Economists Say States Botch Wholesale Phone Rates

Two economists said last month the wholesale phone rates regulators set vary widely across the country, and the disparity reflects the fact that states are considering more than costs in calculating how much money the regional Bell operating companies are authorized to charge competitors to lease their local networks.

Economists with CapAnalysis LLC released the study as part of the FCC’s open docket evaluating how to change the formula used to determine the rates local phone companies must pay BellSouth Corp. and the other RBOCs to lease their networks.

BellSouth, SBC Communications Inc. and Verizon Communications Inc. insist they are being required to lease their phone networks to competitors below their own costs. Verizon provided financial support for the CapAnalysis study.

“Regardless of the debate as to how far below costs the rates are, the outcome of the debate does not affect our conclusion [that] the rates are all over the place,” says Janusz R. Mrozek, a senior economist with CapAnalysis.

Adjusting for cost differences, the economists found states have set rates for unbundled network element (UNE) loops that deviate 15 percent to 19 percent on average from a benchmark rate.

In the study, the economists found that only half of the variation in wholesale rates between states can be attributed to costs. Yet under the Telecommunications Act of 1996 and FCC rules, the only factor states should be taking into account is costs, says Jeffrey A. Eisenach, executive vice chairman of CapAnalysis. “Half of the variation in UNE rates across states is not explained by costs and must be explained by other things,” Eisenach says.

Bob Nelson, commissioner of the Michigan Public Service Commission and Chair of the Committee on Telecommunications for the National Association of Regulatory Utility Commissioners, disagrees. “We look solely at the forward-looking costs in determining how to set the UNE rates,” Nelson says. In the Ameritech region — the territory Nelson is most familiar with — state regulators “apply the law and the FCC policy. They don’t go beyond what I consider to be forward-looking costs,” the commissioner says.

In setting wholesale phone rates, states are required to analyze what it would cost the Bells to lease their networks to competitors such as AT&T Corp. based on maintaining new state-of-art equipment. But the Bells grouse the pricing formula, known as TELRIC, is completely hypothetical.

The CapAnalysis economists also say “all states have set UNE rates significantly below costs.”

Such an assertion has been the subject of intense debate over the last few years as telecom companies big and small have entered the local residential phone market by leasing the Bells’ equipment used to serve millions of homes and small businesses.

Some analysts believe the FCC will adopt changes to TELRIC that will authorize the Bells to charge competitors higher rates. In the meantime, a federal appeals court is set to hear oral arguments later this month over a related issue. An FCC order requires state regulators to determine by summer whether to preserve or phase out over three years the leasing regulations the Bells vehemently oppose.