A failure to communicate

A failure to communicate

Stephen N. Brown

The fight over telecommunications reform will end when the antagonists find common ground, but with the new Congress just one month old, there is no indication of compromise by anyone. The regional Bell operating companies and the Clinton administration are at odds with each other, and the interexchange carriers show no willingness to change their position, whereby they enter local markets before the RBOCs enter the long-distance markets.

Remarks by Vice President Al Gore and Bell Atlantic Chief Executive Raymond Smith indicate the gulf between them. The vice president spoke to the New York Center for Communications, blaming the RBOCs for the failure of last year`s telecommunications reform while stressing the potential of the cable-TV industry to provide local services. He told his audience, "The [local] telephone company tried to disconnect its customers from the future. ...Cable companies are seeking authority to provide local telephone service, and a recent survey reports that one-third of cable subscribers would be willing to subscribe to comparably priced telephone services by their cable company." Smith apparently did not hear about that survey. He told the Federal Communications Bar Association: "We have research indicating that almost half the cable subscribers in our territory...would be `extremely` or `very` likely to switch from their current cable provider to Bell Atlantic if the price and service offering were similar." Smith also made comments that suggest a new view of the communications world, one contrary to the current regulatory regime: Customers...don`t respect outmoded and irrelevant boundaries like `telephone` and `cable,` `long distance` and `local exchange.` They will gravitate to whatever platform can deliver the right combination of price, service and innovation."

Lifting the barriers

Fiber optics will be the platform`s foundation, but the economic feasibility of integrated services requires an integrated communications market instead of a fragmented one. Therefore, Smith advocates that "barriers to entry in local exchange and long distance...be lifted simultaneously [while] competitors...operate on equal terms and conditions." This flatly contradicts the administration`s position. Smith`s suggestion would mean, in the vice president`s words, "that a telephone company with 99% of the market would be treated as if it had no market power at all. That`s not realistic, and it`s certainly not real competition." Gore also rejected the equal treatment premise: "Governmental action may be required to secure viable competitive opportunities for new entrants into local phone markets. ...We have proposed that companies lacking market power be exempt from the kind of price regulation that may be legitimately applied to companies that retain significant market power."

Gore`s remarks were made a few weeks before Smith`s, but there is no doubt the Bell Atlantic chief executive is well aware of the chasm between his views and the vice president`s. Despite this and the 45 Senate democrats, Smith gave a cheery legislative forecast: "I am encouraged by the amount of momentum generated for telecommunications reform in 1994, and by the statements of the incoming Republican leadership about taking a more deregulatory approach. ...I hope that we can work together to put a bill on the president`s desk by Labor Day."

Such a bill would be of limited value to the RBOCs unless it allowed them to offer long-distance service. Thus, they have been busy making the case that the current long-distance market is an oligopoly controlled by AT&T, MCI and Sprint. Last July, Bell Atlantic, BellSouth, Nynex and Southwestern Bell filed a motion in the United States District Court to overturn the line-of-business restric tions imposed on the RBOCs by the divestiture. The restrictions include a prohibition on long-distance ser vice. The motion`s sup port ing documents con tain affidavits from econ omists who concur that the long-distance market is an oligopoly rather than a compettive market. Since 1984, the FCC has reduced by $10 billion the access charges that interexchange carriers pay to local phone companies. The filing says, "Interexchange carriers, in fact, have pocketed a significant portion of those access charge reductions. AT&T cut its prices by about four-fifths of its total savings...keeping the remaining $2 billion for itself." Also: "Price increases initiated by AT&T and followed by MCI and Sprint have reversed prior price cuts...[although] the carriers` costs are falling at rates...of 13% per year. ...Price/cost margins enjoyed by AT&T, MCI and Sprint have been steadily increasing."

These figures suggest that long-distance phone prices would be substantially lower today if the RBOCs were offering this service. Mike Brown, AT&T`s vice president for Federal Government Affairs, disagrees with this and other proposals made by the RBOCs: "They use a partial set of facts that focus on undiscounted rates--the basic `1 +` dial rates." The RBOCs ignore AT&T`s special discounts that apply to 53% of the company`s long-distance minutes billed to consumers. Brown was also cool to the idea of simultaneous market entry advocated by Smith. With this arrangement, says Brown, the RBOCs could immediately become resellers of long-distance service, but there would be no immediate penetration of the local phone companies` markets. In addition, Brown expressed concern about interexchange carriers getting equal access to local exchanges if RBOCs were long-distance competitors. When asked if it were possible for both RBOCs and the interexchange carriers to have equal and nondiscriminatory access to the local exchange, Brown alluded to RBOCs potentially subsidizing their long-distance service: "That was the theory before [divestiture], and it failed. What you have to do is trust the regulatory authorities to detect shifts of money among [services]. If it had worked before, we wouldn`t have had the breakup. We believe the right solution is competition and competitive alternatives to the local monopoly." Familiar with this criticism, Smith dismissed the subsidy argument in his speech to the Federal Communications Bar: "The notion that the most scrutinized companies in the country could shift millions of dollars...without detection by regulators is ludicrous." It is clear the RBOCs and the interexchange carriers are talking to each other, but they do not appear to be listening.

Their latest wrangle involves MCI accusing Pacific Bell of preventing its 41,000 Centrex customers from automatically connecting to MCI for intralocal access transport area toll calls. Centrex is a digital central office technology that provides call waiting, call forwarding and call answering. It also substitutes for customer premises equipment, which can range from a customer-owned switch such as the complex ESS No. 5 built by AT&T, to the simple answering machine. Centrex is generally chosen by smaller business customers that do not want to invest in their own equipment. Centrex also represents the RBOCs` sustained effort to retain business customers rather than lose them to private networks and private branch exchanges supplied by AT&T or competitive access providers. MCI says Pacific Bell has no right to deny customers a choice of toll-call carriers, but the Bell company says it has no obligation to reprogram its Centrex equipment to permit automatic connection. According to Pacific Bell`s spokesman Dave Miller, "When customers signed up, they understood that [their calls] would be carried over our network."

The MCI-Pac Bell clash may seem like a tempest in a teapot, but it is the heart of the RBOC-interexchange carrier conflict. Last July, the Bell company told the California Public Utility Commission: "Thirty percent of our business revenues come from...0.5% of our service territory located in or near major downtown areas." This high concentration of revenues in a small group of customers makes an inviting target for interexchange carriers, to the dismay of the RBOCs. Ronald Stowe, Pacific Telesis` vice president for operations in Washington state, complained: "The long-distance carriers want to postpone competition in their markets as long as possible, while opening up the local loop for plunder."

Another head-on collision?

Today`s prognosis for telecommunications reform looks no better than yesterday`s, with one exception: The Department of Justice is reviewing an Ameritech proposal that may break the deadlock.The proposal calls for a local competitor to have fully interconnected, unbundled and nondiscriminatory access to Ameritech`s local network. Ameritech may be the first RBOC to break ranks and agree to the presence of local competition as a prior condition for entry to long-distance markets. In return, the Department of Justice may support the company`s request that the government wave the prohibition against the company`s offering long-distance service on a resale basis.

Ameritech made the proposal to the Department of Justice one year ago. Since then, the proposal has been substantially revised three times and circulated on an informal basis to long-distance carriers and to companies active in the local telephone business--Teleport, MFS Communications Co. and Time-Warner Inc. At the Department of Justice`s request, the interested parties had face-to-face meetings during December. The department intends to get plenty of public input before deciding whether to recommend the proposal to Judge Harold Greene, who still oversees all requests to waive the prohibition on RBOC long-distance service. A prerequisite for the Department of Justice`s approval is that the local market be competitive. Recognizing the link between federal and state policy, Ameritech filed a corresponding proposal with the Illinois Commerce Commission. The Commission is expected make its decision this spring. Thus, after Illinois` local markets are open and local competition is evident, and if the Department of Justice and Judge Greene concur, Ameritech can offer long-distance service. This is not Smith`s ideal of simultaneous entry, but the cumbersome process may work because it cannot be a prisoner of legislative stalemate. If the process succeeds in the next six months, it could temper the telecommunications debates and influence legislative strategies. That would be a welcome change from the head-on crash that seems so predictable today.

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