Posted:  08/2000

Access Charge Reform Benefits Almost All
By Kim Sunderland

The FCC’s completion of access charge reform this summer is among the most investment relevant and potentially positive actions the commission has undertaken during the last couple of years.

According to one telecommunications analyst, it would behoove the industry to take notice.

“For the first time in 15 years, there is consensus between the local and long-distance industries over how much the long-distance companies should pay to access the local phone network for the next five years,” says Scott
C. Cleland, managing director of Legg Mason Precursor Group (www.leggmason.com). “This is a very rare win-win-win
compromise for long-distance companies, the Bells and regulators.”

The FCC (www.fcc.gov) in June reduced telephone access charges by $3.2 billion to increase local and long-distance competition and save consumers big bucks on their monthly telephone bills.

By adopting the CALLS (Coalition for Affordable Local and Long Distance Services,
www.phonepolicy.com) interstate access charge proposal, the FCC says access charges will be cut and restructured during the next five years.

As part of the CALLS plan, the major IXCs agreed to pass on savings to consumers and to eliminate monthly minimum usage charges. Although IXC rates have been decreasing, low-volume users haven’t been benefactors of those savings because of line-item charges such as monthly minimum usage fees.

Starting in July, all U.S. households should have started seeing savings on their phone bills, with reductions as high as 50 percent for those who don’t make any long-distance calls, and more modest decreases for the moderate to heavy long-distance users, such as businesses.

AT&T Corp.
(www.att.com) and Sprint Corp. (www.sprint.com), for example, which helped devise the CALLS plan, say they’ll eliminate monthly minimum usage charges from their basic rate plans.

“This action alone will lead to immediate, significant savings for customers who make few long-distance phone calls,” according to the FCC. Other members of CALLS include Bell Atlantic Corp.
(www.bell-atl.com), BellSouth Corp. (www.bellsouth.com), GTE Corp.
(www.gte.com) and SBC Communications Inc. (www.sbc.com).

Financially Speaking

The reform is very positive in the short term for AT&T, Sprint and WorldCom Inc.
(www.wcom.com), Cleland says, because it quickly reduces their largest single cost–access charges–in the first year.

AT&T stands to be the biggest winner because it has the most dollars in play of any company. Plus, AT&T will enjoy almost $2 billion in access charge cost reductions in the first year, which is not included in the current earnings baseline, according to Cleland. And finally, AT&T will gain much improved financial flexibility during an extraordinarily high-capital spending period, Cleland says.

Likewise for the above-mentioned Bells, the approved reform is positive long term “because it provides them much greater investment certainty by securing five years of official regulatory certainty,” Cleland adds.

“That this 15-year stalemate was broken and that this breakthrough deal got cut, highlights how much AT&T’s business model has changed into a local infrastructure player in preparation for the
reintegration of the local and long-distance industries after 15 years of artificial regulatory separation,” Cleland notes.

AT&T, though, obviously is worried about the short term when it comes to eliminating certain monthly charges.

Right after promising the FCC to do so if the CALLS plan were approved, the telecom giant filed a tariff that increased some prices by more than 80 percent. Other prices were set to drop more than 40 percent for the roughly 30 million basic rate customers who weren’t on discount long-distance calling plans.

The FCC screamed “broken promises!” Consumers freaked. Investors took notes.

In light of that, AT&T deferred the restructuring of its basic rate schedule. Executives say that AT&T remains committed to establishing competitive, low-cost calling periods free of monthly recurring charges, and that they will conduct further review of various alternatives to restructure long-distance
calling rates for low-volume customers on the basic schedule.

AT&T says its current basic rates will remain in effect until it has completed its review and has informed customers of any changes. And the company will eliminate the current minimum charge on its basic rate schedule as previously announced.

“Recognizing that this is a competitive market, if we can reconfigure our rates to give more people more low-priced calling periods, we’ll do it,” says Robert Aquilina, senior vice president of AT&T Consumer Services.

Although AT&T chairman C. Michael Armstrong still plans to make up the difference.

“The long-distance behemoth appears to be scrambling for a way to make up for revenues lost by elimination of the [$3] fee,” says Dena
Alo-Colbeck, director of public policy for regulatory consultants Miller Isar Inc.
(www.millerisar.com). “By placing a spin on the rate increases … AT&T is likely hoping to implement the rate hikes while quelling the public relations nightmare created by [its tariff filing].”

Resellers Feel Ignored

In addition to the reform’s elimination of monthly minimum usage charges, two phone bill charges–the existing presubscribed interstate carrier charge (PICC) and the subscriber line charge (SLC)–will be made into one line item, according to the FCC.

For the first year, the FCC says the new single charge is lower than the existing two charges combined. Consumers will continue to see savings, even as the charge increases in the second year. And subsequent increases are subject to further FCC action.

While generally pleased that the plan will spur marketplace competition and provide substantial savings for low-volume, long-distance consumers, resellers nonetheless feel left out.

“We are disappointed that the commission’s order did not address key issues facing resale carriers and their customers,” says Ernest B. Kelly III, president of the Association of Communications Enterprises
(www.ascent.org).

Specifically, resellers say the reform doesn’t treat the multiline business PICC in the same manner as the residential PICC by rolling it into the SLC. Capping the multiline PICC at a lower cost is great, but retaining it as a separate billing item places a heavy and unfair burden on resale carriers to collect these charges, Kelly says.

Resellers plan to ensure that the IXCs pass through access charge reductions to resale carriers in much the same way they have agreed to pass along access charge savings to consumers.

“Keep in mind that resale carriers constitute nearly 20 percent of the U.S. long-distance market. To the extent they can reduce their wholesale costs and lower retail prices to customers, it puts that much more pressure on the big carriers to lower their retail prices,” Kelly says.

Consumer Concerns

The new access charge reform also will continue to provision financial support to companies offering phone service in high-cost rural and low-income areas, otherwise referred to as universal service.

Currently, the FCC says roughly $650 million of revenue from access charges is used to support service to high-cost customers. Because the revenue is collected through interstate access charges, it’s available only to the ILECs. But the FCC says that under the new rules, $650 million is removed from access charges and replaced with an assessment on all carriers’ interstate revenues, which then is placed in a fund available to any carrier serving customers in high-cost areas.

The Telecommunications Research & Action Center
(www.trac.org) says that the public interest obligation of universal service now is reaffirmed with a secured system of support for rural and low-income consumers.

“These difficult telephone issues always involve compromises. It is clear that the FCC as a whole … has insisted that this reform proposal look first at consumers, second at competition and third at the industry interests,” says Samuel A. Simon, chairman of TRAC’s board of directors.

Simon says the access pricing system now will be changed to a more flat-rated system that’s “likely to lead to more Internet-style pricing packages in local and long-distance services.”

Washington telecom attorney John Nakahata, a spokesman for CALLS, agrees that this could be a trend of the future, and the adoption of the CALLS plan will allow these types of plans to proliferate.