Skip to main content

The Baby Bells expect to hear good news from the feds, but it looks like the regulators will put them on hold.

Fans of local phone giants


(VZ) - Get Verizon Communications Inc. Report







had high hopes recently for a potentially friendlier outcome to a proposed pricing policy. But those hopes will likely be dashed when the final draft of the sweeping order, now being prepared by regulators, is implemented later this month.

Wall Street has been bidding down long-distance outfits like


(T) - Get AT&T Inc. Report

TheStreet Recommends

this week on speculation that the Federal Communications Commission was working to ease wholesale pricing mandates that force the Bells to rent their networks to rivals at low rates.

"That's wishful thinking," said two people familiar with the FCC situation. "There's been no significant changes to the order," said a person close to the process.

AT&T shares have fallen more than 10% this week, as investors and analysts braced for some form of reversal by the FCC that would remove the beneficial discounts that allow the long-distance giant to resell local phone service. In a

contentious 3-2 vote, the FCC decided in February to hand pricing jurisdiction back to the states, with a sunset provision that would end the pro-competitive discounts in three years.

The decision was seen by many on Wall Street as a setback for the Bells and a major win for competitors AT&T,





. The vote exposed a heated power struggle between FCC chairman Michael Powell and maverick fellow republican Kevin Martin.

As tempers presumably cooled with time, and larger national issues like the war drew attention away from the rift, many observers had expected the two sides to come closer together as they hammered out the final wording of the new regulations.

In fact, one of the factors cited by Goldman Sachs analyst Frank Governali in his downgrade of AT&T to neutral from buy on Wednesday was the likelihood that the FCC order would be "a little less negative for the Bells, and therefore a little less positive for


But as regulatory experts point out, any substantial deviation from the original order will require another round of public discussions and a new vote, which is highly unlikely.

"The commissioners may place a few flowers on top of this pile of manure. But it's still going to stink for the Bells," said Washington tech policy analyst Scott Cleland of the Precursor Group.