Posted: 06/2000

Regulatory,
Competitive Challenges Facing Local Prepaid
By Glenn S. Richards, Esq., and David S. Konczal, Esq.

Prepaid local carriers are growing in scope and number. In many ways, the prepaid local industry represents everything Congress envisioned in passing the Telecommunications Act of 1996–risk-taking entrepreneurs offering new telecommunications services to the underserved segments of American society.

Indeed, without the prepaid local industry, hundreds of thousands of credit-challenged Americans would be deprived of phone service.

Prior to the Telecom Act and its landmark mandates for state and federal regulators to open local telecommunications markets to competition, consumers had one choice for phone service–the ILEC. If a consumer had past-due phone bills or could not provide a deposit or produce sufficient identification, that consumer would be denied phone service, including access to critical 911 emergency calling capability.

With the introduction of competition in local markets and the entry of prepaid local carriers, consumers now have options if they are cut off from the ILEC network.

In many respects, however, consumers and prepaid local carriers still are dependent on the ILECs. To provide service, most prepaid carriers simply resell the flat-rate local services of the incumbent carriers. With the ILECs as their underlying wholesale carriers, prepaid carriers are dependent upon the facilities, functionalities and personnel of the ILECs for almost all facets of their operations.

The Prepaid Local Offering

Prepaid local carriers attempt to eliminate some risk from providing service to credit-challenged consumers by requiring payment prior to the initiation of service. Because the service is paid for in advance, prepaid local carriers do not check credit or require security deposits. If customers fail to pay in advance for the next month’s service, the service is disconnected.

The service offered by prepaid carriers is nearly identical to that of the
ILECs. In addition to unlimited local calling and access to 911 and toll-free services,
prepaid carriers offer advanced features, such as call waiting, caller ID, call forwarding, three-way calling, speed dial, call return and, where available for resale, voice mail.

An important feature of prepaid local service is that customers are charged the same amount each month, allowing them to budget for their telephone needs. As a result, prepaid local carriers block all services that could result in per call or per minute charges, such as toll, directory assistance, directory assistance call
completion, operator services, inbound collect, and third-number billed calls. Customers make long-distance calls by using prepaid calling cards, or, if available, prepaid 1+ long-distance service from their
home phone.

ILEC Intransigence

Prepaid local carriers, like many new entrants in the local exchange market, have experienced difficulties interfacing with
the ILECs.

ILECs have been unwilling to work with prepaid carriers regarding any reasonable request that may enhance or increase the efficiency of the prepaid carriers’ business. This unwillingness to negotiate has led to complaints before state PUCs and filings with the FCC
(www.fcc.gov).

For example, in a few major markets, such as New York City and Chicago, the ILEC does not offer flat-rate local calling, meaning that consumers incur either a per minute or per call charge for each local call. Because prepaid carriers must eliminate all per minute or per call charges in order to offer a prepaid, flat-rate service, they cannot cost-effectively offer a prepaid local product in New York or Chicago.

In some markets, although the ILEC offers a flat-rate local service, consumers incur usage-based charges by making local calls outside their local calling area. Prepaid carriers have requested that ILECs block calls that incur these additional charges, but have been unsuccessful thus far, resulting in a complaint before the Pennsylvania PUC.

Prepaid carriers also block directory assistance and directory assistance call completion. Some ILECs, however, will not block directory assistance on reasonable terms despite the good faith requests of prepaid carriers. Currently, complaints are pending before the California and Pennsylvania PUCs concerning the ILECs’ unwillingness to block directory assistance.

ILECs’ OSSs and billing present more headaches for prepaid local carriers. Prepaid local carriers incur substantial transaction costs with each use of an ILEC’s
OSS. Several state PUCs are conducting proceedings regarding the reliability and cost of accessing
ILECs’ OSS. Compounding this problem, prepaid local carriers have been frustrated with the
general inaccuracy of ILEC bills, as well as the cumbersome, costly and time-consuming process that accompanies each billing dispute.

ILEC Entry

ILECs are unwilling to cooperate with prepaid local carriers, though prepaid local carriers serve a segment of American consumers unwanted by the ILECs. These additional customers increase the amount of traffic on the ILEC network and ILEC revenues.

Further, prepaid providers and ILECs do not compete for the same consumers. This paradigm, however, is beginning to change as ILECs enter the prepaid market.

Having watched the prepaid industry blossom over the past few years, at least one
ILEC, SBC Communications Inc. (www.sbc.com), has begun to offer a prepaid local product. Other ILECs likely will introduce a prepaid local service product during 2000.

While prepaid local carriers are no strangers to competition, ILEC competition is of an entirely different nature. In particular, access to customer information gives ILECs an overwhelming marketing advantage over other providers of prepaid local service.

Prepaid local carriers spend substantial amounts of resources advertising on television, on radio, and in newspapers in an effort to locate customers who have been disconnected by the ILECs. An ILEC, however, knows the name and address of each customer it has disconnected or is soon to disconnect, as well as each person whom it has denied service, allowing the ILEC to target market its prepaid service to these customers.

Indeed, a customer can be disconnected from an ILEC’s postpaid local service and switched to the prepaid service on the same day.

ILEC prepaid offerings are less expensive than what most prepaid local carriers charge, and there is a question whether the ILEC rate may not impute all the charges that the ILECs’ competitors must pay.

For example, competitive prepaid local carriers must pay OSS charges for each transaction with a customer, imposing a substantial financial burden on prepaid local carriers. It is not clear whether these OSS charges are included in ILEC rates for their prepaid service.

PUC Issues

Almost every state PUC has authorized carriers to provide prepaid local service. One exception is Ohio, where the PUC has refused to grant applications for certification filed by prepaid local carriers.

Instead, the Ohio PUC is conducting a generic proceeding to determine whether the service is in the public interest. Until the generic proceeding is resolved, the commission will not act on the pending applications, and it is unclear when, if ever, prepaid local service will be available in Ohio.

Prepaid carriers must educate federal and state regulators and consumer advocates about prepaid local service, which has provided telephone service to hundreds of thousands of Americans who would otherwise have none.

Unlike the
ILECs, prepaid carriers are willing to take the chance of serving credit-challenged consumers. These additional consumers add value to the PSTN on the whole, enhancing universal service and bringing the information superhighway to the unserved population.

Help Is on the Way

Fortunately, prepaid local carriers do not have to fight their battles alone. The National ALEC (Alternative Local Exchange Carrier) Association/Prepaid Communications
Assoc-iation (NALA/PCA, www.nala-pca.org) was formed to promote the interests of the prepaid local service industry. To date,
NALA/PCA has filed comments and complaints with the FCC and state PUCs in an effort to ensure that the interests of prepaid local carriers are adequately represented before federal and state regulators.

As participants in a highly regulated industry, prepaid local carriers must be willing to fight these battles to ensure that they are able to compete on equal terms with the ILECs.

David S. Konczal and Glenn S. Richards are attorneys with Shaw Pittman
(www.shawpittman.com) in Washington, D.C. The authors represent
NALA/PCA and numerous companies providing prepaid local service. They can be reached at
[email protected]
and [email protected],
or +1 202 659 3494.

ROUNDTABLE

On whether the World Trade Organization (www.wto.org) Basic Telecommunications Agreement is working
…

"Liberalization is happening … [but] the U.S. wants to keep up the pressure for change. Will other countries move faster? Probably not [because] they don’t usually like to be ‘bullied.’ And even if they could go faster it is often not in their own best economic interests–even if it is economically desirable for the U.S. ”

–David
Rogerson, principal consultant at Ovum (www.ovum.com)

“Of the approximately 70 countries which made market opening offers to the WTO, not all are equally committed to privatization, liberalization and competition.”

–Mitchell F.
Brecher, partner with the Washington offices

of Greenberg Traurig (www.gtlaw.com)

“The recent escalation of pressure from U.S. companies, exerted via their government, [may be] an attempt to open up new channels to win markets that they are losing through more conventional means. My feeling is that the recent increase in this type of pressure is a sign that the WTO agreement is working well, though I am somewhat surprised that we haven’t yet seen the first telecoms dispute panel.”

–Tim Kelly, head of operations analysis in the International Telecommunication Union’s
(www.itu.int) strategic planning unit