Telecom defeats challenges FCC chief Powell's leadership By Jube Shiver Jr. and James S. Granelli, Los Angeles Times, 3/9/2003 WASHINGTON - Few presidential appointees have had as much promise as Michael K. Powell. The 39-year-old son of Secretary of State Colin L. Powell was named by President Bush to run the Federal Communications Commission in 2001. To Republicans, he seemed the perfect choice. He had the resume: US Army. Antitrust lawyer. Service on the commission since 1997. And he had the core belief in deregulation that his party believed would unwind eight years of Democratic rulemaking. He was a political star in the making. ''No FCC chairman, from day one, has been more politically powerful, more well-connected, and more knowledgeable coming into the job since perhaps Newton Minow during JFK's administration,'' said former FCC chairman Reed Hundt, a Democrat who steered the agency through the initial writing of telecommunications rules in 1996.

But like many others who came to Washington with great expectations, Powell failed his first big political test. Two weeks ago, Powell suffered a stinging defeat in his effort to overhaul the rules governing competition in the local telephone market. The setback underscored that turning ideology into policy is as much about personal politics as tactics. Now he is in danger of squandering his opportunity to reshape the nation's communications landscape. Powell's failure to woo a majority of commissioners to his ardent deregulatory position has caused many in government and industry to doubt his ability to lead the FCC. It also has cast doubt on Powell's political future beyond the FCC.

Although Powell continues to enjoy support from some elected officials - including Representative W.J. ''Billy'' Tauzin, a Louisiana Republican, and chairman of the House committee that oversees the FCC - other lawmakers and industry leaders who asked not to be identified said he must adapt to survive. ''Powell doesn't communicate well and doesn't solicit opinions of others,'' one telecom industry executive said. ''He's said, `I could have got some warmed-over compromise but I didn't want to sacrifice my principles.' But every decision reflects a compromise. To be in an agency that necessarily requires some degree of consensus, you can't operate like that.''

For his part, Powell downplayed suggestions that he harbors ''any personal anxieties about'' being perceived as an ineffective chairman. ''This is a democratic institution,'' he said last week. ''I'm not an obstructionist.'' Powell's defeat was particularly bruising because he was outflanked by someone from his own party: Commissioner Kevin J. Martin, a former FCC staff member with close White House ties. Martin forged an alliance with the commission's two Democrats to foil Powell's proposal to free the regional Baby Bell phone companies from having to lease their lines to competitors at discounted rates. The vote ended the commission's first review of competition rules under the Telecommunications Act of 1996, which was designed to give consumers more choices and lower prices for local telephone service. In the hours after the Feb. 20 vote, the financial markets wiped out $16 billion in shareholder equity in companies such as SBC Communications Inc., the dominant local phone provider in California.

Over Krispy Kremes with FCC staffers the next morning, Powell - in military-style gravity - told them the stock market reaction was a reminder ''that we are playing with live ammunition'' and bitingly referred to Martin as the ''$16 billion boy.'' Such a comment undermines the commission's public assertions that the split between Powell and Martin was an ideological disagreement between friendly colleagues. Although some speculated that Powell took the defeat personally, he put an upbeat spin on the vote and expressed little concern about damage to his political stature. ''Believe it or not, I'm largely satisfied with'' the outcome, Powell said, adding that he's ''ready to go on to the rest of the agenda.''

The FCC chairman, who lives in Fairfax Station, Va., is said to be interested in running for governor of the state one day. However, Powell associates say he hasn't talked openly about seeking political office. Former Virginia Governor L. Douglas Wilder said Republicans are unlikely to push Powell for governor, at least in the short term, because of the wealth of other experienced candidates in the state and Powell's lack of political experience. ''Virginians would be loath to chart a course in choosing a person who hasn't shown management skills in politics,'' he said. Powell originally had planned to follow his father's path as an Army officer, but his hopes of a military career ended after an automobile accident in Germany nearly took his life in 1987. He turned instead to law. After graduating from Georgetown University Law Center, he became a clerk to a federal Appellate Court judge and then took a stint as chief of staff to Assistant Attorney General Joel Klein, who headed the antitrust division under President Clinton. Those law jobs, coupled with his military experience, helped shape his reserved and judicial administrative style. They also gave him a broad grounding in economics and government enforcement power.

Powell is a deliberate thinker who approaches problems tactically. But this style - more aloof than collaborative - may not be well suited to running an agency such as the FCC. It has produced friction and administrative miscues on issues that are largely nonpartisan. For instance, both Powell and Martin staked out traditionally Republican, but ultimately conflicting, positions in the phone battle. Powell's argument was that rivals who use the Bells' networks should build their own facilities rather than being able to lease equipment from the Bells at cheap, regulated rates. Martin, on the other hand, said state regulators know their markets and should decide how best to foster competition. It was two classic conservative positions butting heads: free markets vs. states' rights. Powell aggravated the split by trying to advance a combination of lawyerly argument and soldierly tactics. This story ran on page C6 of the Boston Globe on 3/9/2003.
© Copyright 2003 Globe Newspaper Company.

Powell's Big Defeat at FCC Brings Mixed News for Bells

(Wall Street Journal, 2/21/03)

By YOCHI J. DREAZEN and SHAWN YOUNG Staff Reporters of THE WALL STREET JOURNAL

Vote Is Victory for AT &T , WorldCom; Local Carriers Fear Loss of Market Share

Michael Powell, former Army master sergeant, was ambushed by his own troops Thursday when the Federal Communications Commission derailed his effort to deregulate the nation's local telephone companies.By a 3-2 vote, the FCC freed the regional Bell telephone companies of having to lease their new high-speed data lines to competitors at discounted rates. But the agency defeated a proposal by its chairman that would have lifted the rules for the companies' phone lines as well.Moments after the decisive defeat

Thursday, Mr. Powell lashed out at his opponents in the FCC. (See excerpts of an interview with Wall Street Journal reporter John Wilke.)  With one Republican commissioner voting with the two Democrats, the commission rejected Mr. Powell's plan in favor of an alternative that preserves the role of state regulators in deciding which elements of the Bell phone networks are available at wholesale rates. Mr. Powell's plan would have largely pre-empted the state officials' role and shifted their authority to Washington, while beginning the process of eliminating the wholesale rates for certain pieces of Bell equipment.The vote is a victory for companies such as AT &T Corp. and WorldCom Inc., which have taken a growing portion of the Bells' local phone business by relying on the wholesale rates.

The Bells, on the other hand, having spent millions of dollars lobbying state officials to raise the wholesale rates and federal officials to eliminate them, said they were disappointed by the defeat of Mr. Powell's proposal.The Bells have long argued that the rates are set too low to cover the costs of maintaining their networks and allow rivals to poach high-margin local customers without having to invest in providing the service. They applauded the decision to lift line-sharing requirements for high-speed data lines, but said the new rules don't give them the regulatory relief they need to launch new investments because the rules leave their core businesses under siege.

Mr. Powell himself may have lost even more in the decision. He was unable to persuade fellow Republican Kevin Martin to agree on a deal and was instead forced into the politically humiliating position of having to dissent on the high-profile vote.  The magnitude of his defeat on the wholesale price issue was so complete that it prompted rumors that he would soon resign from the commission altogether, something his aides denied.In an interview after the vote, Mr. Powell said he feared the decision would be struck down in federal court, creating years of additional uncertainty for the market. "I'm very worried about the legal sustainability and I'm really worried about its potentially damaging impact to a fragile industry that's already in a difficult economic environment," he said. "The market needed certainty, and the majority didn't step up to its responsibility on that." 

The FCC's ruling and Mr. Powell's dissent is likely to provoke a rash of lawsuits that could effectively paralyze decision-making and investment, some analysts said. "For at least the next year, it will also be difficult for telecom companies -- especially those that operate on a national scale -- to make business decisions. They will not know what the rules will be from state to state," Commerce Capital Markets analyst Anna-Maria Kovacs wrote in a report.SBC Communications Inc., San Antonio, has seen its profits and share price erode as the number of lines it rents to rivals under the wholesale rates more than doubled last year. Officials from SBC and the other Bells said they were likely to challenge the ruling in court to avoid having to deal with 50 separate state proceedings on the wholesale rules. "It's basically giving the states free rein to do whatever they want," said SBC senior vice president James C. Smith.

Still, SBC and the other Bells also have benefited from the current regulatory scheme, which has allowed them into the long-distance market in much of the country. If the wholesale rules had been eliminated, WorldCom and AT&T's expansion into local telephone service probably would have been halted. WorldCom serves 2.8 million local customers, including 1.8 million in 42 states plus the District of Columbia served by its Neighborhood plan, which it hopes to expand to all 48 continental states this quarter. AT &T has more than two million local customers in eight states and plans to add as many as eight million customers in the next two years.

Some Republican lawmakers blasted Mr. Martin for defeating a Republican chairman. Calling the vote a "low point for the FCC," House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R., La.) derided Mr. Martin as a "renegade" and the leader of a "palace coup."Some FCC officials said Mr. Powell misplayed his hand by failing to keep close tabs on Mr. Martin and the agency's two Democrats as the commissioners began reviewing Mr. Powell's proposal last month. The officials said they were surprised by Mr. Powell's approach given that his relationship with Mr. Martin had deteriorated sharply in recent months.At a dinner honoring Mr. Powell in a crowded ballroom at the Washington Hilton in December, the chairman said he and his fellow commissioners would soon hit the road for a series of public meetings on media ownership, likening the process to a rock band's tour. He drew laughs when he said that all of the commissioners played their instruments together except for Mr. Martin, who was always trying to take the lead.Still, the insurrection took Mr. Powell by surprise.

At the FCC's wireline competition bureau, staffers circulated a draft of the proposed changes to the wholesale rules in late January, but by early February they still hadn't received substantive feedback from Mr. Martin and the two Democrats. Mr. Powell assumed the three men might want changes but were likely to support the item, according to people familiar with his thinking.Late in the evening of Feb. 6, Mr. Martin sent an e-mail making clear that he and the two Democrats, negotiating secretly, had agreed on a wholesale-rate plan of their own that represented a sharp departure from Mr. Powell's proposal. The e-mail made it clear that Mr. Martin had the votes to defeat the chairman.In the days leading up to the vote, aides to the two men tried to find a compromise. Mr. Powell's final offer to preserve some of the state regulators' current authority while leaving final oversight and decision-making with the FCC was rejected shortly after midnight Thursday morning, setting the state for the formal vote a few hours later.John R. Wilke contributed to this article (back to top)

Despite Winning Ruling, Bells Shirk DSL Investment Pledge (WSJ, 2/21/03)

By JULIA ANGWIN and DENNIS K. BERMAN Staff Reporters of THE WALL STREET JOURNAL

The Federal Communications Commission took a stab at deregulating the market for high-speed Internet access Thursday -- but very few people are happy with the results.The regional Bell phone companies that are the biggest beneficiaries of the ruling thumbed their noses at it, despite the fact they had sought it.

Consumer advocates warned that the ruling could result in higher rates for fast Internet connections. And the company that could be most hurt by the ruling, Covad Communications Inc., said it will consider getting out of the consumer segment of its business as a result.The FCC eased a requirement that the Bell companies sell access to their lines to competing high-speed Internet services. The Bells pushed for the move because they said it would level the playing field with cable-TV companies, which usually aren't required to share their lines with competing Internet providers.

The FCC's move seems to set the stage for the Bells to make good on their own promise. They have been saying for years that once the rules on high-speed Internet access were relaxed, they would start spending more aggressively to wire more homes for such broadband service. The high-tech industry was also pushing for such deregulation, hoping it would jump-start struggling equipment companies.But Thursday, the Bells didn't get their way in the second part of the FCC's big ruling -- they had sought relief from rules that require them to sell their voice-calling services to other phone companies at discount rates. Those rules have allowed long-distance companies such as AT&T Corp. to take a chunk out of the Bells' local-phone business.Because of that second ruling, Bell company SBC Communications Inc. won't spend on expansion and innovation of its broadband service while its core phone business is suffering losses, said James B. Smith, a senior vice president at the San Antonio company. "It's not going to happen. I can't justify it to my shareholders," said Mr. Smith.  Officials at Verizon Communications Inc., a Bell that is the nation's largest local phone company, were also pessimistic. "Any new investment is contingent on a strong financial base and it appears the FCC is undermining that base," said Tom Tauke, senior vice president for public policy and external affairs at the New York company.  The Bells' stance on new spending didn't please William McCarty, chairman of the Indiana Utility Regulatory Commission. "I don't know how many green lights you need to start committing to broadband investment," he said. Using a line from the famous "Saturday Night Live" character Roseanne Roseannadanna to refer to the Bells, Mr. McCarty said, "It's always something."

Meanwhile, the ruling devastated the stock of Bell competitor Covad, which emerged from bankruptcy a year ago. Covad shares fell about 43%. Covad uses leased Bell lines to build its own high-speed Internet network. Under the new rules, Covad will likely have to pay much higher access fees to the Bells. And Covad's customers -- which include consumer Internet-service provider EarthLink Inc. -- could end up paying higher fees as well."Now we have to negotiate with our competitors, the Bell companies, for pricing whereas before those prices were regulated by the states," said Covad Chief Executive Charles Hoffman. As a result, Mr. Hoffman said, "We will be ... evaluating whether we'll even be in the consumer business." Instead, he said, Covad will focus on selling Internet connections to corporate users, which already comprise 60% of its revenue.Critics fear that Covad's situation could trickle down to higher prices and fewer choices for consumers who buy the phone-company Internet connections, known as digital-subscriber lines, or DSL. Those connections already cost upwards of $40 a month and providers such as EarthLink have struggled to turn a profit even at those prices.

FCC Commissioner Michael J. Copps wrote in a dissenting opinion that the agency's move may "put us on the road to re-monopolization of the local broadband market," although he agreed with the FCC's other decision to preserve competition in the local voice-calling market.EarthLink, the third-largest Internet provider in the U.S. with about five million customers, is Covad's biggest customer, but Dave Baker, EarthLink's vice president of law and public policy, said the ruling will "not have much affect at all" in the short term. However, he added it is too soon to say what long-term impact it may have.

AOL Time Warner Inc.'s America Online, the largest U.S. Internet provider with 26 million customers, signed a five-year agreement with Covad for DSL services in September. Yet, an America Online spokeswoman said, "We are already delivering DSL access to our customers nationwide through the Bells and today's decision will have zero impact on our ongoing ability to do that."The FCC's ruling does put out a new carrot for the Bells. It essentially says they can have control of a newer way to deliver high-speed access to homes, using fiber-optic cables instead of copper. These so-called fiber-to-the-home efforts bring Internet and video service as much as 40 times faster than today's corporate Internet connections.Just 33,000 U.S. homes are served by such connections, according to research firm Render Vanderslice & Associates.

The Bells have virtually no presence in this fiber technology outside of a few small pilot programs. Yet they have hinted that a fiber rollout to homes could ultimately be the best way to compete against cable because of the technological limitations of DSL.But rewiring America with fiber is costly. Corning Inc., a major fiber maker, estimates it would cost $360 billion to $660 billion over 15 years.