeping the so-called Baby Bells out of the long distance business. Joining us now to explain the ruling and its implication for consumers is Mike Mills, telecommunications reporter for the Washington Post. Welcome, Mike. And first of all, what law was the judge looking at, and what were the relevant portions that were under review?

MIKE MILLS, Washington Post: The judge was looking at the 1996 Telecommunications Act, which Congress enacted and President Clinton signed in February about two years ago with the goal of overhauling the nation’s telecommunications laws for the first time in some sixty-two years.

PHIL PONCE: And just briefly, a little bit of history of what led up to that law.

MIKE MILLS: The law was basically a way to put into law much of the provisions of the consent decree that broke up AT&T back in 1984, back when MCI and other companies wanted to connect to the local and long distance monopoly phone networks, and the Justice Department had accused AT&T of using a market power to keep competitors out. The result of that consent decree was the creation of the Baby Bells. And the deal was that AT&T would go its way with long distance, and the local Bell companies would have a continued monopoly in local phone service, with a ban on offering long distance service, among other things.

PHIL PONCE: And what was the point of the ban? What was the point of keeping the local regional Bells out of the long distance industry?

MIKE MILLS: The deal was that the if the regional Bells could offer long distance service in competition against AT&T and MCI and Sprint and others, that those other companies didn’t have the direct link to your house and my house like the regional Bells do and that they could use that so-called bottleneck into the local house--into the local phone lines to discriminate against their competitors by maybe charging them more for access to the local lines or by using their profits from the regulated local phone business to subsidize their long distance activities.

PHIL PONCE: So what was the argument that the regional Bell companies made in front of this judge?

MIKE MILLS: Well, the Telecom Act set up a new sort of carrot and stick situation for the Bells that said you can get into the long distance business but only when you’ve proven or persuaded regulators that you’ve opened up your local phone market to competitors. They had to meet a lengthy 14 point checklist; the Federal Communications Commission had to approve their application to get into the market; and the judge overturned that portion of the law on the grounds that it punished the Bell companies by keeping them out of the long distance market.

PHIL PONCE: And the local Bell companies made the argument what, that it’s unconstitutional for them to be singled out in legislation?

MIKE MILLS: Exactly. It’s rather unusual to name companies in legislation. And they said that Congress was violating their constitutional rights by essentially deeming them guilty of market abuses that they hadn’t yet committed, you know, perceived into the future, and that without a trial in the judicial court of law, they have been punished by being prevented from getting into the long distance business. And they pointed out that companies like GTE and other local providers that were not part of the consent decree were free to enter the local business, but the Bells weren’t.

PHIL PONCE: So the reaction on the part of long distance companies like AT&T, MCI--

MIKE MILLS: Well, they’re clearly very worried, and I think the government, the FCC, the Justice Department are all fairly taken aback and shocked by this announcement, this ruling by the judge, and the argument is that local phone competition now will probably never evolve the way that the sponsors of the law had planned if the Bells are immediately allowed into the long distance market. It’s sort of like letting a genie out of the bottle. You can’t put it back again. And if the Bells lose their incentive to cooperate in letting local competition flourish, in other words, if they have long distance power to enter that market, then they wouldn’t have any incentive to open up the local market for competitors.

PHIL PONCE: So, in other words, the leverage would be gone?

MIKE MILLS: Exactly.

PHIL PONCE: What does it mean for consumers? What could this mean? Now, obviously, because of the interests that are stake there’s going to be an appeal, but what could it mean to consumers?

MIKE MILLS: It depends on who you talk to. For the Bells’ perspective, they think that consumers will benefit immediately because they’ll have a new options for long distance. They could choose their local phone company for long distance service. The long distance companies and the FCC, on the other hand, argue that competition will suffer, particularly in the residential local market.

PHIL PONCE: If this ruling can be appealed and is expected to be appealed, why is it so significant?

MIKE MILLS: It’s significant because it’s yet another example of the Telecom Act failing to live up to its promise to offer competition for consumers. Another court--a couple of years ago--or actually a year and a half ago--had struck down some important pricing rules that the FCC wanted to impose. And this is another big setback for the sponsors of the Telecom Act.

PHIL PONCE: Because the Telecommunications Act was supposed to increase competition and, therefore, affect prices. What kind of grades is it getting, as far as lowering phone rates?

MIKE MILLS: Well, local phone rates have been rather steady. The long distance rates have gone down somewhat. But, by and large, we haven’t seen the kinds of competition that people have expected.

PHIL PONCE: How big of an industry is this, and how many--in terms of resources, what are you expecting to see in terms of the appeal?

MIKE MILLS: Well, we’re looking at a market that’s worth $100 billion for the local--side of this fight, the local companies and the long distance carriers are going to put into it everything that they’ve got. The local--the Bell companies hired top gun litigators, constitutional scholars, like Lawrence Tribe. Robert Bork is arguing on behalf of AT&T. So this will be a major legal battle, the result of which will be at least as significant as the consent decree that broke up AT&T and the Telecom Act of ‘96, itself.

PHIL PONCE: Getting back to the issue of consumers, what difference does it make to a consumer--what do you say to consumers who might say it would be terrific if I could get local service from the same company and long distance service from the same company, what a convenience, what’s the other side of that?

MIKE MILLS: Well, nobody would argue with that. The idea is that you should be able to pick up your phone and pick a local phone company like you do a long distance company. The regional Bells have promised to try to make that happen in exchange for being allowed to get into the long distance business. So far that largely has not happened, except for in urban areas with large scale big ticket business customers. They do have some choice in local phone providers, but largely residential and small business consumers have yet to see that kind of choice. So the whole question here is, will that ever happen, and does this court decision make that less likely to happen?

PHIL PONCE: How about consumer groups, what are they saying?

MIKE MILLS: Consumer groups are quite angry about this decision. They say that the Bell companies have sort of hand--to rule on their behalf. There’s a judge in Texas who is in the territory of Southwestern Bell, which is known--Southwestern Bell--to be, according to the consumer groups, one of the more intransigent companies when it comes to opening up the local market. Now, Southwestern Bell, on its behalf, says that the long distance companies, AT&T and MCI, have little interest in serving the consumers that the Bell companies have promised to serve; in other words, the large residential consumers; that there haven’t been enough steps taken to reach those customers with competitive local phone service.

PHIL PONCE: And you talked about this decision being a surprise. Why is that?

MIKE MILLS: Well, I think everybody has been focusing on some more arcane pricing issues here in Washington, and few people took seriously this lawsuit, when it was filed by SBC back in July. The judge--

PHIL PONCE: SBC being--

MIKE MILLS: I’m sorry--Southwestern Bell, the Bell phone company that filed the suit--so the New Year’s Day--the New Year’s Eve Day surprise by the judge really set a lot of people--took them by surprise.

PHIL PONCE: And what predictions, if any, are you hearing from the different groups as to what’s going to happen on appeal?

MIKE MILLS: Well, clearly, the government and the long distance companies will ask for a stay, in other words, a motion to prevent this from taking effect until an appeal can be heard. If the judge in Texas does not approve that stay, they can go to the appeals court and ask for a stay. Beyond that, then they will obviously appeal it, and if they lose the appeal in the federal appeals court, then it will go to the Supreme Court. Even if they win, it would go to the Supreme Court most likely because the Bells would ask for it to go to the highest court.

PHIL PONCE: Mike Mills, thank you for being here.

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