Originally created 05/31/97

Obstacles face merging phone companies



WASHINGTON (AP) - The possible union of AT&T Corp. and one of the country's largest local phone company creates a paradox: The merged company initially may not be able to provide long-distance service in SBC Communications Inc.'s seven-state territory in the West and Southwest.

A 1996 law requires that any local phone company seeking to provide long-distance service to its own states must first get approval from the Federal Communications Commission.

Thus far, neither SBC nor any other company has been cleared to do so.

And the phone company would still need that approval even if it merged with AT&T or any other long-distance company, government attorneys and other experts said.

The two companies have been negotiating a possible merger, but a deal is not imminent, and numerous other obstacles from regulators and competitors remain.

Under the law, local phone companies seeking to provide long-distance service inside their local regions must first comply with detailed requirements involving opening their networks and markets to potential local phone rivals.

"SBC would still have to satisfy all of the checklist conditions and have its market open," said Catherine Reid, who helped write the law as senior counsel on the House Commerce telecommunications subcommittee.

A provision in the law can be interpreted as barring SBC from affiliating with AT&T in SBC's local phone regions unless it has federal approval to offer long-distance service in those regions, government and telecommunications attorneys generally agreed.

If the deal happens, one possible option would be to condition the merger upon receiving approval in each of the seven states, said an attorney close to the companies' negotiations.

Another, more difficult option could allow the merged company to provide local and long-distance services everywhere, except in SBC's seven states. Operations in those states would be rolled in one-by-one, if and when FCC granted approval.

Under the law, SBC and other local phone companies are free to provide long-distance in states where they do not provide local phone service.

But SBC and other local phone companies are most interested in providing long-distance service in their local regions. That's where their networks and brand name are strongest.

It's also where local phone companies have the greatest potential to act anti-competitively or to have local customers subsidize investment in long-distance, which is not allowed.

As a result, Congress created a tough test that local phone companies must pass before offering long-distance service in their states.

Neither AT&T nor SBC would comment on merger prospects.

If the two companies merged, they would have 60 percent of the $80 billion long-distance market and dominate local phone and wireless services throughout the Southwest and California.

Thus far, SBC has asked regulators for permission to offer long-distance service only in Oklahoma, one of its seven local phone markets. The others are Texas, Kansas, Missouri, Arkansas, California and Nevada.

It's far from certain whether regulators will approve the Oklahoma application. The Justice Department on May 16 urged the FCC to reject the request, saying the company had not taken steps to open its local phone market to competition.

AT&T has asked to provide local service in all 50 states. It also has needed agreements - none final - in each of SBC's regions to route local calls through SBC's network.

Consumer advocate Gene Kimmelman said the merger talks between AT&T and SBC are "like AT&T setting the white flag up. This is capitulation. AT&T is saying they need a local Bell company to compete in the local phone business. It can't do that by itself."

Bristling at such suggestions, AT&T temporarily broke its silence saying: "Our position has not changed a bit.

"Local competition is the most important customer benefit of the (1996) act, and ... no such merger should be approved unless it will result in more competition in the provision of local service."