Regional Bell operating companies are warning that innovation, jobs and new investment in services will suffer because of a recent regulatory ruling forcing them to continue offering their local lines at a discount to competitors for three more years.

And they vowed court action, while long distance companies such as AT&T vowed more local phone services for consumers.

"Here we have the FCC issuing an order that provides no incentive to invest," said Randall Stephenson, chief financial officer of SBC Communications, in remarks at a Merrill Lynch telecommunications conference in New York Tuesday.

Stephenson and other Baby Bell executives warned of dire consequences, and protracted legal fights, over parts of a ruling by the Federal Communications Committee last week that said the nation's local phone companies have to continue offering their local voice lines to competitors at a discount.

In addition, the commission turned over to the states the job of deciding whether to do away with the Unbundled Network Element Platform (UNE-P) rule on sharing the lines, which has Bell companies railing.

Stephenson said the FCC ruling would harm consumers in the long run and "stifle innovation," while providing a "direct profit to long distance companies who have zero incentive" to invest or innovate, since they're guaranteed access at discounted rates to the local bell company's voice lines for now.

"We're going to have to go back to the courts and address this," he continued. "This is obviously yet another setback for this industry. We'll have to look at the number of people we employ as a result of this order."

Ivan Seidenberg, chief executive officer of local phone service provider Verizon, said the company would be seeking a reversal of the FCC's ruling about leasing local phone lines to competitors.

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"You cannot take national markets like these and have 51 jurisdictions make a study of this and come up with any consistent pattern that will drive consistency in the industry," Seidenberg said. He noted at "at least one word in every graph of that order that's" worthy of appeal.

Speaking at the same conference, the CEO of BellSouth Corp., Duane Ackerman, said as a result of the FCC order, the company would be more tentative about its capital expenditures with new investments.

Blair Levin, a telecommunications analyst with Legg Mason, and former chief of staff of the FCC from 1993 to 1997, said there's no doubt that the Bells would be better off if the FCC had decided to get rid of the UNE-P rule. But he also questioned the direct relationship the Bells officials are drawing between deregulation and investment.

"Innovation is not just a function of the UNE-P (rule)," he said. "Why did the cable industry invest billions in upgrading their networks? Was it only because they were deregulated? It's also because they had to compete with satellite companies."

Blair noted that SBC appears to be the most vulnerable Bell company as a result of the FCC order "given its difficulty in gaining entry to the long-distance market and its testy relations with many of its state regulators."

Blair also noted that while SBC chose to pay a dividend to shareholders this week, it could have also decided to invest the dividend in new networks or broadband services.

Expect a lot of litigation that could lead right into the FCC's next review of the rules in three years, he said, while technology innovations by other companies, such as cable providers offering telephony services, will march on.

Also overlooked, he added, is that the Bells also have a long-term opportunity with broadband as a result of the ruling, which said the local phone companies do not have to share access to their broadband networks.

David Dorman, the chairman of AT&T, also speaking at the Merrill conference, said the long-distance company is looking at wireless, electricity grids and cable providers as a means to enter local phone markets and offer new services.

Meanwhile, a member of the FCC, Jonathan Adelstein, told the National Association of Regulatory Commissioners that some states may move more quickly than the industry thinks in deciding whether to do away with the line-sharing rules that the Baby Bells are vowing to fight.