Posted: 07/2005

Special Access Pricing Debate

Heats Up

By Josh Long

Rivals of the two largest regional phone companies in the United States are urging federal regulators to ensure that SBC Communications Inc. and Verizon Communications Inc. be required to divest assets and offer wholesale network access to thousands of commercial buildings at regulated rates under their acquisitions of AT&T Corp. and MCI Inc.

Telecommunications companies assert the AT&T and MCI acquisitions will remove the biggest competitive suppliers of network access to commercial buildings in the United States, eliminating incentives for SBC and Verizon to lease their networks to other carriers at reasonable rates.

Network operators winning bids to provide telecom carriers local transport and loops to buildings have rates 50 percent to 60 percent lower than the regional phone companies’ “special access” fees, Simon Wilkie, a former FCC chief economist representing XO Communications Inc. and other competitive telecom carriers, stated in a filing with the FCC. Wilkie says AT&T and MCI are the most frequent bidders competing with the regional phone companies’ special access rates.

SBC and Verizon maintain competitors greatly exaggerate the number of buildings where AT&T and MCI provide network access to other telecom providers while understating the number of competitive alternatives.

“AT&T has only limited local facilities in the SBC region, whereas there are many other CLECs with extensive local networks and greater wholesale capabilities than AT&T,” AT&T and SBC stated in a filing with federal regulators.

The regional phone carriers also dispute claims the acquisitions would hurt the market for resold special access services. Competitors argue the two largest long-distance carriers - AT&T and MCI - receive special volume discounts from SBC and Verizon and resell network access to other providers.

“AT&T receives no unique volume discounts from SBC that it could pass on to other carriers, and contrary to competitors’ claims, it does not engage in such resale arbitrage in the first place,” AT&T and SBC stated.

BT Group Plc, the largest telecom firm in the United Kingdom with U.S. operations, called on regulators to require SBC to provide special access services at non-discriminatory prices and divest facilities, operations and customer contracts that overlap with AT&T. “The merger (of AT&T and SBC) would give the merged firm the greatly heightened incentive and ability to abuse its dominance over wholesale local connectivity by using discrimination and price-squeeze strategies against competing providers” of global telecommunications services, BT stated in a filing with the FCC.

Qwest Communications International Inc. argues in a filing with the FCC that the Verizon-MCI merger would hurt the company in a similar manner. “We would be directly harmed by the elimination of MCI as a provider of wholesale access in the Verizon region,” stated Qwest, which lost to Verizon in the bidding war to acquire the No. 2 long-distance firm. “After the merger, MCI no longer will act as an independent source of wholesale supply or as a restraint on Verizon’s access pricing.”

MCI and Verizon assert in a filing with regulators that telecom providers have choices for network access to buildings. “Every building with MCI fiber is in a cluster of contiguous wire centers with at least one competing fiber supplier in that area and 81 [percent] of MCI’s buildings are in individual wire center serving areas with [four] or more competitive suppliers,” the companies stated.

Competitive telecom providers claim that it is often too expensive to build a fiber network from a telecommunications CO to a commercial building, an argument challenged by MCI and Verizon. “In addition to the fact that there are already existing competitive alternatives to MCI in the majority of overlapping areas and buildings, for all or most locations where MCI is present, competing carriers can economically deploy new fiber,” the carriers stated in an FCC filing.

The debates raging over wholesale network access are nothing new to the industry. In fact, regulators have already begun examining many of the same issues telecom carriers raised in their criticism of the pending mergers. There are two pending proceedings on special access before the FCC.

The FCC opened a notice of proposed rulemaking in January examining whether to reform special access regulations. The ruling could affect the prices the Bells are authorized to charge rivals for special access services. Comments in the proceeding were due June 13.

Regulators opened the proceeding in response to a petition filed in 2002 by AT&T. AT&T maintained the Bells’ “special access rates are at supracompetitive levels,” according to the FCC.

In 1999, the commission began deregulating the special access market. The FCC granted the Bells flexibility in the rates they could charge competitors for special access services depending on their ability to meet certain triggers that demonstrated competition.

For example, a Bell company showing that unaffiliated service providers are colocated in 15 percent of their central offices in a metropolitan area may offer special access through negotiated contracts and price cap tariffs; and a Bell faced with more competition can provide special access through negotiated contracts alone, according to BellSouth Corp.

As part of its pending rulemaking, the FCC has sought comment on whether it should maintain, modify or repeal the pricing flexibility rules.

The competitive industry maintains the Bells’ special access fees - and their profits on these services - are excessive and have risen substantially in areas where the Bells have been granted pricing flexibility. The regional Bells generated $13.5 billion in 2003 revenue on interstate special access services, representing approximately 45 percent of all Bell interstate operating revenue, according to the FCC.

“Special access services across the country are monopolies again and have gone through the roof,” says Jason Oxman, senior vice president of legal affairs with CompTel/ALTS, the trade association representing Bell competitors.

BellSouth, the third-largest local phone company, says it is the other way around - rates have actually decreased since the company was granted pricing flexibility. “Carriers that use special access circuits typically make use of discounted pricing plans and sometimes negotiate contract tariffs with individualized service measurements and guarantees. As a result of these negotiations and competition, BellSouth’s special access prices are declining more rapidly now than before BellSouth was granted pricing flexibility,” BellSouth stated in an FCC filing.

The Bells also argue that competitors rely on FCC data that does not accurately convey their actual profits because the data does not reflect the current costs of providing special access.