Think of Robert Woltz as the Gulliver of telephony. His company, Virginia Verizon, is a true giant, owning a vast network of copper connections to homes and businesses across the state and controlling more than 75 percent of the state’s 4.7 million local telephone lines. Like Gulliver, however, Woltz has a big problem with all of those lines. The Lilliputians of the deregulated phone industry are using them to tie him down. Empowered by the Telecom-munications Act of 1996 — a law designed to spur competition in local phone service – they have access to Verizon’s wireline network so they can win customers. Verizon remains strapped down inside its local service boundaries. The old Bell Atlantic can’t move into long-distance broadband markets until regulators are convinced its network is open to all. That hasn’t happened yet. "No one else has to worry about those silly lines, just us," the president of Virginia Verizon says.

They don’t exactly feel Woltz’s pain over at Richmond-based Cavalier Telephone, one of Verizon’s fiercest new competitors in local phone service. The two companies have clashed repeatedly over problems in switching customers or in disputes about gaining access to Verizon’s network. Working on interconnection problems with Verizon "is like stepping on the tail of a dinosaur and waiting five years for its head to turn around," says Marty Clift, Cavalier’s vice president of regulatory affairs. "Of course they’re dragging their feet."

This Virginia turf war mirrors the fight going on nationwide over the lucrative telecom sector, valued by Bear Stearns at $285 billion a year. Five years after the market was opened, it is still dominated by Baby Bells left over from the 1980s breakup of the Bell monopoly. They have a huge advantage over much of their competition because they own the prized "last mile" connection to customers. Competitors have gained ground in Virginia and now have 9 percent of the local phone exchange market, just above the national average of 8.5 percent.

Lately the fight has taken a nasty turn. In April, Cavalier and three other competitors, including telecom giant AT&T, asked the State Corporation Commission to split Verizon in two, separating the retail segment from the wholesale seller of access. A decision could come by mid-summer. Woltz calls the "structural separation" proposal a needless "flimflam" orchestrated by AT&T that serves only to protect weak companies that wouldn’t survive without a regulatory umbrella.

In Washington, FCC Chairman Michael Powell is after the Baby Bells as well. In May he asked Congress for authority to increase the penalties his agency can impose on uncooperative incumbents from $1.2 million to $10 million per violation. At the same time, a bill is being pushed in Congress that could help the Bells retain their dominance. Rep. Billy Tauzin, R-La., the new chairman of the House Energy and Commerce Committee, wants to let incumbent carriers into the broadband market. Tauzin’s bill drew 224 co-sponsors when introduced last year but former Rep. Thomas J. Bliley sidelined it in the energy and commerce committee, which he then chaired. But now Bliley’s retired. Competitors to the Bells say that by letting Bells into broadband long-distance service, it eliminates the incentive for them to open their networks. "If that law passes it is going to be a death knell for local competitors," says Wilma McCarey, president of AT&T Communications of Virginia.

Some, however, argue the 1996 act wrongly assumed that new competitors in local phone service couldn’t afford to build their own networks. Jerry Ellig, a senior research fellow at George Mason University’s Mercatus Center, says growth in the wireless industry proves otherwise. The boom in wireless competition and investment in recent years suggests "that making new competitors build their own network actually gets us to competition sooner."

Woltz naturally welcomes a change in the law. The 1996 telecom act, he argues, actually discourages competition and stifles investment. Telecom challengers know that winning a share of the local market will trigger the incumbent’s release so they don’t try very hard, he says. And incumbents like Verizon are loath to invest in new infrastructure if they know they’ll have to share it with competitors. "Tell me how that’s good for a consumer," Woltz says. He bristles at accusations that Verizon has dragged its feet in opening its network. "If we hadn’t been acting in good faith to do that, we wouldn’t have been anywhere near as far along as we are."

The two sides could not be farther apart. Clift of Cavalier says Verizon’s system doesn’t let his company tell new residential customers when they’ll be connected. Those customers often get frustrated by the wait and go back to the incumbent. "Verizon has designed a system that’s not friendly to competition. It really needs a radical overhaul, or we’ve got to get into structural separation," says Clift.

Maureen Flood, director of regulatory affairs for CompTel, an industry group based in Washington, scoffs at the Bells’ claims that innovation is being stifled. DSL technology, for instance, was available long before incumbents started offering it, she says. They jumped in only after the telecom act became law and competitors started offering it. "They didn’t have any incentive to deploy it because they were a monopoly," she says. "It’s hard to train a monopolist to be a competitor."

What does this all mean for business customers? Better service may have been the idea behind the telecom act, but it’s not the widespread reality so far. A big problem is that phone companies aren’t motivated to provide good service evenly. Desirable business customers get preference, says analyst Ryon Acey with Scott & Stringfellow. With commercial customers "there are a lot of bundling opportunities," he says. "When you offer them local service you’re very well-positioned to offer them other services."

Businesses in larger urban regions like Northern Virginia, Richmond and Hampton Roads will always have more options, Acey says. "If you’re in Charlottesville [and other smaller markets], you’re going to have a more difficult time finding competition." The disenchantment of financial markets with local phone competitors and the crumbling telecom sector make the prospects even worse. Companies Like Picus Communica-tions, Teligent and PSINet that once competed in Virginia are dead or dying. Telecom providers that survived the crash will be retrenching and focusing on making a profit in their existing markets, Acey says.

That’s the strategy of Herndon-based Net2000 Communications, a broadband provider of telecom service. The company recently got $190 million in funding and will use it to upgrade existing networks, which will reduce its dependence on the incumbent local telephone company. Chairman and CEO Charlie Thomas says Net2000 is doing "extraordinarily well" in its Virginia markets of Virginia Beach, Richmond and Northern Virginia. "I don’t think the number of companies that will fail in telecom is over, but at the end of all this the survivors will be stronger," he says. The survivors won’t be anxious to expand, which is bad news for businesses in the state’s second-tier cities such as Lynchburg, Roanoke and Charlottesville. "I don’t think there’s going to be extensive business competition in those markets under the current regulatory environment for years to come."

Net2000 has avoided a dependence on the incumbent. It uses T1 lines to deploy broadband service, which means fewer technical problems and better control. Waynesboro-based nTelos seeks the same kind of control, says Rob Cale, vice president of marketing. The company is a hybrid of sorts — in some markets it’s the incumbent, in others it’s the challenger. "We’ve put a great deal of emphasis ... on owning the facilities. It helps us control the quality of service [and] the cost factor."

Acey says cable companies see the troubles in telecom as an opening to enter the local phone market. Companies like AT&T and Cox Communications are doing so today in a limited way, he says, but need improvements in the technology for two-way voice and data service over the coaxial cable.

Smaller localities are tired of waiting for the private sector to work it out. In May the Bristol Virginia Utilities Board won its suit against former Attorney General Mark Earley over a state law that bans municipally owned utilities from entering the telecom market. The board argued the state’s ban violated the federal telecommunications act and U.S. District Court Judge James P. Jones agreed. The utility immediately began connecting new business customers to its 125-mile fiber-optic network. The Virginia Telecommunications Ind-ustry Association has appealed the ruling.

Caught in the middle of the dispute is the State Corporation Commission, which is trying to adapt to a new role. "We’re becoming referees as opposed to regulators," says William Irby, director of the commission’s Division of Communications. The SCC is trying to cope by updating state laws. It recently won General Assembly approval to increase the size of fines it can levy on companies violating interconnection requirements from $1,000 to $10,000, and it’s trying to streamline rules so fines will be imposed automatically. Last summer the commission formed the Collaborative Committee to Investigate Market Opening Measures with representatives from local exchange carriers. And it’s overseeing a test of Verizon’s operating system, which should be done by year’s end. Still, Irby sounds skeptical that incumbents and challengers can ever get along. "Early on we perhaps naively had the hope that all of this was going to work like it was written on paper," he says. Yet forcing incumbents to share networks with competitors "is just fraught with opportunities for things to go wrong. As long as they have to depend on the incumbent, I think there are going to continue to be these problems."

With so many cracks in the ground beneath the telecom sector, it’s hard to guess which one will split open and start swallowing companies. But with all the foot-stomping going on something has to give. Tauzin’s bill won approval in the commerce committee, though its prospects are uncertain with the change of control in the Senate. At Verizon, Woltz expects to be ready to seek FCC approval to enter the long-distance market as early as next July. Clift of Cavalier, though, promises a lot of rumbling before then. Besides its SCC petition, Cavalier plans to file a federal suit this summer seeking damages from Verizon over alleged "bad acts" in opening its network. The adage about the squeaky wheel applies to this fight, Clift says. "We know how to squeak very loud."

Return to Virginia Business - July 2001