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Off-track reform: The 1996 Telecom Act
Tele.Com / June 10, 1998

By Larry Luxner

WASHINGTON -- In August 1996, six months after Congress signed the historic Telecommunications Reform Act of 1996 into law, the FCC unanimously approved a sweeping set of rules governing competitive access providers' entry into the local market.

"Today marks the end of 60 years of monopoly in the local market," FCC Commissioner Rachelle Chong declared at the time. "Consumers won't see a difference overnight, but when we're done, we'll see a lot more technological choices out there, as well as more choices of rate plans and service plans."

Roy Neel, president of the United States Telephone Association, was far less enthusiastic, warning the same day that the FCC order "might inadvertently stifle investment in the network by creating an incentive for new entrants to cherry-pick only high-volume customers and certain network services, ignoring the goal of facilities-based competition."

Nearly two years later, the USTA's crystal ball appears to have been right on target.

"We believe there is still no incentive for those companies to put facilities in, and offer competitive services to all customers," says USTA spokeswoman Jocelyn Miceli, whose group represents over 1,000 local-exchange carriers, including the five Baby Bells. "Our companies have done everything in their power to open their market to competition. However, we cannot force the competitors to offer services to everybody."

While in fact there are rate plans and choices than ever before, true competition in the local market is limited mainly to high-volume downtown areas of major metro areas. For the vast majority of Americans, the Telecom Act has had negligible impact.

"It was big on promises, big on hype, and little on results," says Scott Cleland, a telecom analyst at Legg Mason Precursor Group in Washington. He calls the controversial, precedent-setting and long-winded legislation "the mouse that roared."

"The main part of the Telecom Act was the ending of local monopolies in return for the Bells getting into long-distance. But very little competition either way has resulted," Cleand said in an interview. "GTE was allowed into long-distance, and they've taken two million customers. So that's been significant. But the Bells haven't got into long-distance, and aren't going to in the foreseeable future unless the Telecom Act is ruled unconstitutional. There's a lot of sniping going on, but virtually no chance of a rewrite of the Telecom Act anytime soon."

Cleland adds that the Act "hasn't been a disaster if you had low expectations, but there's been no Bell entry, and the amount of local competition isn't real competition, it's more like open season on subsidies. The existing business competition we have is directly related to the high price umbrella for business, because business rates subsidize residences. Other competitiors can cherry-pick without universal service liability."

At the same time, the quality of customer service by both RBOCs and major long-distance carriers seems to have taken a nosedive since passage of the Telecom Act.

According to the FCC, overall consumer complaints about phone service have jumped 14% in 1998, with complaints about "slamming" -- which occurs when long-distance carriers sign up customers without permission -- rising to 20,000 in 1997, a 56% from the year before.

Meanwhile, according to The Wall Street Journal, New York's Public Service Commission recently cited AT&T for possible fines after receiving 371 slamming complaints against the company between June 1997 and February 1998. AT&T blamed the problems on three outside telemarketing firms it had hired; it said two of them were immediately suspended, and that the third company later resigned.

Paul Glenchur, an analyst with Schwab Washington Research Group, says "everyone would agree that progress toward full competition has been slow." That's not surprising, he said, considering that the Telecom Act comes after decades of monopoly in both the local and long-distance markets.

"It's been sloppy and regulators have made some mistakes, which is going to happen in a complex economic environment," he said. "The courts have also muddied the waters quite a bit."

One thing the analysts agree on is that New York-based Bell Atlantic -- which now controls nearly the entire local phone market in a dozen states from Maine to Virginia -- has been by far the most cooperative of the Baby Bells with the FCC. Other RBOCs that have made progress in their efforts to open up the local market and boost their chances of getting into long-distance include SBC (formerly Southwestern Bell) and Ameritech, with BellSouth and US West lagging behind.

Says one observer: "[Bell Atlantic] has been the most willing to play ball with the FCC, though they haven't gotten much from it."

In fact, Bell Atlantic claims it has 1,000 employees solely devoted to opening up its local markets and is investing $1 billion to ready the market for competitors. According to a lengthy statement issued on the second anniversary of the Telecom Act in February 1998, the company says it has signed 393 agreements with competitors, 275 of which already have been approved; implemented over 33,400 unbundled loops in its markets being used by competitors; put 231,500 interconnection trunks into operation; installed 404 collocation sites in its switching centers, and assigned 2,012 exchange codes for use by competitors.

"While some long-distance companies, most recently MCI, have made a conscious business decision not to compete in the local phone market," says the statement, "the strength of many of Bell Atlantic's other competitors is evidence that those companies who want to compete have the economic incentive to do so."

Tom Tauke, senior vice-president of government relations at Bell Atlantic, says the Telecom Act has clearly not lived up to its promises.

"The expectations of Congress when the act was passed seemed to focus on the economic benefits that would come," Tauke told us from his Washington office. "Congress expected there would be more services at lower prices and high quality. To date, it's fair to say the industry has continued to provide more and better services, but I don't know if that's attributable to the Telecom Act. Prices have not dropped significantly, and in fact prices for most consumer products have increased, in part because of the costs imposed on the industry as a result of the mandates contained in the act. To date, the broad expectations of Congress have not been fulfilled."

Tauke, like other telecom officials, says too many people expected too many things to change overnight. "This hasn't happened, in part because this is a very complex industry and it takes a while for competition to develop."

For example, he said Bell Atlantic has spent $700 million just on local number portability (LNP), a technology that allows consumers to switch telephone providers and keep the same phone number. All in all, Tauke said his company has completed 75-80% of the work necessary to put the required infrastructure in place. In New York -- where Bell Atlantic has focused its efforts the most -- that figure is closer to 95%.

"When we've completed 100% of the tasks required for local competition, then the FCC will favorably consider our entry into the long-distance market. The FCC has continually expanded the requirements set up by Congress for our entry into long-distance. So we've been shooting at a moving target. The bottom line is that right now, there seem to be two states where there's a reasonable chance of approval: New York and Texas."

He adds: "The capability [for LNP] is coming online, and so in most of our region now, that capability is in place. Have competitors taken full advantage of it? No, but now that it's there, it's another tool available to facilitate competition."

On another front, FCC Chairman William Kennard has suggested he might favor lifting some restrictions on long-distance services by local exchange carriers if the move would encourage high-speed Internet connections at the consumer level.

At a USTA-sponsored luncheon in early May, Kennard -- who has the authority to waive such restrictions under Section 706 of the Telecom Act -- said local phone companies should play a major role in advanced network deployments. At least three Bell companies -- Bell Atlantic, Ameritech and US West -- want to deploy high-speed digital subscriber line (DSL) services, and are asking the FCC to waive the long-distance restrictions on such advanced networks. However, groups representing long-distance and competitive local-exchange carriers are against relaxing the bans until true competition arrives in the local providers' own areas.

DSL is seen as the RBOCs' answer to cable TV companies, which are now offering fast Internet access services through their own connection to residences.

Steve Stewart, who follows regulatory affairs for IBM, is also steering committee chairman of the Internet Access Coalition, which comprises seven major industry associations and 12 computer vendors such as IBM, Intel, Microsoft, Apple and Compaq.

"IBM is very interested in ensuring there's competition in broadband high-speed data networks," he says. "The Telecom Act is a start towards that, though obviously more work needs to be done. I think it's too early to draw any conclusions."

Stewart, who'll be following the Section 706 proceedings closely, says he wants to "ensure that CLECs and ISPs have a fair opportunity to compete," and "to remove unnecessary barriers for the incumbent LECs."

Over the next year, says Tauke, the first four or five states will grant approval for RBOCs to enter the long-distance market. "As that occurs, it'll put rate pressure on companies like AT&T and MCI to start moving into the local market. My guess is that in the next year to 18 months, competition in major metro areas will really intensify. Probably it'll be four to five years before that competition is evident in all parts of the country."

Yet in testimony Apr. 16 before the communications subcommittee of the Senate Committee on Commerce, Science and Transportation, analyst Cleland predicted very little prospect for real residential competition in the foreseeable future.

"It is becoming increasingly apparent that in the next couple of years we will not see much widespread local competition beyond the business market in the big cities," the analyst told committee members. "Unless there's a technological breakthrough lowering the cost of alternative service, or most state regulators rebalance rates by substantially raising residential local rates, local competition in 90% of the residential market will be stillborn."

Cleland added that "as for Bell entry into long-distance, it is very unlikely that we will see the FCC approve a Bell entry application for long-distance in 1998, and probably not in 1999, because it is increasingly apparent that the FCC and the Justice Department have a very tough standard of what an open local market means. While the Clinton administration supported the Telecom Act, it's no secret that the administration was less than enthusiastic about the prospect of loosening the standard for allowing Bell entry into long-distance. Like a cruel joke, at least 80 million American households are being left 'on hold' waiting for a 'competitive' rescue that no competitor plans to launch in the foreseeable future."

At the court level, parts of the Telecom Act may be doomed. The Precursor Group is now cautioning investors "not to be blindsided in the next several weeks if the D.C. Circuit Court of Appeals rules in favor of BellSouth that the Telecom Act's Section 274 restriction preventing Baby Bells from entering the electronic publishing business is an unconstitutional bill of attainder." TPG says the case is "potentially a huge precursor of how courts will rule on the constitutionality of keeping just the Bells out of long-distance."

In the meantime, Glenchur notes that first-quarter revenues at companies such as Intermedia have doubled compared to first-quarter 1997 sales, though none of them are registering profits yet.

"We're seeing a fair amount of competition growing in the local business markets, particularly the high-volume, high-margin downtown customers of incumbent carriers," he said. "They're very profitable because they make lots of long-distance calls, because they're big revenue generators and because their rates are set well above cost, largely to subsidize residential rates. So they've been fairly attractive pickings for the LECs."

For example, competitive exchange carriers have picked off 20% of the Manhattan market, which consists of skyscrapers loaded with corporate clients.

"When you have artificially high rates combined with lucrative high-margin potential, it shouldn't surprise people that competitive LECs have skimmed the cream," said Glenchur. "On the other hand, residential customers are kept low by regulation. They're the flip side of the two features that make the business market attractive. They don't offer the big dollar potential. So naturally, where would the competitive carriers go to make the fastest profits?"

As to when true competition might arrive, Glenchur says "some people think it will never happen. I think we'll probably see it slowly, in spots. It's as much a function of technology as it is a function of regulation and market dynamics."

In California, that frustration has led to a court battle between The Utility Reform Network (TURN) and Pacific Bell, a subsidiary of SBC. PacBell, which is asking the FCC to approve its entry into long-distance, had filed over 6,000 pages of documents in an attempt to prove that it's no longer the sole provider of local access services in California.

Yet a TURN report filed in early May with the California Public Utilities Commission -- and based on PacBell's own data -- claims that only 1% of customers in the nation's most populous state are served by competitive local-exchange carriers. And of the CLEC customer base, only a "minute fraction" are residential customers. The non-profit organization adds that resale of local service has remained stagnant at 1.5% since the three biggest resellers -- AT&T, MCI and Sprint -- have stopped marketing such services.

On the East Coast, meanwhile, Bell Atlantic, which has been moving very aggressively to open markets at the state level in order to win long-distance entry in New York and other key states, is getting impatient.

"The FCC should end the guessing game on long-distance entry applications by clearly spelling out the requirements for approval," insists the company. "While the FCC recently signaled its willingness to work with local telephone companies and state regulators in preparing applications that can win its approval, we will be looking to the FCC ... for a strong signal on its willingness to see local phone companies competing in long-distance."

In addition, says Bell Atlantic, "policymakers should recognize that the level of competition in the business market is an indication that this market warrants less regulation. Some state regulators have begun to see that there is no justification for continuing to regulate services that are demonstrably competitive -- such as business and high-speed data services. We are optimistic that all policymakers -- from the FCC to the U.S. Congress to state regulators -- are ready to take a fresh look at how to regulate this vital industry."

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