The U.S. telephone network the Bell System built and ran for almost a century is dying, replaced by technology that propels Internet messages. Rules underpinning that old order should expire with it, AT&T Inc (NYSE: T) says.

Its argument has skipped from state capital to state capital and could arrive in force at the U.S. Federal Communications Commission, which is considering a request from the modern-day AT&T to establish test zones where rules of the Ma Bell era wouldn’t apply.

“We have to be able to start this transition from the old to the new,” Jim Cicconi, AT&T senior executive vice president, said Nov.last month during a discussion at the Brookings Institution, a Washington-based policy group. “The underlying statutes really aren’t designed for the current situation.”

The debate over whether rules of the copper-line era should apply to today’s fiber-optic and Internet-based networks centers on the changes in an industry whose service for decades was guaranteed by government rules, rather than driven by competition.

Traditional wire-line service was in 95 percent of U.S. households in 2000 and less than 40 percent in 2011, as fiber- optic lines have replaced copper and many households dropped landlines altogether, according to an analysis by USTelecom, a carriers’ trade group.

$14 Billion

Successors to the Bell monopoly that was broken up by court order in the 1980s, including today’s AT&T and the local-phone units of Verizon Communications Inc., are required to offer service to every residence. They must meet standards for providing a quick dial tone, a sure connection and resiliency during storms and power outages. Newer competitors offering phone service over fiber-optic or Internet connections, including Comcast Corp., don’t have to abide by the same rules.

AT&T on Nov. 7 said it would invest $14 billion to build more high-speed Internet connections over wires and wireless infrastructure. It’s tied the request for regulatory changes to that planned spending.

The change in network architecture shouldn’t allow the large phone companies to escape requirements that they provide connections for competing carriers to reach customers, said Jerry James, chief executive of Comptel, a Washington-based trade group of smaller carriers including Cbeyond Inc. and TW Telecom Inc.

“It’s just the transition of the network from one technology to another,” James said in an e-mailed statement. “The network’s been digitized for decades. AT&T is just using the transition as another opportunity to say, ‘We want to get out from under regulation.’”

‘No Sense’

AT&T, in filings, has asked the FCC to set a date for extinguishing another requirement — to maintain the old network — and to declare the new Internet-protocol, or IP, network is “subject to minimal regulation only at the federal level.”

“It makes no sense, and it’s extremely expensive, to continue maintaining an infrastructure that fewer and fewer people are using,” Cicconi said in an interview. “It is not a 21st-century technology.”

The money could better be spent on high-speed Internet service, or broadband, AT&T said in a Nov. 7 filing at the FCC.

Rules that require companies to serve all customers in an area, often at regulated rates, stifle investment in all-IP networks, AT&T said. The company said wireless service will reach customers who aren’t tied into its new high-speed landlines.

State Deregulation

Rules requiring service to all are still valuable, said John Burke, a Vermont regulator who is chairman of the telecommunications committee of the National Association of Regulatory Utility Commissioners, a Washington-based nonprofit that represents state regulators. Wireless signals don’t yet reach all houses, he said.

“We’re not there yet,” Burke said in an interview. “I know I sound like the Marines: I’m not leaving anybody behind. But that’s how I feel.”

The argument reprises debates at the state level, where lawmakers have reconsidered the need to oversee phone companies as competition intensifies. Between 2010 and April 2012, 21 states enacted laws to limit regulation of telecommunications services, according to a June study by the National Regulatory Research Institute. The group, based in Silver Spring, Maryland, conducts research for state regulators.

California joined that roll in September, when Governor Jerry Brown, a Democrat, signed a law that keeps state agencies from regulating the Internet-based voice service that’s an increasing portion of carriers’ traffic. AT&T, Verizon, Comcast, Time Warner Cable Inc. and Microsoft Corp. supported the law, according to a legislative analysis.

California Liberals

Regulating new phone systems “frankly should be considered at the federal level,” Cicconi said. The California bill doesn’t disturb existing law, he said.

The California Association of Competitive Telecommunications Carriers, a San Francisco-based trade group known as Caltel, with members including Level 3 Communications Inc., asked Brown to veto the bill.

“AT&T and Verizon have used this switch-over, this conversion to a new technology, to achieve total deregulation,” Sarah DeYoung, Caltel’s executive director, said in an interview.
Consumer groups also opposed the bill, according to the state legislature’s analysis.

“It’s really tied California’s hands behind its back and will prevent the state from ensuring we have reliable telecommunications service,” Regina Costa, telecommunications director at the Utility Reform Network, a San Francisco-based consumer advocacy group, said in an interview

DeYoung said she rued the possibility her state’s action offers a talking point the big companies could use with the FCC to push for deregulation: “It’s California — and you know how liberal they are.”