Bell Battle Could Get Ugly for Bush

A legal defeat for Ma Bell and MCI(MCIA.PK) could turn into political ugliness.

The eight-year effort to stimulate phone competition by forcing Bells to rent rivals access to local networks at cheap rates hit a major roadblock at the White House on Wednesday. But it was good news for the Bells, whose stocks jumped after U.S. Solicitor General Theodore Olson chose not to ask the Supreme Court to consider an appeal of a prior defeat of proposed pricing rules.

And soon after the Bells -- Verizon (VZ), SBC (SBC), BellSouth (BLS) and Qwest (Q) -- were handed the victory, the once-hotly divided Federal Communications Commission said it planned to offer no appeal. FCC chief Michael Powell vowed Thursday to draw up a new set of pricing rules, but offered no time frame for when the guidelines would be complete.

AT&T (T) and MCI are the two telcos most affected by the elimination of steeply discounted access rates. Analysts and investors say that without much legal ground to stand on, the two companies face some grim decisions.

At a time when political sensitivities are running high during an election year, industry watchers fear that AT&T and MCI could announce plans to shut down consumer businesses in some states, raise prices in other areas, and possibly lay off workers, as they place the blame on the Bush administration.

Through its Neighborhood residential phone business, MCI has signed on more than 3 million local phone customers to its unlimited calling, flat-rate plan based on cheap discounts from the Bells. Similarly, AT&T has signed on customers in nearly every state to its own flat-rate plan.

AT&T says it's too early to discuss pricing decisions and job cuts. On Thursday, it filed a joint appeal with MCI of the appelate court decision with the Supreme Court.