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  • barbs99 barbs99 Apr 12, 2003 2:26 AM Flag

    A New FCC Ruling Could Salvage Covad

    The feds may be open to rolling back a decision that delivered a severe setback to Covad
    I know, you're probably wondering if I'm making the case for this once-failed penny stock from a phone booth smack in the cross hairs of a madman's rage. That's understandable. But if I haven't lost you at the mere mention of Covad, here's how I came to be intrigued by this seemingly long-shot proposition.

    Early February saw the Federal Communications Commission revisit a key telephone line-sharing order. The rancorous 3-2 vote handed state regulators jurisdiction over wholesale phone-service pricing -- the amount the Baby Bells must charge rivals for access to their local phone lines.

    While much was made of how the ruling was a blow to the Baby Bells, the commission's vote also tersely threw out the practice of line sharing -- the one that keeps Covad in business, essentially. Because the company's primary business involves selling digital subscriber line, or DSL, service over lines it shares with the Bells, Covad looked like toast to Wall Street. The decision amounted to Covad's biggest setback since it emerged from bankruptcy more than a year ago, and sent the stock tumbling more than 40%.

    So nearly two months later, as the FCC works out the exact wording of the 400-plus- page order, it seems some of the commissioners may be willing to reconsider. Some people in the agency say that, while the main points of the order will stand -- specifically the unbundled network elements provision, or UNE-P -- the panel is taking further testimony from Covad and others on the line-sharing matter.

    In fact, said one FCC insider, if the commission was to change any aspect of the ruling, it would likely be line sharing.

    People familiar with the issue say the Feb. 20 line-sharing decision was one of the weaker elements of the FCC's order, at least from a legal standpoint, since it broke from the mandate of the Telecom Act of 1996. That law was designed in large part to nurture new services and foster competition over the local phone lines. Sharing those lines, albeit politically tricky and legally contentious, offers one of the few avenues for competition.

    The commissioners didn't spend much time detailing their decision on the line sharing, so they won't have to make a federal case of it should they decide to change it. One likely outcome of the finalized FCC order due this month is that the commission, instead of killing line sharing, moves the jurisdiction over the matter to the states. This would be consistent with the rest of the UNE-P order and salvage the core practice underlying Covad's business.

    From an investment standpoint, a softening of the line-sharing order can hardly be interpreted as a ringing endorsement of Covad's long-term strategy -- but it will get them back to pre-Feb. 20 status.

    And likewise, you could expect the stock to regain some of that same status.

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