The FCC tackles access charges

Mar 1st, 1996

Stephen N. Brown

"Enabling legislation" describes laws that create federal agencies and define their powers and duties. "Enfeebling legislation" refers to laws that weaken and destroy the agencies. Now that Congress has finally passed a telecommunications reform bill, the next target is the Federal Communications Commission, or FCC. If the current bevy of Republicans retains control of Congress, and their party captures the presidency in this year`s elections, by 1998 the FCC will be caught in a web of enfeebling legislation that will make the agency a shell of its former self.

The first group to go will be the Cable Bureau, even though it went to great efforts to build up its staff after the cable industry was reregulated in late 1992. According to the telecommunications reform law, cable TV`s price regulation generally ceases if the cable company is operating in a competitive market--a situation expected to be the norm in five years.

The next group to go will be the FCC`s Wireless Bureau. In the past two years, much of the commercially usable radio spectrum has been auctioned to the private sector. The auctions will eventually end, and when they do, the only remaining wireless-regulatory functions will pertain to technical service standards rather than to any broad pricing or social goal. The cable and wireless bureaus are the two most likely victims of enfeebling legislation. Many other permutations are possible, but no one can safely predict what new thumbscrews will be applied to the FCC.

What is clear is that the telecommunications industry would not be sad to see the decline of the FCC. One industry official said recently that FCC Chairman Reed Hundt "is the wrong man for the job." Hundt, an antitrust lawyer who is a college friend of President Clinton and a friend of Vice President Gore, has often angered the industry for what it considers to be his retrograde policy.

Supplier line access charges

Last summer, for example, the telephone industry opposed the FCC`s proposed video dial tone rules because the industry believed they would hamstring efforts to develop video dial tone markets. Last year, the industry also headed off an FCC proposal that would have damaged the growing integrated services digital network, or ISDN, market. The agency wanted to apply a subscriber line access charge to each channel carried on an ISDN line, in which a $3.50-per-month fee is applied to each telephone line. A single ISDN line into a home or business has many channels, generally in multiples of eight, with each channel being capable of carrying voice and data. Applying the access charge to ISDN channels would have cost approximately $30 to $90 per month for ISDN subscribers.

These examples represent what the industry believes has been a generally negative direction taken by the FCC under Hundt`s leadership. Many in this industry long for a return to an FCC run by appointees of Presidents Reagan and Bush.

Despite their criticism of him, the telecommunications industry needs Hundt--at least for the time being--to pursue reform in certain areas, notably access charges. Access is a broad term used to connote a price for the privilege of gaining access to a communications network. The public is familiar with the subscriber line access charge because it appears on everyone`s local telephone bill. A different kind of access charge is hidden in long-distance phone bills. Because a long-distance call requires access to the local network, approximately 40% of the call`s cost is the access charge paid to the local telephone company. For every dollar AT&T, MCI and Sprint earn for a long-distance call, 40 cents is returned to the local telephone company. The long-distance access charge has been in place for years and supposedly constitutes a subsidy to local telephone service.

The FCC has gradually reduced the charge over the years and has marked it for elimination. But because the long-distance access charges are seen as subsidizing local service, they will not be quickly replaced. In a recent speech, Hundt joked with his audience and signaled the agency`s intent to tackle the issue. He said: "When [Alexander Graham] Bell made his first phone call to his assistant, Mr. Watson, he [told him]...Come here. I need you. I want to talk about access charges." After a suitable pause, he added, "Maybe that isn`t true. But that`s the way we`ve always told it at the FCC. ...Within the next six months, the FCC, its state counterparts and industry should talk about access charges. We should do this with the shared goal of completely overhauling the current system. ...Our current access-charge rules and the universal service system are not sustainable in an era of emerging competition. Our current federal access-charge system...builds barriers to competition."

Not only is Hundt`s goal admirable, but it is also mandated by the new telecommunications reform law. It links access reform at the local level to local telephone companies` entry into long-distance markets. The regional Bell operating companies must comply with the requirements of the law`s Subtitle B: Special Provisions Concerning Bell Operating Companies. It says the Bell company`s local market must have a "facilities-based competitor" for which "the Bell operating company is providing access and interconnection to its network facilities for the network facilities of one or more unaffiliated competing providers of telephone exchange [local] service." The new law also contains a so-called "competitive checklist" that specifies other rules local companies must follow to allow access to their networks.

The new law has a significant number of conditions aimed at local telephone companies. This may confirm an obvious truth: Local networks are vital to everyone, therefore, AT&T, MCI, Sprint and others need fair access to the Bells` local networks. There`s nothing new here. What the law misses and what most industry observers have not asked is, "How badly do the Bells need access to AT&T`s or MCI`s network?" The answer is, "Not very." The Bells are perfectly capable of hauling long-distance traffic over their own networks. Otherwise, it would make no sense for the Bells to clamor for entry into the long-distance market without having the capability to deliver the service. Also, they do not like to depend on the established long-distance carriers for anything. In the late 1980s, when local telephone companies were still fully regulated entities, they built so-called administrative networks to manage and maintain the company`s telecommunications systems. The networks are also fully capable of performing commercial long-distance functions.

Once the Bells enter the long-distance market, they can use their own networks to offer the service within their service territories. Ameritech, for example, operates in seven states in the Midwest, and the company can handle a call from Chicago to Cleveland. If the company wanted to handle traffic from Chicago to Washington, DC, a high-speed, high-volume path would have to be established with Bell Atlantic, the adjacent Bell company serving the nation`s capital. Once that path and others like it are established among all the Bell companies, they can bypass the nation`s current commercial long-distance network. The ramifications are clear: There is no level playing field in telecommunications. Once the field was tilted to AT&T, but now it is tilted the other way. The Bells have the local networks and do not need AT&T`s network. Two-thirds of AT&T`s profits come from telecommunications services. Imagine the company`s future if the local companies build a fiber ring around the giant and siphon off a major portion of revenues. In the face of such vulnerability, AT&T`s gigantic layoffs make good sense.

Protracted struggle expected

On the other hand, the Bells` own long-distance networks give them a good reason to delay the reduction of long-distance access charges. Industry observers expect to see a protracted struggle over access charges, with the Bells raising the subsidy flag, warning of dire consequences to local telephone rates if access charges are lowered too fast. There is another side to that argument. The charges also serve as a convenient way to raise a competitor`s costs for long-distance service. For example, consider a long-distance call on AT&T`s network. The customer has to pay $1.00 for the call, but 40 cents goes to the local company. Compare that to a long-distance call on the Bells` network, where there is no access charge or where the access charges net out to zero if there is traffic between two adjacent Bell companies. Get ready to change your long-distance carrier and pocket those savings. Maybe.

The new telecommunications reform bill contains language aimed at preventing access charges from being used in that manner. The language appears in Subtitle B, which requires the Bells to have a separate affiliate for the "origination of" long-distance services. The law also says that "a Bell operating company or an affiliate thereof...shall charge the affiliate...or impute to itself...an amount for access to its telephone exchange service that is no less than the amount charged to any unaffiliated interexchange carrier...." Thus, if Ameritech were to apply a 40-cent access charge to MCI for a five-minute call from Chicago to Cleveland, Ameritech would have to charge itself and its customer a minimum of 40 cents for the same call. Therefore, the law establishes the minimum price of a long-distance call, which is the Bells` access charge. However, the law does not directly address the issue of subsidies in long-distance markets. For example, if AT&T or a regional Bell operating company were to charge 41 cents for the call, does the additional penny really cover the call`s cost, or is that penny just a "loss-leader" type of pricing used to capture new customers? That problem will plague long-distance pricing for years to come, long after access charges are gone.

More in Market Research