Bells Keep Upper Hand on Pricing - TheStreet

The latest salvo in the telecom industry's pricing standoff handed both sides minor gains while leaving the regional Bell companies firmly in control.

The Federal Communications Commission froze phone network rental fees for six months and put a cap on rate increases for another six. The decision means that the Baby Bell phone companies retain the upper hand over peers such as

AT&T

(T) - Get Report

and

MCI

(MCIP)

, though it could slow the long-distance giants' retreat from the consumer phone business.

The latest ruling covers the discounts that the Bells --

Verizon

(VZ) - Get Report

,

SBC

(SBC)

,

BellSouth

(BLS)

and

Qwest

(Q)

-- must offer to competitors that rent their expansive local phone networks. The delay will allow the FCC to write new pricing rules. Additionally, the FCC said Friday that after the six-month freeze, the Bells can increase residential line-leasing rates by $1 per month.

Predictably, neither camp seemed happy with the latest ruling. BellSouth was troubled that the discounts won't go away sooner. Meanwhile, AT&T says the rules are stacked in the Bells' favor and anticompetitive.

On Monday, shares across the sector were mixed. AT&T rose 16 cents to $14.46; MCI added 4 cents to $17.47 and SBC rose 8 cents to $26.65. But, Verizon dropped 22 cents to $39.38 and BellSouth slid 11 cents to $26.98.

The unfolding phone-pricing drama is no small matter, and the losers in the bunch have threatened to make some political ugliness to argue their case. In fact, in the wake of the initial setback, rival telcos AT&T, MCI and

Z-Tel

(ZTEL)

each beat a limited retreat from the local phone market. AT&T said it would stop seeking conventional phone customers, and MCI is closing down its small business sales unit.

Analysts agree that the discounts, which are governed by a rule known as unbundled network elements platform, or UNE-P, are ultimately doomed. But some observers say that with Friday's move, regulators effectively handed AT&T and MCI a reprieve of at least one year.

The rates stay the same for a month after the rules are published in the Federal Register and then they go up $1 when the freeze expires. "That's not such bad news," says one investor who owns MCI and

Talk America

(TALK)

.

The Bells and would-be competitors have squared off over the local phone market for eight years. Regulators have attempted to referee the process by drawing steeply discounted wholesale pricing rules that would loosen the Bells' grip on the local network and lead to lower-priced phone service for consumers.

But the Bells successfully fought the effort, gaining the Bush administration's support in large part by promising not to raise wholesale prices until after the presidential election, say industry observers.

Meanwhile, MCI is trying to reorganize itself around selling services to large businesses and has said it is monitoring the costs to provide residential services in various markets. AT&T, while dominant in the corporate services market, is looking to beef up Internet calling as a way of bypassing the Bells' local phone network.

The FCC's interim rules extend the status quo, but only for so long. Then, the Bells will likely win back some of the customers they lost to competitors, Smith Barney analyst Mike Rollins wrote in a research note Monday. Rollins has a buy on Verizon and BellSouth and a neutral on SBC.

"We continue to see the direction of these rules as positive for the Bells," wrote Rollins.