Interconnection delay portends lengthy siege

Interconnection delay portends lengthy siege

TRAVER H. KENNEDY and DANIEL A. TAYLOR

Since Congress passed the Telecommunications Reform Act of 1996, the Federal Communications Commission (FCC) has begun deregulating the U.S. telephony marketplace. The Commission issued its first set of rules regarding how incumbent local exchange carriers must interconnect their networks with competitors, and these carriers cried foul. The local exchange carriers, or regional Bell operating companies, are stalling at every turn. If these stalling tactics are the way telecommunications deregulation may develop, then future industry preparations should anticipate a lengthy siege.

On October 15, 1996, the Eighth Circuit U.S. Court of Appeals decided to allow a stay of the FCC interconnect rules (see Lightwave, December 1996, page 30). Then, the U.S. Supreme Court upheld this decision on October 31. Until next month, when the Eighth Circuit decides on the legality of the FCC rules, the rules will be halted. Any interconnect agreements will be according to terms of the local telephone companies.

Who owns the local loop?

Interconnect rules define how local telephone companies sell wholesale access to their competitors. Because the local exchange carriers have had monopolies for the purpose of building the local network, deregulation hinges on granting access to this network to any company that wishes to become a local telephone company. The Telecom Act also dictates that any Bell company may enter the long-distance market, provided that it allow competitors to use the local network.

As soon as the legislation was passed, several regional Bells began offering long-distance service. Today, however, they are stalling. At issue is ownership of the local telephone network. The local exchange carriers argue that they built the local network and are still paying for it. Another perspective is that the public granted the monopoly and proceeded to pay for the network and a few healthy corporate bonuses over the years. The Bells were guaranteed to make money and have become some of the most cash-rich companies in the world.

Meanwhile, the FCC set up the interconnects to keep new telephone companies out of the bureaucratic mire of state Public Utility Commissions. By guaranteeing that any unsuccessful price negotiation could go to arbitration, the FCC ensured that a potential competitor would not get closed out of the local telephone market.

Competition is intended to lower costs and improve services. If the incumbent local exchange carriers cannot offer local telephone service at competitive rates, then perhaps they are in the wrong business. They admit that competition is a good thing, but they wish it on their terms. While a monopoly is no longer practical, the Bell companies desire something shy of an oligopoly, which is still less than perfect for consumers.

The local loop has been paid for many times over. Telephone companies have been operating inefficiently for many years, but their monopoly has ensured that they will make money. Accounting for cost interconnects is a way for local exchange carriers to pay for their high overhead and to compete at the same time. Their other options are to reduce the number of employees and to decrease salaries.

Local exchange carriers know that as long as the state public utility commissions are involved in the interconnect rate setting, they will have more opportunities to keep their interconnect rates higher than the FCC would set. The Bells know about the FCC`s "just-say-no" policy, but the state utility commissions may say "yes." Furthermore, a potential competitor will have to sign interconnects with a regional Bell operating company in several states, resulting in different negotiations and different rate agreements.

Rates will differ from state to state if the negotiations go before the public utility commissions; this has already been seen as the Bells seek to lower Integrated Services Digital Network rates. The reason for haggling over the rates and staying on the interconnect is money.

Adjusting to competition

The local telephone industry has sales of $1.5 billion each week. A 1% gain in an interconnect agreement in a key state may mean tens of millions of dollars every year. By preserving their margins, the Bells stand to make more money without slashing their overhead or adjusting their modus operandi. These companies need time to adjust to competition, and this stay on the interconnects is a way to give them the time they need.

The downside is that companies are already working outside of the FCC interconnect rules. MFS Communications Inc. has already signed interconnect agreements with six of the seven regional Bells. Also, companies such as WinStar have launched their own wireless local-loop technology in New York and Boston. If the Bells want to price according to their accounting costs, they risk being bypassed by wireless and other technologies. Then, they will lose their economies of scale and will be unable to compete in any market.

Having one local loop is desirable. The local exchange carriers are holding network investment as their trump card. One local loop will make it highly cost-effective to continue investing in new technologies such as fiber-optic networks. Furthermore, the local exchange carriers are in the best position to build Synchronous Optical Network rings and hybrid fiber/coaxial-cable networks, which are the best hope for getting fiber to jump the curb into homes and businesses.

However, the Bell companies are their own worst enemies. Saddled with an extremely high overhead, they need to reduce their costs by orders of magnitude to compete with the Internet, wireless and other new technologies. For now, they remain financially strong, but if this court case is any indication, they lack the vision to effectively embrace the future as they waste time fighting the inevitable. No legal argument can assuage market forces. Competition is coming, with or without the Bells. q

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