California Opens Door for More Phone Resale

Long distance giants AT&T Corp. and MCI are prepared to invade the California turf of the No. 1 local phone company, Verizon Communications Inc.

Yesterday the California Public Utilities Commission reduced the wholesale rates Verizon can charge rivals to lease its local phone network. The decision came 10 months after the regulators slashed the wholesale rates in the territory of SBC Communications Inc., which controls nearly 70 percent of California’s local telephone lines, according to the PUC.

Verizon is the second-largest incumbent phone company in the state behind SBC. The California PUC yesterday nearly cut in half the wholesale rates phone companies must pay Verizon to resell a line to consumers and small businesses: the wholesale rates were cut to around $16, down from roughly $29, sources said.

In reaching its decision, the California PUC followed a proposal AT&T and WorldCom Inc. presented to New Jersey regulators, which formed the basis for the wholesale rates in the Garden State. Verizon’s competitors had 6 percent market share in New Jersey through the first six months of 2002, the most recent Federal Communications Commission data available.

Verizon officials said the California regulators ignored the myriad forms of communication, such as e-mail and wireless, used rates from New Jersey rather than reviewing Verizon’s costs, and ultimately has adopted rates that require the phone company to provide rivals network access “well below” its costs.

The regional Bell operating companies have made this complaint for several months, yet FCC commissioners voted three to two last month to preserve the regulations unless state public utility commissions decide otherwise.

“Under this decision Verizon pays AT&T and WorldCom to compete in California,” said Tim McCallion, Verizon Pacific Region president, in a statement. “It is hard to imagine a justification for this decision.”

Verizon is preparing a cost analysis to present to the commission as it gears up to set the permanent rates, spokesman Jonathan Davies said.

“The UNE-Ps that were in effect prior to yesterday’s decision were a lot closer to rates that are reasonable based on our costs,” Davies said.

Permanent rates will be set at a later date, but PUC spokesperson Sheri Inouye said there is no timeframe. She added the rates could be affected by the FCC’s order following its vote last month governing telephone and broadband regulations. The interim rates go into effect immediately, she said.

Critics of the Bells say the phone giants should use the regulations to their advantage by competing in each other’s territories through resale. Verizon spokesman Jonathan Davies said the company is competing out of its franchise area in San Francisco in multidwelling units primarily through resale and providing Los Angeles businesses services through a fiber-optic network it built.

“We certainly think building our own facilities is a far superior way to go,” Davies said, adding the company does not plan to compete in the mass market outside its territory through resale. Asked whether Verizon would compete in SBC’s region for small business and residential customers, he said, “It’s too soon to say how we are really going to go forward from here.”

Verizon is not at risk of immediately losing droves of customers. AT&T and other phone companies must first work with Verizon to ensure its provisioning systems can adequately handle commercial volumes, Diamond said.

AT&T is hoping to enter Verizon’s territory “as quickly as possible,” Diamond said, “but it could be several months away.”

MCI spokeswoman Carolyn Tyler declined to reveal when the company would make its move. But she said MCI is “anxious to finally compete against Verizon and give consumers an alternative with The Neighborhood,” its local and long-distance bundled package.

“These reductions validate the claims of MCI and others that Verizon was grossly overcharging competitors and we applaud the CPUC for its support to lower wholesale rates,” Tyler said.

MCI provides consumers The Neighborhood in SBC’s California region, but Tyler declined to reveal the number of customers in that territory. In the 415 area code, customers subscribing to MCI’s Neighborhood plan for $49.99 a month get unlimited local and long-distance calling in addition to five features, such as three-way calling, speed dial and call waiting, according to MCI’s Web site,

Some lobbying groups praised the California PUC decision as a victory for residential customers that would save them hundreds of millions of dollars.

“The CPUC’s decision is a much-needed $270 million present to the roughly 25 percent of residents with no choice in residential phone service,” said Peter Arnold, a spokesman with the Voices for Choices coalition. “By ripping away the last vestiges of an outdated, regulatory monopoly, the agency set the stage for a thousand flowers to bloom.”

Davies said Verizon has no plans to lower its retail rates. Instead, the company is developing new bundles that give “customers greater value for their money.” For example, Verizon aims to incorporate wireless and broadband, but the company is awaiting regulatory approval to bundle those services.

“We are hoping sometime this year,” Davies said. “Before the end of the year we would like to get something out.”

AT&T estimates local phone competition is saving consumers $7 million a day. Last May the California PUC lowered the rates SBC could charge rivals to resell local phone service. In August AT&T entered the market, offering consumers a 20 percent discount off SBC’s comparable plan, Diamond said. “They lowered their rates pretty quickly to match ours,” he said.

AT&T reports a few hundred thousand lines in California through resale, specifically the unbundled network element – platform (UNE-P). All those lines are in the SBC territory. Nationally AT&T reports more than 2.5 million residential local customers and about 500,000 small business customers on the resale platform in nine states.

SBC already faces stiff competition in California’s local residential market. The state’s largest competitors are cable giant Cox Communications Inc., AT&T and WorldCom Inc., according to a competition report the California Public Utility Commission issued last month.

SBC spokesman John Britton said his company is being required to give competitors up to a 60 percent discount, making it impossible for SBC to recover the capital costs of maintaining the network and make a fair return on investment.

“This regulatory scheme is totally nonsustainable economically,” he said. “No company can invest $5 to make $3 and that is the situation we are facing right now.”

AT&T wants to be guaranteed a 45 percent profit margin for reselling service, yet SBC is investing $2 billion a year in California to maintain and upgrade the network and “we are not guaranteed a 45 percent profit,” Britton said.

AT&T pays SBC $14.50 on average to resell phone service, down from $24, Diamond said. SBC is asking the regulators to increase that rate to $29 even though in October 2001 it said its costs were $18, he said.

Britton said the precise numbers were not at his immediate disposal, but he conceded SBC has revised its cost studies after analyzing recent data on switching costs and capital depreciation among other factors.

“I will acknowledge that much is true,” he said.

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