Former Bells dial up big numbers in statehouses

Introduction

Telecommunications companies spent $60.3 million* on political contributions over six years and a minimum of $83.4 million* on lobbying over two years in an attempt to curry favor with elected officials in the states, according to a new Center for Public Integrity analysis.

Large regional telephone companies and cable television operators are spending millions in the hope that legislative success at the state level will translate into similar success in Washington, D.C., as Congress debates a major rewrite of federal telecommunications laws this fall.

The most active telecommunications company in the states by far has been San Antonio, Texas-based SBC Communications Inc. In just one two-year period—2003-2004—the former “Baby Bell” spent a minimum of $16.3 million to lobby state governments. And it spent another $10.2 million on contributions to state political parties and candidates’ campaigns from 1999 to 2004.

The legislative influence of SBC and other former Bells—the regional phone companies that spun off following the breakup of AT&T in the 1980s—has grown considerably with the collapse of chief rivals AT&T Corp. and MCI Inc. But the power vacuum left by the once-mighty long-distance carriers is being filled by the cable television industry, a relative newcomer to the regulatory wars.

Meanwhile, even with the rapidly changing playing field, the most persistent priority for the former Bells continues to be the elimination of state regulation over local phone rates—an area in which they have enjoyed considerable success, much to the dismay of consumer advocates.

This report marks the first attempt by the Center to track the influence of a single industry in all 50 states.

The lobbying total is a conservative tally—poor disclosure laws in nearly half the states make it difficult to get a true picture of all industry spending. Despite the limitations, the survey provides a good snapshot of which companies in the telecommunications business are most active in statehouses across the nation.

The contribution data, provided by the Institute on Money in State Politics and analyzed by Center researchers, reflects donations made to candidates for state office and to state party organizations. It does not include contributions made to federal candidates or national political parties. The lobbying data was compiled by Center staffers and includes spending by traditional telecommunications companies, such as AT&T and SBC, as well as wireless providers, cable television system operators and industry trade associations.

The contribution data includes donations made by traditional carriers, telecommunications services and equipment companies.

Lobbying

Telecommunications companies spent $36.6 million in 2003 to lobby in the states and $46.8 million in 2004, a whopping 36 percent increase.

The marked increase from 2003 to 2004 is due almost entirely to one company and one very expensive real estate dispute.

Cablevision Systems Corp. spent $13.36 million of its $13.8 million, two-year total in 2004 fighting construction of a stadium in New York City that was to be the new home of the National Football League’s New York Jets. In addition to being the nation’s sixth-largest cable television system operator, Cablevision also owns and operates renowned sports and entertainment venue Madison Square Garden. Cablevision executives feared that a new football stadium just down the street in Manhattan would take revenue away from the Garden.

The expenditure makes Cablevision No. 2 on the list of the biggest spenders on lobbying, according to the Center’s research. It was apparently money well spent; after an unfavorable ruling by a state panel, investors decided against building the new venue.

No. 3 on the list was Verizon Communications Inc. at $12.2 million. Verizon, like SBC, is a former Bell and they share many of the same lobbying priorities.

SBC, formerly known as Southwestern Bell Telephone Co., operates in 13 states, including Texas, California, Illinois, Michigan and Ohio. It is the second-largest phone company in the nation in terms of revenue, behind Verizon. SBC spent the most money in its home state of Texas—a minimum of $7.9 million and as much as $14.4 million. The precise amount is unknown because Texas only requires lobbyists to report a range—a very wide range.

SBC spokesman Dave Pacholczyk provided the Center with a written statement in response to our findings.

“Telecom is one of the most heavily regulated industries in the country, requiring us to participate in the legislative process more than most businesses,” it reads. “Decisions made by government can have a significant impact on our ability to serve our customers, so we have to make sure policymakers are educated and informed on our issues.”

Verizon’s top target was Pennsylvania, where only those who lobby the Senate need report expenditures. The total spent there was $3.2 million.

The state most lobbied, according to the Center’s research, was New York, with $17.6 million spent there (thanks largely to Cablevision). Second was California at $14.4 million, and third was Texas at $14 million. The true Texas total, however, may be as high as $26.1 million.

Not surprisingly, the more populous a state is, the greater the amount of lobbying dollars spent. But due to varying disclosure laws, that doesn’t always hold true.

Lax reporting rules

There’s a common perception that lobbyists spend most of their clients’ money treating legislators to free drinks, food and outings to sporting events. In truth, a more accurate measure of lobbying activity is found when lobbyists’ actual salaries are included. And in many large states, that figure is unknown.

Federal law requires lobbyists and their corporate employers to include salaries in the totals they disclose. That’s not the case in 21 states.

For example, Ohio has nearly double the population of neighboring Indiana. But Indiana reported $2.6 million in telecommunications industry lobbying in 2003 and 2004, while Ohio reported a paltry $69,254.

Indiana reports salaries; Ohio does not.

Such issues have an even more profound effect on the lobbying total reported by BellSouth Corp., another of the Baby Bells. The company does business in nine Southeastern states; five of them—Alabama, Florida, Georgia, Louisiana and Tennessee—do not require lobbyists to report their salaries. Tennessee, in fact, only requires that lobbyists disclose campaign contributions.

Due to those limitations, BellSouth reported only $1.1 million in lobbying, putting it in 14th place on the overall list.

In Pennsylvania, a 2002 court decision left the state with no lobbying law at all. Lobbying of House members and the governor goes undisclosed, although lobbyists still report expenditures related to contacts with senators because of Senate rules.

However, getting the records from the state’s Senate is expensive. A Center researcher drove to Harrisburg, Pa. to get them. They were not available and were eventually mailed to us—to the tune of $1,885.80 in “research costs.”

Alabama may have the most absurd lobbying law. Despite registering 15 telecommunications industry companies, which employed 27 lobbyists, the spending total reported on disclosure forms was zero throughout 2003 and 2004. That’s because Alabama does not require that salaries be disclosed. What’s more, only expenditures that exceed $250 in a single day must be reported. None of Alabama’s lobbyists, apparently, exceeded that ceiling.

Campaign contributions

Campaign contributions are generally measured in two-year cycles. The Center examined data that included the elections in 2000, 2002 and 2004. In the 2000 cycle, we identified $17.6 million in contributions, in the 2002 cycle, $24.8 million, and in the 2004 cycle, $17.9 million.

The fluctuation is not unusual. Most governors’ races, which draw the most contributions in the states, take place in between presidential election years.

Second to SBC’s $10.1 million in contributions was AT&T Corp. at $10 million. SBC has agreed to acquire the former telephone monopoly. The deal is awaiting regulatory approval from federal and several state agencies.

Third in contributions was the National Cable and Telecommunications Association at $6.6 million. The total includes state cable television organizations that are associated with the national group. Fourth was Verizon at $6.1 million and fifth was BellSouth Corp. at $3.8 million.

SBC spent the most money on contributions in California, at $2.9 million, with Texas a close second at $2.4 million.

AT&T’s favorite officeholders were also in California, where the company spent $2.8 million in contributions. Florida ranked second in AT&T expenditures at $1.7 million, and Illinois was third at $1 million.

The top states in terms of donations from telecommunications organizations were California at $10.4 million, Florida at $7.1 million, Illinois at $5.8 million, Texas at $4.9 million and New York at $3.9 million.

Not surprisingly, California, with 35 million residents, is the largest and most lucrative market for telecommunications services in the nation.

As for the recipients of that largesse, the top spot goes to a state party organization. The Florida Republican Party took in just under $4 million from telecommunications interests. Second was Democratic former California Gov. Gray Davis at $1.4 million; third was the Florida Democratic Party at $1.3 million.

Most states either limit corporate contributions to parties or ban them outright, and such donations to national political parties were banned by the 2002 McCain-Feingold campaign finance law. Florida’s party organizations, however, can accept unlimited corporate contributions.

The largest individual donor to state races among telecommunications executives was Stephen C. Frobouck, president of the Anderson Group of Companies of Pittsburgh. Frobouck, whose corporation builds transmission towers for cell phone companies, gave $688,195 to the campaign of Pennsylvania Gov. Ed Rendell, a Democrat.

According to news accounts of Rendell’s run for governor in 2002, $500,000 of the contributions came in the form of a loan. Frobouck was made a member of Rendell’s transition team when the former Philadelphia mayor was elevated to governor.

Fading giants—AT&T, RIP

Despite their greatly diminished status, long-distance phone giants AT&T Corp. and MCI both made the list of biggest spenders on contributions as well as lobbying.

AT&T ranked No. 4 in lobbying at $7.8 million and No. 2 in contributions at $10 million. MCI, formerly known as WorldCom, was No. 6 in lobbying at $2.8 million and No. 8 in contributions at $1.5 million.

But their days of largesse in the states are now over.

After the Telecommunications Act of 1996 was signed into law, AT&T and MCI were in constant battle with the regional Bell companies—in court, at the Federal Communications Commission, in Congress and in the states.

The law was intended to create competition in local phone markets by forcing the Bells to lease their networks to competitors (such as AT&T and MCI). Once they had proven that their local networks were available for others to use, they could get into the long-distance business.

Competition was slow to develop, and revenue from long-distance service continued to fall. Then MCI imploded after a massive accounting fraud scandal that resulted in its CEO being sentenced to federal prison. But the real nail in the coffin for both companies was a 2004 federal court decision freeing the Bells from giving AT&T discounted access to their local phone networks.

By this time next year, AT&T will cease to exist as we know it. AT&T shareholders voted in June to approve a buyout by SBC. The merger is still awaiting state and federal approval, but appears set to close within the year.

MCI, meanwhile, was the subject of a bidding war between Verizon and Qwest Communications International Inc., another former Bell company. Though Qwest bid about $1.3 billion more, MCI management opted to accept Verizon’s offer. Shareholders are scheduled to vote on the takeover on Oct. 6 at the company’s Ashburn, Va., headquarters.

Both mergers are opposed by consumer advocates, who believe they will result in higher prices for customers.

Emerging giants—cable grows up

As MCI and AT&T fade away, a new and possibly more effective competitor has emerged to take on the regional phone companies.

Pay cable television has been around since the 1970s. In the beginning, cable was a fairly humble business—coaxial cable was strung from house to house to deliver clear television signals to homes in areas too remote to receive over-the-air broadcasts. Cable grew quickly, however, as programming improved and expanded.

Today, roughly 67 percent of all homes with a television subscribe to a cable service.

But the real revolution for the cable industry has come through the advent of digital technology. By converting signals from analog into a digital stream, operators can pack much more information into their pipelines. Rather than offer television service alone, cable companies are providing high-speed Internet service, known as broadband. The Internet has also allowed cable companies to deliver a new telephone service known as VOIP, short for voice over Internet protocol.

The delivery of local phone service has made cable a direct competitor with traditional telephone companies and placed it on the radar screens of state regulatory authorities.

The NCTA and associated state cable trade associations spent $5.2 million in lobbying in 2003 and 2004 in the states, putting them in fifth place among telecommunications providers. They also spent $6.6 million on state elections, for third place.

The cable trade associations spent the most on contributions in California ($1.6 million), in Illinois ($1.2 million) and Florida ($1 million). Top lobbying states for the organization were California ($1.1 million), Texas ($749,000) and New Jersey ($587,000).

Much of the cable industry’s effort has been focused on smoothing the way for new Internet phone service and keeping an eye on traditional phone companies that want to provide competing pay television service over the Internet.

While the cable industry is clearly outgunned by the phone companies for now, that may not be the case for long. Kagan Research LLC, a private firm that tracks cable television statistics, predicts that the cable industry will double overall revenue from $66.5 billion to $139 billion by 2015.

No regulation, please

The cable-versus-telephone regulatory fight is expected to be addressed in the pending rewrite of the 1996 federal telecommunications law. Some say the federalization of all telecommunications regulation is inevitable. But there is still plenty going on in the states.

According to a search of the LexisNexis database of state legislative activity, there were 5,187 bills introduced or enacted from 1993 through the first half of 2005 that contained all or part of the word “telecommunications” in their summaries.

Taking into account the cyclical nature of activity in statehouses nationally, legislative activity on telecommunications issues rose dramatically following passage of the landmark 1996 law, peaked in 1999, and has trended downward gradually since then.

When AT&T was broken up in the early 1980s, most of local telephone service was turned over to the regional phone companies, known then as the Baby Bells. To protect consumers from unreasonable prices and bad service, the states assumed control over rates.

The chief responsibility in the states is still regulation of local telephone rates. And the top legislative priority of local telephone companies has been the removal of the states’ authority over local telephone rates.

The 1996 federal act was supposed to create competition in local markets, and the former Bells began arguing that state regulation of rates was no longer necessary.

Competition in local phone markets never quite caught on, at least not as it was originally envisioned by Congress. But competitors have emerged—Internet phone service providers and the cellular telephone industry, which now has as many customers as landline telephone companies do.

Although the former Bells and other “incumbent carriers” still control 80 percent of all access lines, they maintain that they should no longer be subject to state regulation of local phone service.

The National Regulatory Research Institute published a paper in April 2005 that said 19 states in the nation have seen legislation pushed by incumbent carriers to deregulate.

Directed primarily at public utility commissions and state legislatures, the authors of the report cautioned that “it would be extremely unwise to dismantle the regulatory apparatus without assurance that meaningful competition is firmly established.”

The concern now for those who still rely on basic landline telephones for their communications needs is that prices will go up and they will have no one to complain to. It will be especially hard on those who live in rural areas, low-income Americans and the elderly, who may not have access to other competitive services.

Among the states that have passed deregulatory laws are Idaho, Iowa, North Dakota, Pennsylvania, Utah and Texas. One of the most dramatic victories came in Florida, where the Legislature passed a bill that would allow phone rates to be raised by anywhere from 26 percent to 90 percent, according to one report. The Florida attorney general challenged the measure, but lost in the state Supreme Court.

Florida’s disclosure law is too weak to be able to draw any real conclusions about how intensely lawmakers were lobbied on the issue, but examining contributions sheds some light on corporations’ influence. Florida bans contributions to candidates from corporations, and limits individual contributions to $500. There are no such limits for party organizations.

Among telecommunications companies in Florida, BellSouth has no equal in terms of raw political influence. During the span from the 2000 elections through those in 2004, BellSouth gave $846,828 to the Florida Republican Party— including a $100,000 contribution in July 2002. The company also donated $259,000 to the Florida Democratic Party over the same period.

From 1999 to 2004, contributions to Florida’s two party organizations accounted for 29% of all state contributions made by BellSouth nationwide.

States as bellwethers?

As technologies converge, the regulatory lines have become less clear and states have sought to assert their authority, often in vain. For now, it appears that many of the legislative battles taking place in statehouses are simply dress rehearsals for what will prove to be the ultimate showdown in Washington.

Among the state issues with national implications are the video franchising wars (attempts by traditional telephone companies to enter the pay television market), municipal broadband service and consumer protection rules for cellular telephone plan subscribers.

SBC just won a key battle against the cable television industry during a special legislative session in Texas.

Former Bells like SBC, Verizon and BellSouth, have been spending billions of dollars to bury fiber optic lines in cities across the country. Fiber optics will allow Bell companies to bring video programming to their customers’ homes—putting them in direct competition with the cable industry.

But the phone companies that want to offer video service are being required to secure cable television-style franchises from the cities where they want to do business. The phone companies argue cable rules should not apply. SBC lobbied for passage of a bill in Texas that would allow for a statewide video franchise. Gov. Rick Perry signed the bill into law, but the cable industry—seriously outgunned in this case—has filed suit to overturn it.

One issue that resonates with consumers is the collective frustration with the still-maturing cellular telephone industry. Once considered a luxury, cell phones have become ubiquitous—an increasing number of Americans (especially young people) have opted to drop land-line service altogether and use cell phones exclusively.

The increase in popularity has brought with it an increase in complaints. According to a Consumers Union report, the number of complaints filed about wireless phone service with the FCC increased nearly 38 percent from 2003 to 2004, rising from 21,357 complaints to 29,478.

In response, the California Public Utilities Commission in 2004 issued the Telecommunications Consumer Bill of Rights, which included rules requiring clearer billing on cellular telephone bills and other consumer protections. But, with a turnover of commission membership, the bill of rights was tossed out just one week after the first new commissioner appointed by Gov. Arnold Schwarzenegger was sworn in. Consumer activists blamed the flip-flop on intense pressure from the industry.

California was the second-most lobbied state for telecommunications companies at $14.4 million in 2003 and 2004. SBC and Verizon accounted for more than half of that total. While the cellular telephone industry is highly competitive, the biggest players are owned by the old landline companies. Cingular Wireless, the largest cell phone company in the nation, is owned by SBC and BellSouth. Verizon Wireless is No. 2.

California was the top state for contributions from the industry, with $10.3 million given to its candidates and party organizations from 1999 to 2004. The biggest contributor in the state was SBC at $2.9 million, with AT&T a close second at $2.8 million.

A less publicized issue that has gone from relative obscurity to the top of the legislative agenda in at least a dozen states is an effort by cities to create wireless networks that would allow local residents Internet access.

In Illinois, SBC and cable providers joined forces to beat back such a referendum. Opponents spent more than $300,000 to defeat the proposal, according to one report.

The future

Many of the issues being debated in the states—such as allowing municipalities to create wireless networks and telephone companies to deliver television programming—will be debated in Washington, D.C., this fall.

On Sept. 15, a draft version of the telecommunications act revision was circulated by the House Committee on Energy and Commerce. It would eliminate the basic regulatory separation between telephones, the Internet and cable. The 77-page draft also introduced a new term—”broadband Internet transmission,” or BIT.

The bill would place all broadband services—cable, DSL and even wireless—under the same regulatory scheme. It would also attempt to spark competition by allowing cities to build their own wireless systems, remove barriers from Bell companies to deliver video and make it easier for broadband companies to offer phone service.

The draft, which has yet to be formally introduced, was crafted by committee Chairman Joe Barton, R-Texas, and ranking member John Dingell, D-Mich. Virtually all telecommunications legislation of any substance is debated first in that House committee and its Senate counterpart, the Committee on Commerce and Transportation. Sen. Ted Stevens, R-Alaska, who chairs the Senate committee, is said to be working on a bill.

Eventually, the major players in the industry will strike a bargain, brokered by Congress. What that will look like isn’t certain, but there is general consensus that it will involve further federalization of telecommunications. That begs the question: What will be left for the states?

Not much, according to Janee Briesemeister, senior policy analyst for Consumers Union’s Southwest office.

“All that may be left for the states is the authority to enforce rules that are set by the hands-off FCC,” she said. “This is especially scary in terms of consumer protection, where the FCC still thinks the market is protecting consumers.”

Data analysis by Assistant Database Editor Agustin Armendariz. Center staff members Kevin Bogardus, Neil Gordon and Robert Morlino also contributed to this report.

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*Since this report was first released, the Center received some additional information from the Institute on Money and State Politics and the New Jersey Secretary of State’s office that resulted in a upward adjustment of some contribution and lobbying figures.