Another Fork in the Road

Posted: 10/2003

Another Fork in the Road
By Josh Long

The RBOCs still must make available the local phone network to rivals at just and reasonable rates under federal law, even if state regulators rule the incumbents do not have to lease parts of the network at the current wholesale rates they vociferously oppose.

However, some lawyers and federal regulatory advocates say they do not know how those rates will be set and who sets them: a state regulator or the FCC.

Under Section 271 of the Telecommunications Act of 1996, Verizon Communications Inc. and the other Bells providing long-distance services within their incumbent territory must make parts of the local network available to competitors at just and reasonable rates. Those provisions would kick in if, for example, the New York State Public Service Commission said Verizon was not required to lease its local phone switches to competitors at current so-called TELRIC rates.

Brad Ramsay, general counsel with the National Association of Regulatory Utility Commissioners, says it is clear the FCC has jurisdiction to handle a complaint if a phone company is not satisfied with the rates. However, it is unclear how the rates are set in the first place, some regulatory experts say. During an interview in late August, Ramsay said he asked FCC staff for clarification. The FCC told him the order did not specify who sets the rates, Ramsay said.

The order was less clear on how these rates will be set and who will be setting them, says Peter Karoczkai, senior vice president of sales and marketing with InfoHighway Communications Corp.

What is clear is that there is great disparity between what the Bells and their competitors consider a just and reasonable rate.

FCC to Revisit Wholesale Pricing Formula
By Josh Long

State utility regulators will spend next year analyzing whether or not to preserve the wholesale phone platform SBC Communications Inc. and its Bell brothers want to knock into oblivion. That may end a rhetoric-strewn battle over the regulations governing local phone service, but the war will continue.

In September the FCC opened a notice of proposed rulemaking (NPRM) to reevaluate the pricing method state regulators use to calculate the rates the Bells can charge competitors to lease their local phone networks.

The ruling could put a wrench in the long-term plans of AT&T Corp., MCI, Sprint Corp., and smaller phone companies, such as Z-Tel Technologies Inc., who all provide local phone service to consumers and small businesses by leasing the Bell networks through the so-called unbundled network element-platform (UNE-P).

Analysts at Legg Mason say the FCCs notice signals a possible boon for the Bells because a new pricing formula may authorize the local phone giants to charge competitors more money to lease their networks.

The pricing formula, known in regulatory circles as TELRIC (total element long-run incremental cost), is based on the future cost of the Bell companies maintaining new networks. BellSouth Corp., SBC Communications Inc., Qwest Communications International Inc. and Verizon Communications Inc. claim the pricing formula is completely hypothetical and requires them to lease their local phone networks to rivals at below cost. The Bells argue the formula should be based on actual costs.

It is my hope that at the end of this proceeding the market will benefit from a methodology that is less theoretically freewheeling, FCC Chairman Michael Powell said in a statement the day the NPRM was issued. The tentative conclusion stated in the item supports this policy direction. While I have heard some concern surrounding the tentative conclusion, our commitment to retaining a forward-looking approach is unwavering. What we are debating is the extent to which realistic assumptions about the incumbents network should be included in our pricing rules.

The FCC opened the wholesale pricing case one month after releasing the rules directing state regulators to determine whether to preserve the UNE-P or phase it out in designated markets over three years. That ruling signaled a victory for AT&T and smaller phone companies aiming to bundle local and longdistance phone service.

However, some of these companies say the resale platform will do them no good if they have to pay the Bells significantly more money to lease their networks.

Higher wholesale prices for competitors could result if new guidelines were implemented consistent with the leanings of the FCCs initial tentative conclusions in the NPRM, said Banc of America Securities analyst David Barden in a research note. Higher prices would eventually result in lower margins for CLECs and/or smaller addressable markets.

Over the last few years, many states have lowered the wholesale phone prices after conducting comprehensive studies based on TELRIC.

This has triggered a fierce war between the Bells and the biggest long-distance phone companies, that have expanded local phone service around the country. In September, AT&T announced plans to expand local residential phone service to 35 states by the end of the year.

Some consumer-advocacy groups say the heated competition has helped spawn choices  and lower prices  for consumers. But the Bells and their allies contend the competition is artificial because they are being required to subsidize their rivals.