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Qwest Awaits Minnesota PUC Penalty Ruling

Nov 12, 2002 | The telecommunications industry and other parties weighed in this week on what penalty, if any, Qwest Communications should face for a series of illegal, secret deals that regulators say were intended to quash phone competition in Minnesota.

Punishment for the actions, which will be considered by the state Public Utilities Commission on Nov. 19, could take the form of fines, finger-wagging or a forcible breakup of Qwest's wholesale and retail operations, along with other potential sanctions.

Regulators and competitors in other states, including Oregon, will be watching the Minnesota regulators closely. The PUC could be breaking new ground, observers said. "Some of these proposals have never happened before," said Jeff Kagan, a telecommunications analyst based in Atlanta. "It's really unprecedented."

In preparation for the hearing, the PUC asked for comments from Qwest's competitors, employees and other affected parties.

Some smaller telecom companies, angered by what they view as anticompetitive bullying by Qwest, are hoping for tough penalties such as "structural separation." Under that plan, Qwest's Minnesota operations would be split into a wholesale unit—which would control the company's network facilities—and a retail side, which would have to buy access to the network like any other competitor.

Big Qwest rivals, such at AT&T Corp., also are in this camp, and Minnesota's Department of Commerce has voiced its support of tough sanctions. But some Qwest employees have voiced concern that such penalties would cost them jobs if Qwest's costs rise sharply.

The case stems from the discovery by the Commerce Department of deals between Qwest and smaller competitive local exchange carriers (or CLECs) that had not been disclosed by the company.

An administrative law judge in September found that the deals violated federal laws in part because they sought to thwart regulators by offering CLECs discounts in exchange for their support of its bid to re-enter the long-distance market in Minnesota.

Qwest had maintained that it wasn't required to disclose the deals, but softened its tone after the PUC ruling. "We're disappointed in the commission's decision," said spokesman Bryce Hallowell. "But we understand their concerns and will follow their direction."

Qwest officials maintain, however, that the company has changed its ways; they argue that the PUC should simply monitor the phone company's actions rather than issuing punishment. They also said structural separation would be unworkable and hinted that such a move would result in higher rates and lost jobs.

For the most part, competitors aren't buying that argument. "I'm not saying it would be easy, but separation is certainly feasible," said Rick Smith, president of the Minneapolis-based CLEC Eschelon Telecom Inc.

Eschelon hasn't filed a formal recommendation with the PUC, but Smith said he thinks separating Qwest's wholesale and retail operations is the best way to combat Qwest's ability to use its dominant position to crush competitors.

Not all observers favor the idea, however. Kagan, the telecom analyst, said splitting up Qwest would give off an unflattering image of the state's regulatory climate. "It would throw the entire competitive system into chaos," he said. "It's the last thing the state should want" at a time when Qwest is reinventing itself under new CEO Richard Notebaert.

But Tom Pelto, vice president of law and government at AT&T, said Qwest shouldn't get a pass by saying, "we've changed."

"We've heard that new-management argument before, when [ex-CEO Joe] Nacchio came in," he said. "Nothing I've seen from Qwest suggests that they get it."

AT&T will suggest that the PUC fine Qwest, delay its long-distance bid—no surprise, since AT&T badly wants to keep its rival out of long-distance—and ask Qwest to prove why it shouldn't be split up. "That would give the PUC time to see if Qwest got the message," Pelto said.

Bill Popp, CEO of Golden Valley-based Popp Communications (one of the few CLECs that didn't cut a secret deal with Qwest), favors a large fine that could go toward CLECs hurt by Qwest's policies. By state law, however, any fines would be deposited in the state's general fund.

He discounts talk of revoking Qwest's authority to sell service in Minnesota, which would force Qwest to sell its operations here. "That would be ridiculous, way overkill," Popp said.

Eschelon's Smith echoed those comments. "I think forcing a sale would hurt consumers and companies like us, rather than help."

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