Posted: 03/2002

ROAD RAGE
Qwest Claims IXCs Hike Rates,

Delay Company’s Long-Distance Re-entry

By Kim Sunderland

The pressure that Qwest Communications International Inc. must be feeling to get in-region long-distance approval as its co-BOCs have been doing fairly regularly, has been manifested in a rampage against the nation’s interexchange carriers (IXCs).

Qwest has been badmouthing the nation’s Big 3 IXCs for increasing their long-distance rates. AT&T Corp., WorldCom Inc. and Sprint Communications Co. earlier this year increased their basic rate plans 10 percent to 20 percent.

Qwest also says the IXCs are waging an aggressive campaign to delay its long-distance re-entry in its 14 Western states.

“AT&T’s agenda is clear — spend millions of dollars to keep Qwest out of the long-distance business while skimming billions of dollars from unsuspecting customers through price hikes,” alleges Steve Davis, Qwest’s senior vice president for policy and law.

Is this paranoia on Qwest’s part? Not according to the company.

AT&T, in particular, has come under fire from lawmakers for its recent decision to increase the amounts it levies on residential customers’ long-distance bills to recover the company’s costs of contributing to the federal Universal Service Fund, which subsidizes service to rural and poorer areas.

House Energy and Commerce Committee Chairman W.J. “Billy” Tauzin (R-La.) is considering whether to conduct a hearing on the matter, and the committee’s ranking member, Rep. John D. Dingell (D-Mich.), has asked the FCC to investigate.

The price hikes appear to continue a trend, says Qwest. In July 2001, AT&T increased basic rates by as much as 11 percent, followed by a 16 percent jump — up to 35 cents per minute.

“AT&T will continue to increase long-distance prices until they have to compete with Qwest,” Davis says. “It’s that simple.”

Qwest’s long-distance re-entry will save customers throughout its local service territory more than $1 billion annually, or approximately $70 to $113 per residential customer, according to a study by professor Jerry A. Hausman, director of the Massachusetts Institute of Technology (MIT) Telecommunications Econo-mics Research Program.

A report by Consumer Action, an independent consumer non-profit organization, also found long-distance rates are increasing everywhere except in states where the local telephone provider has been allowed to offer competitive long-distance services, such as Texas and New York. The study found that consumers in these states were offered rates for basic service plans that were up to 66 percent lower than the big IXCs’ plans.

“We expect the big long-distance companies to continue to make up nuisance objections to delay our long-distance re-entry so they can continue to exploit customers who don’t have a real alternative,” Davis says. “When customers do have a choice, like in Texas and New York, rates go down and customers ditch their big long-distance company to save money.”

AT&T calls Qwest’s accusations a “publicity stunt.”

“No one should be fooled by Qwest’s rent-a-professor study,” counters Tom Pelto, AT&T’s vice president of law and government affairs. “When Qwest abruptly exited the long-distance market 18 months ago, it didn’t make a dime’s worth of difference to consumers, and their re-entry promises to be equally inconsequential. What will make a difference is a second local competitor, not the 300th long-distance company.”

“Qwest should not be granted long-distance approval until there is competition in the local market, and that isn’t the case anywhere in Qwest’s region,” Pelto says. “In fact, the local market in its territory remains a virtual monopoly.”

AT&T contends that in Qwest’s 14-state region, less than 5 percent of residential local service is provided by competitors. Pelto says that’s because Qwest’s wholesale prices doom competitors to failure and its operations support systems (OSS) don’t work.

Bad Blood

Joseph P. Nacchio, Qwest’s president and CEO, worked for AT&T for 26 years, and he led its consumer and business long-distance services. In 1996, he was passed over for the top spot and left, joining Qwest and eventually leading it to its current fortunes.

Nacchio has been vocal about his belief that Qwest could become a — if not the — major global communications player.

By harnessing the power of the Internet, Nacchio has said that Qwest plans to offer low-cost interactive services to businesses and consumers and challenge established leaders, including AT&T.

But Nacchio also has said that among Qwest’s top priorities is to offer long-distance services in its 14-state local service territory. Re-entering the long-distance business, will give Qwest new revenue opportunities to the tune of about $2 billion a year, he adds, saying that he believes Qwest can garner about 20 percent of the annual $10 billion long-distance market.

Nacchio wants long-distance approval badly. That is because long distance will generate needed revenue and nab big business accounts.

In the meantime, neither AT&T nor WorldCom, which have suffered from price wars, competition and soft demand in the long-distance telephone market, are waiting around for another BOC to be granted in-region long-distance approval.

Both reported in January during a Salomon Smith Barney conference in Scottsdale, Ariz., that they expect to see strong growth in sales of local and international services. In separate presentations, the No. 1 and No. 2 U.S. IXCs said they would expand their local and international businesses, while they continue to rely on their traditional long-distance units to generate cash.

They also say they will expand their local telephone networks, which would reduce the fees they pay to transmit long-distance telephone calls across the Bells companies’ local networks.

“The real enemy is attacking the RBOCs,” said AT&T President David Dorman during the conference.

AT&T plans to offer local services over the high-speed DSL assets it acquired from bankrupt NorthPoint Communications and over network elements it leases from the Bells.

Meanwhile, WorldCom says it also may expand its local network by leasing or reselling network services from existing local telephone companies in states where it makes economic sense.

Obviously, the race is on for all of

these carriers.

Although ambitious, Qwest says it expects to offer long-distance services in its 14 states by mid-2002, a goal that’s been reworked several times. But company officials say the company is making progress toward receiving federal approval to re-enter the long-distance market. For example, in December, Qwest completed a critical OSS test in Arizona. It also is nearing completion of an OSS test covering its other 13 local service states.

Company officials say Qwest expects to file this month with the FCC for long-distance approval for several states and to file applications for the remaining states in

late spring.