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Regulatory News – IXCs, LECs Plot New Access Charges Course

Posted: 09/1999

Regulatory News

IXCs, LECs Plot New Access Charges Course
By Kim Sunderland

Two of the nation’s largest long distance carriers have joined with four local exchange
carriers (LECs) on a plan to revamp the Federal Communications Commission’s (FCC’s) access
charge rules. The proposal, submitted to the FCC in late July, would bring together two
usually warring fractions on an issue that is both controversial and complex.

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. Calling themselves the Coalition for Affordable Local and Long
Distance Services, the carriers say their plan is aimed at consolidating residential phone
bills and reducing long distance rates.

"The parties who signed on to this agreement did so freely and openly," says
economist Wayne D. Gantt, president of the Ansley Group, Atlanta. "They recognize the
fierce competition that is evident in the communications services marketplace. This
reinforces the overall further commoditization of basic service prices. The more
profitable areas will be advanced data services. This competition will separate the true
‘high-quality’ communication services companies from the wannabes."

According to the companies, consumers now pay about $1.50 a month to cover
interexchange carrier (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.

But consumer groups aren’t happy with the plan, saying that the IXCs have been known
not to pass on savings to their customers. "At some point we have to say that the
emperor has no clothes," explains one source. "The revenue and the neutrality to
the BOCs (Bell operating companies) needs to be challenged. These monopolies get the same
amount of money coming in to them, it just gets called something else."

Access Charge Reductions
(based on 1998 demand figures; in $ millions)

Company

Reduction

Ameritech Corp. $87.7
Bell Atlantic Corp. $234.6
BellSouth Corp. $150.0
Pacific Telesis Corp. $55.6
Southwestern Bell Corp. $60.8
US WEST Inc. $109.1
GTE Corp. $44.6
Aliant Communications Corp. $1.8
Frontier Corp. $5.9
Southern New England Telecommunications Corp. (SNET) $16.1
Sprint Corp. telcos $44.5
Citizens Telecommunications Inc. $9.2
Cincinnati Bell Inc. $4.9
Total $824.8

Source: Federal Communications Commission, July
1999

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.

"There is concern," says another 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’ justified costs."

One industry expert, however, believes this plan not only will provide customers with
more information, but also will help stimulate the market. In the near term, economist
Gantt says there will be competitive alternatives for residential customers, who have been
paying less than the real costs of their services. In the longer term, this agreement will
stimulate network upgrades for high-speed Internet connections. Gantt believes that this
plan will allow more customers to see the benefits of competition because it’s an
"orderly transition away from subsidies" and allows IXCs to lower rates, local
companies to serve the residential market more profitably and customers to have more
choices.

"Any time prices are transparent they are generally more efficient," Gantt
says. "The communications industry practice of cross subsidies is an artifact. With
new service providers and new products radically changing the communications industry, any
attempt to rationalize pricing is a plus. Most surveys of businesses and consumers reflect
a desire for clear and understandable pricing of these services. For the past several
years, prices for basic long distance service have been going down; this will likely
continue."

The FCC plans to put the IXC/LEC proposal out for public comment. The coalition, which
hopes to have its proposal implemented by year’s end, has warned that if the proposal
isn’t adopted, the projected pace of access charge reductions could slow down.

The new LEC access charge reductions took effect in the beginning of July. Access
charges now are slated in the next year to drop a net $825 million over last year’s total.
Meanwhile, the FCC continues to investigate the effect of flat fees on low-volume users of
long distance service (see related story), a
clear sign that the federal agency isn’t ready yet to do away with the current process.

On July 1, long distance carriers should have started seeing overall reductions in
their access charge payments and contributions to universal service programs. Although the
flat per-line charges that the long distance companies pay will increase, the per-minute
charges they pay will continue to decrease significantly, the FCC says. These price
changes are designed to improve the price structure for U.S. long distance calling and are
likely to lower prices, further stimulate long distance calling and boost the economy in
general, says FCC Chairman William E. Kennard.

"Long distance companies will have available a net of half-a-billion dollars,
which can be–and should be–used to further lower long distance rates for American
consumers," Kennard says. "Consumers should be the ultimate beneficiaries of
these reductions.

"If consumers see higher flat fees without reduced per-minute rates, they may want
to shop around for another long distance company, or even consider not having a
presubscribed long distance company at all," he adds.

As it stands now, consumers aren’t likely to see any difference in their long distance
bills in the United States because long distance carriers will have to pay more flat
per-line charges and still make universal service contributions. IXCs somehow have to
support those extra expenses, sources say.

When the access charge reductions went into effect, AT&T, for example, gave its
basic-rate customers (or low-volume users) a price break. But the IXC also said it plans
to increase the flat-rates it charges customers to offset its primary interexchange
carrier charges (PICCs) and universal service payments.

A Sprint spokesman says the access charge reductions "will move more access
charges out of per-minute rates and into a separate flat charge." This change, he
says, better reflects the fact that much of the costs of access don’t vary with the amount
of long distance usage. In Sprint’s case, for instance, the company’s average interstate
long distance prices between 1995 and 1998 declined by about 4 cents a minute. At the same
time, the carrier’s access charge payments and universal service costs decreased by
roughly a penny a minute, the spokesman explains, resulting in a total savings for
customers of $1.5 billion over those three years.

But did the customers see any of those savings? asks ILEC lobbyist the United States
Telephone Association (USTA). The Washington-based group says the large IXCs have been
given billions of dollars in access charge reductions by the nation’s local phone
companies since 1991. But "one place that we are not seeing a drastic reduction is in
long distance rates for consumers," USTA President and CEO Roy Neel says.
"Companies like AT&T and MCI WorldCom are lining their own pockets with these
access charge reductions so that they can buy up new companies."

The small and medium-sized IXCs 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), which represents
the competitive industry. "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."

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 local telcos filed their annual price cap tariffs, reducing access charges, with
the FCC in June. Despite several IXC requests to suspend and investigate those tariffs,
they took effect July 1.


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