Covad Gets Bailout, Fights Back

But can't keep Bells from pursuing bills that could crumple the startups.

The growing symbiosis between Regional Bell Operating Companies and their smaller rivals is fueling an odd mix of legislative wrangling and financial cross-pollination that could ultimately weaken competition in broadband data services.

The conflict came into stark relief last week when SBC Communications Inc. gave longtime rival Covad Communications Group Inc. a cash infusion of $150 million. But the bailout was not enough to keep Covad—and more than 100 other CLECs (Competitive Local Exchange Carriers)—from denouncing SBC and fellow Bells for pursuing legislation that would devastate the startups.

Known as the Tauzin-Dingell bill for its sponsors U.S. Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., the legislation would allow the Bells to offer long-distance broadband data services without first demonstrating that their local markets are open to competition, as required by the Telecommunications Act of 1996.

"On the regulatory front, [Covad and SBC] will always be competitors," said Covad CEO Charles Hoffman. "Its pretty common in business now to be both rivals and partners."

According to the Association for Local Telecommunications Services, in Washington, which represents CLECs, the legislation would put 150 competitive carriers out of business, costing at least 77,000 jobs and devaluing $56 billion in network infrastructure, figures that the measures advocates reject.

Proponents of the bill say it would promote deployment of broadband technologies, especially in rural areas.

Opponents of Tauzin-Dingell maintain that it would hurt the Bells smaller rivals by eliminating the Bells incentive to allow competition in local markets. Loss of lucrative broadband market share, coupled with a reduced requirement for the RBOCs to share local lines, would doom many of the financially strapped CLECs.

The bills critics hope not only to quell any possibility of its passage but also to demonstrate to the financial community that the measure stands no chance of future momentum. It is not certain that the measure would pass in the House of Representatives if voted on today, and it is even less certain that there would be sufficient support for a Senate counterpart.

"With this bill hanging around, it holds a hammer over the heads of these [CLECs]," said Rep. Anna Eshoo, D-Calif. "The bill has a stifling effect on the market."

With an ever-thinning stream of investment capital flowing to startup telecom companies, the Bells emerge as the most likely source of funding in the industry. In last weeks deal with Covad, SBC, which owns 5 percent of the Santa Clara, Calif., DSL (digital subscriber line) provider, agreed to replace a long-term $600 million incremental payment plan with a one-time $75 million prepayment, a $50 million four-year loan, a $10 million restructuring fee and elimination of a $15 million debt.

Covad filed for bankruptcy protection in August and plans to come out reorganized next month. If it does not, but instead follows in the footsteps of defunct DSL providers NorthPoint Communications Inc. and Rhythms NetConnections Inc., last weeks deal gives SBC, the countrys largest DSL provider, first dibs on Covad assets.

From the Bells perspective, it is precisely the CLECs troubles that necessitate the Tauzin-Dingell legislation.

"The CLEC industry is in trouble, and we would contend that thats exactly why we need this broadband legislation," said Saralee Boteler, spokeswoman for SBC, in Washington. "Its outrageous to now attempt to blame capital market decisions."