Local and long-distance carriers battle over interconnection

Sept. 1, 1996

Stephen N. Brown

Some local telephone companies are stalling in the wake of passage of the Telecommunications Act, but the FCC`s new interconnection rules may break the impasse

In August, the Federal Communications Commission (FCC) issued rules to govern how competing telecommunications service providers should interconnect their networks with each other. The main protagonists, the regional Bell operating companies and the established long-distance carriers, made written comments to the FCC in Docket 96-98, which gave the agency broad discretion to shape the rules.

The docket`s central issue is state versus federal oversight of interconnection negotiations and agreements. The Bell companies want flexible implementation by the states, where they often have the upper hand in regulatory politics (see Lightwave, June 1995, page 36). Roy Neel, president and chief executive of the United States Telephone Association (Usta), revealed the Bell companies` interconnection strategy in March when he spoke in Tokyo to the Communications Industry Association of Japan: "This year, there will be a major decision [by the FCC] about interconnection policy in the new competitive environment. ...Complicating the FCC`s process will be the efforts by some companies and industry groups...to turn back the clock on telecommunications reform, to try to win back what they lost in the great debate in our Congress. ...The FCC gets most of the attention, but it is our state regulatory commissions [that] oversee most of the rates and policies for market entry. And they are not about to fold up their shops simply because Congress passed a new law." A month later, Dan Hubbard, senior vice president for SBC, was more direct: "SBC supports...broad guidelines for opening up the local market through good-faith negotiations between companies, overseen and facilitated by the state regulators who best understand the issues specific to their states."

Guiding hand from the FCC

AT&T, MCI and smaller long-distance carriers prefer a strong guiding hand from the FCC. John Purcell, vice president of government relations for Frontier Corp., said the FCC "must establish mandatory national guidelines for interconnection...lest that policy be frustrated by state action inconsistent with national goals." MCI`s Chief Policy Counsel, Jonathan Sallet, said the FCC "must adopt clear, consistent national rules that will once and for all open the regional Bell companies` monopoly markets." MCI and Frontier apparently fear that state regulators are predisposed to favor Bell companies--a fear confirmed in one state by Dan Miller, chairman of the Illinois Commerce Commission.

On May 10, Miller spoke at Northwestern University`s Second Annual Conference of the Consortium for Research on Telecommunications Policy, a meeting sponsored in part by the Ameritech Foundation and held in Evanston, IL. Before Ameritech and other local telephone companies can offer long-distance service in a state where they also offer local service, they have to meet the requirements of the Telecommunications Act`s so-called competitive checklist. A major item on that list is interconnection. At the conference Miller indicated his opinion that Ameritech--a Bell company--was 70% to 90% through the checklist, even though the company had no substantive interconnection agreement with AT&T or MCI at that time. Robert Lock, the executive assistant to former Illinois Commerce Commissioner William M. Dickson, does not support Miller`s position. Lock, currently a partner with Competitive Strategies Group Ltd. of Chicago, said, "I am afraid that despite what Mr. Miller may say, there is no way in the world that Ameritech is 70% to 90% through the checklist. ...There are quite a few things that need to be done to bring Ameritech into compliance."

Less than a month after Miller`s speech, Time Warner, MCI and AT&T strongly criticized Ameritech. Marsha Schermer, Time Warner`s vice president of regulatory affairs, dismissed an interconnection agreement between Ameritech and MFS Communications, saying, "The interconnection agreement...may suit MFS, but it doesn`t come near to offering local telephone customers the types of choices for service envisioned by the [Telecommunications] Statute`s checklist for competition." MCI`s regional director in the Midwest, Joan Campion, complained: "The [Telecommunications] Act requires that Ameritech set prices based on cost, but Ameritech refuses to tell us what their costs are. How is that fair negotiation? ...Ameritech is attempting to keep all of ...[us] in the dark during these negotiations, so that only it will know what`s going on...[to] play one of us against the other. This is just another unfair negotiating tactic that should not be permitted." AT&T expressed similar frustration about its interconnection discussions with Ameritech and asked regulators in five states to mediate.

Ameritech responded to the criticism by blaming AT&T for the impasse. Larry Strickling, Ameritech`s vice president of public policy, said: "The only conceivable rationale AT&T could have for such delaying tactics and demands is to try to keep us out of their market for as long as possible--not to get a better deal for entering the local telephone market. By keeping a negotiated settlement bottled up in a process they`ve created and refined, they may be hoping to stall our bid to provide customers with a competitive alternative. It won`t work."

Strickling`s comments are very similar to remarks made by other Bell operating companies. For example, Bell Atlantic`s General Counsel James R. Young claimed that AT&T is using negotiations as a delay tactic: "AT&T has poured molasses in the works, demanding huge discounts and ridiculous concessions, all with the single aim of keeping Bell Atlantic from qualifying to compete in a business AT&T has dominated for years--long-distance service. ...If AT&T were serious about negotiating an agreement with Bell Atlantic, we`d have one now." Bell Atlantic`s Vice Chairman James G. Cullen, perhaps wishing to educate the media about the difference between serious and frivolous negotiations, used AT&T as a foil for MFS: "We`ve successfully come to terms on numerous highly complex [interconnection] issues. ...gifvery step of the way, MFS has shown a cooperative spirit. What a stark contrast to some of our talks with AT&T." Other companies chimed in. Scott McClellan, US West`s vice president of public policy, said, "We`re confident we can interconnect with AT&T as soon as they are ready. We see no reason to delay. If AT&T is equally serious about competing in the marketplace instead of at the negotiating table, that competition can begin almost immediately." Charles Coe, group president of customer operations for BellSouth, said, "We`ve been meeting almost daily with AT&T since early this year and we`re not anywhere close on the major issues. ...We`re in favor of competition developing immediately. ...We`ll be able to begin offering our customers one-stop shopping for their telecommunications needs, including long distance."

Delay: a common tactic

At first glance, all these assertions are plausible. During negotiations each party promotes its own self-interest. Delay is a common tactic. Each party blames the other, and the public does not know who to believe. However, the Bell companies` comments are not credible in light of political sparring between FCC Chairman Reed Hundt and the Usta`s Roy Neel. A few weeks before the FCC issued its interconnection rules, Hundt held a press conference and said: "The only truly significant interconnection agreement for those interested in competition is one between AT&T or MCI and one of the Bells that addresses every point in the checklist, and I haven`t seen one of those yet."

Hundt`s comments brought an injudicious reply from Neel, who did not realize the implication of his remark: "Chairman Hundt knows that nothing in the Telecommunications Act suggests that Bell companies must meet AT&T and MCI demands before the 14-point checklist for long-distance entry can be met." Apparently Neel and the Usta have known this since the Telecommunications Act became law, thus his words expose the Bell companies` motivation to stall interconnection negotiations. Because the Bell companies can enter the long-distance market without reaching agreements with AT&T and MCI, Neel`s constituents have nothing to lose and much to gain by stonewalling the established long-distance carriers. Based on the evidence, the Bells are responsible for the breakdown in negotiations.

Apparently Neel has a vision of a future in which Bell companies offer long-distance and local service while the established long-distance carriers are denied substantial entry to local markets. Is this really what Congress labored so long for, and would there be any repercussions? Such a near-term and easy victory for the Bells could backfire, as Neel suggested when he spoke in Tokyo. Speculating on the effects of an easy victory, he said: "Therein lies a critical lesson for any company seeking to take advantage of the 1996 Telecommunications Act; if you move too fast and too successfully and reap windfall profits in the process, be forewarned. What government giveth it can quickly take away. ...If the short-term losers in the race...are successful, they may be able to convince the Congress and a future White House to reverse many of the gains in the 1996 reforms." To date, no regional Bell company has signed an interconnection agreement with AT&T. AT&T`s Chairman Robert Allen said of the Bell companies: "At the rate they`re approaching compliance with the competition guidelines, it could be well into the next century before any of them serve their first long-distance customer in their own territory." Allen`s statement may be bravado. It all depends on FCC`s interconnection rules.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. Tel: (615) 399-1239.

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