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Regulatory News – FCC Advances Unified Access Charge Plan

Posted: 11/1999

Regulatory News

FCC Advances Unified Access Charge Plan
By Kim Sunderland

When two of the nation’s largest long distance carriers joined with four of the
country’s biggest local exchange carriers (LECs) on a plan to revamp the Federal
Communications Commission’s (FCC’s) access charge rules, a hush fell over the industry. On
this contentious issue, at least, years of fighting between these carriers has stopped.
Equally remarkable is the fact that the plan, introduced in July, already has been put out
by the FCC for public comment.

The integrated proposal is an interstate access reform and universal service plan
covering price-cap incumbent LECs (ILECs). It’s designed to be implemented over a
five-year period beginning in January 2000 and would apply to those carriers voluntarily
opting to participate. First, the plan would revise the current system of common-line
charges by combining existing carrier and subscriber charges into one flat-rated
subscriber line charge (SLC), and would provide for limited deaveraging of those charges
under specific conditions. Second, the plan would establish a portable universal service
fund that provides explicit support to replace support currently implicit in interstate
access charges. Third, the plan would establish a "social compact" under which
traffic-sensitive switched-access rates are reduced annually until they reach an agreed
level. Once that level is reached, rates for all access elements are frozen until July
2004.

This is serious business, not only for the heavy hitters, but for smaller competitors
as well. "For small to medium-sized IXCs (interexchange carriers) and resellers, the
impact of this proposal should be favorable," says John T. Nakahata, the Washington
attorney representing the Coalition for Affordable Local and Long Distance Services
(CALLS). "Even if they use special access for origination, the CALLS plan cuts
terminating access substantially as well." The plan, signed jointly by AT&T Corp.
and Sprint Corp. with Bell Atlantic Corp., New York; BellSouth Corp., Atlanta; GTE Corp.,
Stamford, Conn.; and SBC Communications Inc., San Antonio, would reduce interstate access
charges by $5.6 billion annually over the next five years and still deliver on universal
service. The coalition says its plan is aimed at consolidating residential phone bills and
reducing long distance rates.

According to CALLS, consumers now pay about $1.50 a month to cover IXC access of the
local phone network. Under this plan, these access charges will get rolled into the
subscriber line charge (SLC), which is the roughly $3.50 monthly cost of a LEC phone line
into the home. The combined single fee would start at $5.50 a month and increase over five
years to roughly $7. Local phone service also will be kept affordable for rural and
low-income customers by adding $650 million to the universal service fund, the coalition
says.

"This is generally good news for smaller competitors and resellers because this
proposal lowers the cost of terminating and originating access charges below any level
they could have reached otherwise," says Nakahata, a partner with Harris, Wiltshire
& Grannis. "This is competitively significant for smaller companies because it
creates a very positive and stable business environment." This is especially true, he
says, among competitive carriers looking to expand outside of being a traditional IXC,
such as those planning to provide integrated offerings.

The FCC will determine the validity of that statement after it finalizes compilation of
a record on the plan. In September the federal agency released a notice of proposed
rulemaking (NPRM) on the CALLS plan; the first round of comments was due Oct. 29 and
replies are due Nov. 19. The coalition has asked the FCC to implement the plan in its
entirety or drop it. The FCC actually has the chance to rule on this issue by the end of
the year, but that would "be a real squeeze," says Rich Lerner, deputy chief of
the FCC’s competitive pricing division, which is handling this NPRM. "I’m sure the
commissioners will take this up on a timely basis," he adds, "but we have to
wait until the comments come in."

Some industry analysts say that smaller competitors and resellers would have a tough
hill to climb under the CALLS proposal. As the plan is implemented, prices over time would
move closer to an ILEC’s actual cost. "This is not positive for resellers or smaller
competitors because their margins would shrink," says consultant Jeffrey Binder,
president of Jeffrey Binder & Co., Brookline, Mass. "They would have to come up
with nonpricing-related strategies to differentiate themselves from the ILECs, such as
better customer care, in order to attract customers."

Competitors are skeptical of the CALLS plan, agrees another Washington attorney.
"The competitors are suspicious because this plan has been worked out by the big
guys," he says, "and the smaller carriers weren’t invited to the party."
Had they been invited, the competitors surely would have told the coalition to drop the
idea of ‘revenue neutrality.’

The concept of revenue neutrality is supported enormously by the ILECs because it means
the incumbents are making the same amount of money in access charges, but it’s categorized
on a bill under a different name. In this case, it would be under the SLC. The ILECs’ net
income, the attorney says, is the same, but it’s called something different and collected
in a different way.

There are some economists, on the other hand, who think that the CALLS plan basically
moves the industry toward a more efficient way to price, and transfers ILEC costs to where
they belong. Economist Wayne D. Gantt, president of the Ansley Group, Atlanta, says the
CALLS plan will allow more customers to see the benefits of competition because it’s an
"orderly transition away from subsidies." He also says the plan allows IXCs to
lower rates, local companies to serve the residential market more profitably and customers
to have more choices.

"Net-net, it would create a more simple solution," says Stuart P. Conrad, a
financial analyst with Deutsche Banc Alex. Brown in Atlanta. The plan would "provide
the opportunity for long distance carriers to benefit more directly from annual reductions
and not significantly impact any player’s overall bottom line in the early stages of
implementation."

Conrad says if the ultimate result is "demand stimulation," the IXCs and
other carriers could be winners as the presubscribed interexchange carrier charge (PICC)
portion of access charges is reduced. "Since this is basically passed through to the
end user, the IXC does not really participate when this begins to fall," he explains.
"With greater emphasis on initial reduction of the per-minute, or variable,
component, the long distance companies can get more of the benefit."

In fact, Nakahata says the plan follows economics by moving away from government
planning to a free-market model. "You have to allow basic economics to work," he
says. "The plan is a transition that moves away from government micromanagement to
let everyone compete."

Consumer groups, however, aren’t happy with the plan, saying that the IXCs have been
known not to pass on savings to their customers. "There is concern," says an IXC
source, "that there will be a spike in the SLC, which will only further irritate
consumers. In the end, the consumer pays the same amount, which is more money than the
BOCs’ (Bell operating companies’) justified costs." MCI WorldCom Inc. reportedly
anticipated this type of reaction from consumers and opted out of joining in on the
proposal. US WEST Inc., Denver, and Ameritech Corp., Hoffman Estates, Ill., also declined
to be parties to this access charges plan. US WEST is on the record as saying it wants the
universal service portion of the CALLS plan reworked.

But the consumer groups’ fears could work to the advantage of the small and
medium-sized IXCs, which will keep downward pressure on long distance prices, says Robert
McDowell, vice president and assistant general counsel for the Washington-based
Competitive Telecommunications Association (CompTel). "And if the larger carriers
were to keep their prices high and not pass through savings to consumers, this would only
benefit the smaller carriers," he says.

There are fixed costs for IXCs that they can’t control and they can’t eat, McDowell
says, including universal service line items and PICCs. "But competition has brought
down long distance rates by nearly 75 percent since the breakup of AT&T,"
McDowell adds. "We anticipate that trend to continue."

The ILECs know it’s only a matter of time before access charges are brought down to
cost. The CALLS plan would cap what the ILECs recover now, basically speeding up the
process. So why are they involved in this plan?

"The ILECs consider access charges to be one of their riskier lines of
business," Binder says. "Access charges amount to one-third of their revenues
and as these charges get more and more exposed, the risk for them increases. This plan
could stabilize a huge amount of money for the larger carriers."


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