Welcome to the Business Journal Archives
Search for articles below, or continue to the all new BusinessJournalDaily.com now.
Search
Baby Bells Paying to Play
By John DunbarCenter for Public IntegrityWASHINGTON -- The four regional Bell operating companies remaining from the break-up of AT&T accounted for roughly two-thirds of all Federal Communications Commission fines and settlements paid since January 2000, according to an investigation by the Center for Public Integrity. The majority of the total was paid by companies that ran afoul of rules written to create competition in local telephone markets. Since a 1996 rewrite of federal communications law, the so-called Baby Bells have battled to hang on to their dominance of the local telephone service market in the United States. The three companies that have paid the most fines or settlements since January 2000 are all Bells. On top of the list is Denver-based Qwest Communications International Inc., which has forked over $17.1 million, including a $9 million fine paid recently. Second is Verizon Communications with $12 million, and third is San Antonio, Texas-based SBC Communications Inc. which has paid $11.5 million. (BellSouth Corp. is ninth overall with $2.15 million.) Thanks largely to the agency's aggressive enforcement of competition rules and a creative approach to increase fines related to indecent broadcasts, proposed fines and settlements have increased dramatically so far this year, researchers discovered. The average amount proposed per infraction in 2003 was $119,933 compared with $362,282 through June 9. Center researchers focused on both proposed fines and actual payments submitted to the government. The survey shows that a total of $64.6 million has been paid by companies regulated by the FCC to settle disciplinary actions, with $42.8 million, or 66.2 percent of the total, paid by the four Bell operating companies. Of that amount, $41 million is attributable to rules created following the Telecommunications Act of 1996. The study is believed to be the first-ever comprehensive examination of both fines proposed by the FCC and fines or settlements paid to the FCC by all the companies the commission regulates. The Center spent more than a year collecting and analyzing enforcement actions by the agency, a task made difficult due to the complex process involved in fining agency-regulated companies and weaknesses in the FCC's method of tracking proposed fines and payments, particularly those issued prior to 2000.Researchers identified a total of $101.3 million in proposed fines and settlement agreements and $64.6 million in payments. The gap between total proposed fines and total payments is due to several factors. Some fines are still working their way through the FCC's appeals system -- a process that can last years -- or have been challenged in federal court. Often, the proposed fine is lowered or even canceled during the appeals process. Finally, some companies hit with large fines refuse to pay or have gone out of business. Local competitionOne of the prime selling points of the Telecommunications Act of 1996 was the promise of competition in local telephone markets and lower bills for consumers. At the time, local telephone service was monopolized in most parts of the country by the regional telephone companies that emerged following the breakup of AT&T in 1984. Rather than require new competitors to build new systems to compete with the Bells, the Act required the existing phone companies to open up their networks to competitors. Once a local phone service provider has opened its system to competitors to the satisfaction of the FCC, it was permitted to compete in the lucrative long-distance phone service market. Thus far, the rules have allowed about 19 million customers to buy local telephone service from a company other than their traditional local provider, according to published reports. Disputes rising from the law have sparked multiple lawsuits including one that led to a 1999 Supreme Court case ruling upholding the FCC's power to implement local competition. Justice Antonin Scalia described the act as a "model of ambiguity or indeed even self-contradiction." Since the 1996 law passed, Bell companies like SBC Communications, Verizon and Qwest have been at war with AT&T and MCI as both sides have sought to gain a competitive advantage. U.S. Sen. John McCain, Republican from Arizona, frustrated with the ongoing dispute, has opened new hearings examining the landmark law. McCain has called the law a "fatally flawed piece of legislation, written by lobbyists, that freezes telecommunications policy in a bygone era." The Bells are required to lease parts of their networks to competitors. But the Bells contend that prices set by local public service commissions and the FCC are too low. The Bells won a huge victory when a federal appeals court rejected the pricing rules. Further helping the Bells was a decision by the Bush administration not to appeal the decision to the U.S. Supreme Court. The pricing rules were set to expire after the court rejected a request from AT&T, MCI and other companies to issue a stay. Just yesterday AT&T announced it will stop competing for local and long-distance residential customers in Ohio, Missouri, Washington, Tennessee, Louisiana, Arkansas and New Hampshire. The company said its action is a result of a June 9 decision by the Bush Administration and the Federal Communications Commission not to appeal a recent federal court decision that overturned FCC wholesale rules put in place to introduce competition in local markets. READ STORY The Bells have been big contributors to the president. For the 2004 election cycle, employees and political action committees from the four companies contributed $300,520 to his re-election campaign, according to the Center for Public Integrity's analysis of campaign contributions. By way of comparison, the three major long-distance telephone companies, AT&T, MCI and Sprint, have contributed a combined $59,160 to the Bush campaign. In addition, Edward E. Whitacre Jr., chairman and CEO of SBC Communications Inc., is a "Ranger," meaning he has bundled together at least $200,000 in contributions for the campaign. Verizon CEO Ivan Seidenberg is listed as a Bush "Pioneer," meaning he's raised at least $100,000 for Bush. Aggressive enforcementSince the rules implementing the 1996 act were implemented, the FCC has aggressively pursued violators. For example, while the agency's crackdown on shock radio has gotten a tremendous amount of attention, one fine -- the $9 million paid by Qwest -- is twice as much as all the fines proposed by the FCC for broadcast indecency since 1990 combined. David Solomon, chief of the FCC's Enforcement Bureau since its formation, told the center that the bureau was created in part to make competition enforcement one of the commission's "high priorities." In fact, the four largest penalties in the history of the FCC are all against Bell operating companies and are all related to competition. Qwest was fined for failing to disclose business agreements it made with local competitors. The concern is that secret agreements with selected competitors may not be offered to larger companies like MCI and AT&T which pose a much greater competitive threat. Qwest rejects any notion that the company has been anti-competitive. "Qwest has been and remains a leader in competition policies," company spokesman Skip Thurman told the center in a prepared statement. In the past six months, Qwest has been more likely to negotiate than fight. For example, Thurman said Qwest is the first company to offer "stand-alone DSL" -- meaning customers may subscribe to super-fast Internet service without having to buy other services. And in what appears to be the strongest evidence of a truce, Qwest, at the urging of the FCC, "negotiated a landmark, business-to-business deal with MCI" that would allow the company access to Qwest's network to allow long distance service. As for the $9 million fine, the company maintains it did nothing wrong. "At all times the terms and conditions of the agreements in question were available to carriers through the Qwest website and through other filings with state commissions," Thurman said. "In the more than two years since these agreements were first made available, not one carrier has chosen to adopt any of them. Finally, these agreements have long since expired or been terminated." Qwest, which reported $14 billion in revenue in 2003, was fined $20.7 million by the Arizona Corporation Commission for the same issues that generated the $9 million fine. Qwest also was responsible for the second-largest enforcement bureau payment. In May of 2003, the company agreed to pay $6.5 million for violating a federal ban on providing long distance services in its 14-state region before receiving permission from the FCC. The third-highest fine was issued to SBC for $6 million for "violating a competition-related condition" that the FCC imposed when it approved the 1999 merger of SBC and Ameritech Corp. "Such unlawful, anticompetitive behavior is unacceptable," said FCC Chairman Michael Powell in announcing the fine.SBC paid the fine, but is appealing it in court. The company disagrees with the FCC's contention that it acted in an anti-competitive fashion. "We believed and we still believe this action was unjustified," said Paul Mancini, senior vice president and assistant general counsel at the company. Mancini also noted the fact that the Bells are the most fined companies only makes sense, given how heavily regulated they are. "The vast majority of FCC rules deal with landline local business," he said. By comparison, long distance, cable television and satellite have been largely deregulated, he added. "Where they (the commission) focus most of their enforcement action is local service." The fourth-highest payment was $5.7 million by Verizon. The company, in a March 2003 consent decree, admitted it violated a federal ban on marketing long distance services prior to FCC authorization. Jeff Ward, senior vice president/compliance with Verizon said the dispute was a result of Verizon "inadvertently doing some marketing of long distance before approval," which he deemed "hardly anticompetitive." Overall, Ward said the fines assessed to Verizon are old news. "Most of the action, most of the concerns that make up that $12 million (total) occurred as our networks were being opened up to competition. They were start-up issues," he said. "Now most of our discussion is business to business, not over startup issues." SlammingWhile local telephone competition enforcement is a top priority at the FCC, another major priority is protecting consumers from unsavory practices in the long-distance business, especially "slamming." Slamming, or slamming combined with other offenses, accounted for $21.7 million in fines and proposed settlements since 1999, according to the center's analysis. A customer is slammed when a firm changes someone's long-distance service to another provider without authorization. At times, the new long-distance provider adds insult to injury by "cramming" the new customer with unauthorized charges. Slamming has been a top enforcement priority of the FCC since the late 1990s, when the agency began announcing new fines for the practice on a regular basis. While many of the fines were issued against no-name third party companies, the biggest payment ever issued relating to the practice was assessed against the nation's second-largest long-distance company. In June 2000, the agency announced it had reached a settlement with MCI WorldCom Communications Inc. (now MCI) for $3.5 million to settle a slamming investigation. In addition to the payment, the company promised to restructure its telemarketing and other business practices to protect consumers. Generally speaking, the more modern the communications service, the less regulation there is by the FCC. Local telephone service providers are fined more than cellular telephone service providers, for example. The cellular industry is largely unregulated. But there is one key public safety issue that comes up often. The FCC requires cellular telephone companies to implement "enhanced" 911 services, which allows emergency vehicles to locate a cellular phone user in distress. Fines regarding this service account for virtually all FCC enforcement actions against cellular telephone companies. Since 1999, the FCC has issued about $5.56 million in paid fines and consent orders against wireless carriers with $5.23 million related to E911 rules. The largest single proposed fine was issued on May 20, 2002 against AT&T Wireless for $2.2 million. The fine was appealed and lowered to $2 million, which AT&T Wireless paid. Overall, T-Mobile USA has paid the most at $2.35 million. AT&T Wireless is second at $2.1 million and Cingular Wireless is third at $775,000. High fines, low paymentsLarge companies like Qwest and AT&T generally pay up when the FCC decides they have done something wrong. That's not always the case with some lesser-known FCC offenders. Part of the reason is that large phone companies often enter into agreements to settle a dispute. The company makes a payment to the U.S. Treasury and the FCC drops its investigation. Often, the offender admits to no wrongdoing. But some of the biggest fines issued over the past few years have been against companies that are here today and gone tomorrow. For example, America's office workers are all-too-familiar with the daily deluge of unsolicited faxes that fill up the "in" basket. One of the chief culprits in the "junk fax" business is a company called Fax.com. The company faxed messages on behalf of others for a fee, apparently violating FCC regulations and federal law on 489 separate occasions. The agency said the company was pursuing a "pervasive and egregious pattern of deception." Fax.com was fined $5.38 million in August of 2002. In January 2004, the Orange County Register reported the company's Aliso Viejo headquarters were vacant. The newspaper also reported that Fax."