Telecom Act's 3rd Birthday Is a Monster Mash

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February 1, 1999

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Telecom Act's 3rd Birthday Is a Monster Mash

Posted: 02/1999

Telecom Act’s 3rd Birthday Is a Monster Mash
By Kim Sunderland

February marks the Telecommunications Act of 1996’s third birthday, which, similar to
President Clinton’s tumultuous reign, is fraught with swirling clouds of contradiction.

Generally speaking, many in the interexchange carrier (IXC) industry believe the
Telecom Act is achieving, albeit slowly, what it’s meant to do: legitimately keep the Bell
companies out of the long distance business until they open up their markets to

The payphone industry, according to one source, "is stuck trying, like everybody
else, to get everything implemented," so it’s an ongoing battle depending on the
issue or particular section of the Telecom Act being addressed.

Resellers, who are being throttled by some of the Federal Communications Commission’s
(FCC’s) decisions regarding local competition, want all the remaining obstacles

And then there’s the undertow that’s draining the Telecom Act’s effectiveness. It
includes an effort this year by several members of Congress to revamp or dispose of the
(FCC), which, ironically, was charged by Congress with implementing the Telecom Act,
coupled with the incumbent local exchange carriers’ (ILECs’) continuous fight against
various provisions of the act.

"The Telecom Act is working," says Robert McDowell, executive vice president
and general counsel for America’s Carriers Telecommunication Association (ACTA), which
represents the IXCs. "But the monopolies are doing all they can to thwart local

That’s mostly been happening in court where the LECs have gotten themselves so tangled
up in legalese it’s been as bad as falling into quick sand.

The ILECs’ biggest lobbyist, the United States Telephone Association (USTA), blames the
court problems on the long distance companies. "Regulators have continued to move the
target on long distance entry requirements," says USTA President and CEO Roy Neel.
"If competitors provided wireline facilities-based services to both businesses and
residences, this would unquestionably show that the local market is open, thus enabling
the [regional Bell operating companies (RBOCs)] to obtain interLATA (local access and
transport area) relief.

"However," he adds, "competitors–namely, the big long distance
companies–are cleverly gaming the process in order to prevent this from happening."

Neel recommends that certain regulatory actions would speed the development of
competition, including regulatory parity, merger approvals and regulatory incentives for
the deployment of advanced telecommunications services.

In December, USTA reported that the following areas significantly impede the
development of local competition:

  1. The lack of comprehensive universal service reform;

  2. Ineffective access charge reform;

  3. Artificially low pricing for interconnection, unbundled network elements (UNEs) and
    resale; and

  4. Anomalous reciprocal compensation rules.

Executives with the American Public Communications Council Inc. (APCC), which
represents the private payphone industry, agree that haggling over certain provisions of
the Telecom Act have slowed competition, such as universal service. "Local
competition is not done yet," says an APCC attorney adding that "there are no
choices" for consumers as far as payphone companies go.

The Telecommunications Resellers Association (TRA) also agrees that there have been
several misguided FCC decisions that "have hamstrung new market entrants," such

  1. Narrowly interpreting the Telecom Act’s definition of "telecommunications
    services" to exclude critical services such as voice mail, thereby denying resale
    carriers the ability to offer a service package equal to that provided by the ILECs;

  2. Relying on market forces that haven’t emerged to drive interstate access charges to the
    forward-looking economic cost of originating and terminating interstate, interexchange
    traffic, which gives the ILECs a massive competitive advantage over resale carriers that
    can’t resell exchange access;

  3. Permitting ILECs to act through affiliates as competitive LECs (CLECs) free of Section
    251(c) obligations, which allows them to defeat resellers through strategic price
    manipulation; and

  4. Ruling that high-speed, dedicated connections (and soon likely switched, dial-up
    connections) between Internet service providers (ISPs) and end users are interstate, which
    jeopardizes the right of CLECs to get reciprocal compensation from the ILECs with regard
    to traffic delivered to ISPs.

In a Dec. 1 report to the House Commerce Committee, TRA proposed several regulatory
initiatives to eliminate local competition obstacles, such as increasing wholesale
discounts to levels that will support broad local resale, and establishing performance
standards on the LECs, which could be penalized for noncompliance.

But while the Telecom Act may not be "the greatest thing since sliced bread,"
it is a step in the right direction, says Assistant Attorney General Joel I. Klein, who’s
in charge of the U.S. Department of Justice’s antitrust division.

The fact that the act has been mired in court proceedings is natural, Klein notes. For
example, when two companies are using the same wire, the cost of that wire is paramount
and "we’re gonna fight like the devil over price," he says.

The Telecom Act’s entanglement in litigation is drawing to a close in Klein’s view, and
so, despite rumors to the contrary, the act shouldn’t be reworked. If that were to happen,
he’s convinced there would be even more litigation, further delaying the nation’s move
toward local telecom competition.

On Capitol Hill, some members of Congress are blaming the FCC for the Telecom Act’s
slow progress on local competition.

For instance, House Commerce Committee Chairman Tom Bliley (R-Va.) has said that one of
his committee’s chief challenges this year is "aggressive oversight of the FCC,"
making sure the commission implements the Telecom Act as Congress intended.

Republicans such as Senate Commerce Committee Chairman John McCain of Arizona and
Congressman Billy Tauzin of Louisiana, chairman of the House telecom subcommittee,
wouldn’t mind seeing the FCC or the Telecom Act changed.

"I think that’s one thing we failed to do in 1996 when we rewrote the 1930’s
[communications] law was to redo the FCC itself," Tauzin told PHONE+ Magazine
recently. "I think that’s work that begs doing.

"We’re also going…to see what we can do about making the ’96 [Telecom] Act work
properly," Tauzin added. "I think it’s jammed up in court proceedings and
regulatory processes."

Tauzin, along with House Commerce Committee ranking member Rep. John Dingell (D-Mich.),
also plans to resurrect hearings and a proposal on the InterLATA Communication
Improve-ments Act, which garnered eight additional co-sponsors from both sides of the
aisle in 1998.

The act, H.R. 4801, is considered bipartisan legislation that is designed as the first
shot in the war to revamp the act by making myriad changes to Section 271, which governs
Bell entry into long distance. For instance, the bill would limit the FCC’s authority
regarding the Bell companies’ requests to offer long distance service and give most of the
decision-making to state regulators. The bill also would allow the Bells to transmit
international calls and data without regard to artificial boundaries, or LATAs.

This bill is part of "a full-scale assault on the Telecom Act by the Bells,"
says Jim Crawford of the Association for Local Telecommunications Services (ALTS), which
represents CLECs. "We hope Congress will uphold the act because it’s a good law that
doesn’t need to be fiddled with."

Yes it does need fiddling, counter the Bells, none of which would comment on their ’99
strategies regarding the Telecom Act. But word on the street is that the RBOCs are
lobbying Congress hard to have the act rewritten, largely because they haven’t been able
to nab long distance approval from the FCC.

And while modest inroads have been made in delivering the data and voice traffic of
businesses in large cities, the Bells and other independent LECs still service 99 percent
of the 180 million local lines in the United States. They don’t want to give up that
monopoly control, a November 1998 industry policy paper says.

The policy paper, released by the Brookings Institute, notes that several Bells and
GTE, in fact, convinced a federal court of appeals that the FCC "unlawfully usurped
the states’ regulatory powers" when it developed pricing rules to implement the
Telecom Act. The U.S. Supreme Court now is mulling that jurisdictional case and is
expected to issue a decision before adjourning this summer.

Also pending before the Supreme Court is a petition by Southwestern Bell, which has
challenged the constitutionality of the entire Telecom Act.

Brookings, a conservative think tank in Washington, late in 1998 sponsored a national
issue forum on "unleashing true telecom competition" at which several speakers
lashed out at the Telecom Act.

The Telecom Act is flawed, said Henry Geller, a forum panel member, "because of
it’s enormous micromanagement." Geller, a communications fellow with the Markle
Foundation and a former FCC attorney, called the nation’s telecom policy a mess. He claims
the act has been "terribly drafted" because it contains too many uncertainties,
such as those regarding jurisdiction and pricing.

"And forget about Congress," he said. "[Sen.] McCain knows it’s not
going to work. The only way to make progress–God help us–is through the FCC."

Despite this rhetoric, it’s also partly true that the Telecom Act won’t be overhauled
this year. It’s only been three years since the act was signed into law, so how much can
we expect to happen in that short a time span?

"No tinkering is needed" on the Telecom Act, ACTA’s McDowell says.
"That’s just not a political possibility."

What is needed, McDowell adds, is for "the FCC and the state public utility
commissions to watch the RBOCs like hawks on interconnection and access charge

FCC Chairman William Kennard, during a Progressive Policy Institute panel last year,
agreed that an effort to rework the act won’t happen. He said that even though technology
continues to change rapidly, that’s not justification to change the Telecom Act after only
three years. On the other hand, he added, that does make for "flexible
interpretation" of the act by the FCC.

Republican members of Congress won’t succeed in an overhaul of the act, according to
one source, largely because no one on Capitol Hill wants to risk losing what local
competition does exist. That would be a bad political move because less competition in
telecommunications would hurt the U.S. economy.

"McCain and Tauzin are just blowing hot air," the source says. "No one
is strong enough to get the Telecom Act rewritten. Not even them."


Bells Play Hardball with Crammers

Bell Atlantic Corp. and SBC Communications Inc. subsidiaries Pacific Bell and
Southwestern Bell have taken severe action against cramming that they say is in the best
interest of consumers, but could put the incumbent local exchange carriers (ILECs) at a
competitive advantage over their future interexchange competitors.

In early December, Bell Atlantic announced it was stepping up its efforts to protect
customers from cramming–the practice used by some providers to add unauthorized charges
to telephone bills for services customers did not order–by eliminating 27
telecommunications service providers from its bills. These companies allegedly are linked
to Bell Atlantic customer complaints regarding bogus charges on their phone bills. These
27 companies are in addition to the 59 service providers Bell Atlantic has denied billing
services to since last spring.

Pacific Bell and Southwestern Bell followed suit with announcements stating those
services providers about which the ILECs receive the most cramming complaints will be
given a 90-day deadline to reduce the number of complaints against them. Pacific Bell and
Southwestern Bell says those companies unable to meet these terms no longer will receive
their billing services.

While the need to eliminate cramming is a growing concern, there remains the question
whether these ILEC tactics are the best course as the ILECs are the ones who hold a
monopoly on billing for the local level.

"It was fine when the ILECs were the only local providers and they were not in the
long distance race," says Charles Hunter, telecom attorney with Hunter Communications
Law Group, Washington. "But now that the two are converging, if the ILECs can start
cutting off their billing services–on the whole or in part–they can do a lot of
competitive damage to folks in the long distance market and enhanced services [market]
just as the ILECs are starting to come into those industries."

The problem, Hunter adds, is whether it is justifiable to allow the ILECs to take
action unilaterally, which on the one hand looks like it is in the public interest, but on
another level just happens to strategically assist them in their effort to hammer the

Whether it is right or not, however, it will be difficult to stop the Bells as the
billing and collections industry is completely deregulated.

"And then it becomes a question: Even though billing and collection services were
deregulated a long time ago, at what point does this become a competitive
impediment?" Hunter says.

–By Jennifer Knapp

FCC Lays Down Law on Slamming Violations

Probably in an effort to produce some sort of telecommunications decision before 1998
ended, the Federal Communications Commission (FCC) Dec. 17 adopted rules to reduce
slamming, which is the unauthorized switching of a long distance service.

"We’re sending a clear message to anyone who even thinks about slamming that there
is no profit in it," FCC Chairman William Kennard said during the FCC’s meeting.
"It will not pay to steal phone customers anymore."

Swamped with 20,000 complaints in 1998 alone, and egged on by members of Congress who
failed to pass anti-slamming legislation in 1998, the FCC determined in Common Carrier
Docket No. 94-129 that slamming victims will be exempt from paying any long distance phone
charges to an offending company for 30 days.

The commission also restricted how long distance companies can switch people by
eliminating a verification process that switched people to a new carrier if they didn’t
return a postcard mailed by a telemarketer. Long distance companies still can obtain
consent by a written letter from prospective customers authorizing a switch, a third-party
verification of the switch or a toll-free number to call for switching carriers.

And in an unexpected forward-looking move, the FCC also extended these new rules to
local phone companies.

The Telecommunications Resellers Association (TRA) in Washington called the decision
"over-regulatory," while the America’s Carriers Telecommunications Association
(ACTA) claimed the decision "will hurt small carriers." Both associations are
concerned with the 30-day exemption period the FCC allows to slamming victims.

ACTA is contemplating filing a petition for reconsideration. "Four of the five
commissioners disagreed with all or part of the order," says Robert M. McDowell,
ACTA’s executive vice president and general counsel. "The commissioners themselves
seem as-hamed of their own product."

Bell Atlantic Corp. officials say the FCC’s stiff action is in response to the long
distance industry’s "irresponsible behavior," which should give the commission
enough reason to approve its request to provide long distance services.

In other news, the FCC proposed $4.4 million in fines against both Long Distance Direct
and Business Discount Plan for alleged slamming. The proposals came on the heels of
Minimum Rate Pricing Inc. (MRP) volunteering to change its business practices and pay $1.2
million to settle FCC slamming allegations.

In a consent decree released Dec. 16 in FCC Report No. CC 98-44, MRP detailed measures
it will take to protect consumers against slamming. This is the largest voluntary payment
the FCC has received in any slamming-related consent settlement to date.

–By Kim Sunderland

ILECs Still Want Nothing to Do with Data Subsidiaries

Incumbent local exchange carriers (ILECs) continue to push against having to form
separate subsidiaries to handle advanced services.

In December, a joint filing by the largest ILECs (four of the five regional Bell
operating companies [RBOCs] and GTE Corp.) and certain computer companies basically
proposed to extend their local bottleneck to Internet services, according to the United
States Internet Service Providers Alliance (USISPA).

In their filing, the big ILECs require a wholesale waiver of key elements of the
Telecommunications Act of 1996 in order to have the necessary economic incentives to
deploy high-speed broadband Internet access technologies such as digital subscriber line
(DSL). Included in this filing were requests to leave their businesses intact.

The companies, BellSouth Corp. CEO F. Duane Ackerman says, are asking the Federal
Communications Commission (FCC) "for more lenient regulatory treatment of the Bell
companies as they deploy advanced Internet network connections."

These ILECs offer four "concessions," each subject to various technical,
economic and timing limitations. They are the following:

  • Competitive local exchange carriers (CLECs) can utilize collocation (common cage, virtual, physical or cageless) for advanced services of an ILEC’s choosing;

  • CLECs can utilize DSL-capable loops as unbundled network elements (UNEs);

  • The ILECs’ integrated provision of DSL services are subject to existing nonstructural safeguards, which translates into no data subsidiaries; and

  • The ILECs’ advanced services offerings will not discriminate against unaffiliated Internet service providers (ISPs).

  • In exchange, the RBOCs and GTE seek relief from certain legal requirements, including the following:

  • No provision of DSL electronics as UNEs;

  • No resale of DSL services at any discount;

  • Unlimited transfer of ILEC assets, employees and services accounts to separate affiliates for up to 12 months;

  • No significant separation requirements;

  • Deregulation and detariffing of advanced services rates once half of residential lines have access to DSL services; and

  • Granting the RBOCs liberal waivers of interLATA (local access transport area) boundaries for data services.

"On its face, this proposal is a sham," the alliance told the FCC. "The
RBOCs and GTE give up nothing." The alliance is comprised of various state ISP
associations and the Commercial Internet eXchange Association (CIXA). Representatives of
such organizations and companies as AT&T Corp., MCI WorldCom Inc. and the Competitive
Telecommunica-tions Association (CompTel) also signed the alliance’s letter to the FCC.

On legal grounds, the alliance stated in the letter, the proposal violates the Telecom
Act by promising to abide by "existing nonstructural safeguards," and to grant
competitors access to unbundled loops and collocation rights already required by the
Telecom Act.

The largest ILECs gain a "get-out-of-jail-free" card from the most critical
procompetitive mandates of the Telecom Act, the alliance stated, adding "this hardly
seems like a fair bargain, especially for consumers."

A Related Battle

Another related issue for interexchange carriers (IXCs) to watch is the battle
involving the ILECs, the Internet and reciprocal compensation.

Four Senate Commerce Committee members have urged the FCC to rule that dial-up Internet
access is interstate and not local. The bipartisan effort to have the FCC finally
establish the jurisdictional nature of these calls came in a Dec. 1 letter to FCC Chairman
William Kennard from Sens. Conrad Burns (R-Mont.), John Breaux (D-La.), Sam Brownback
(R-Kan.) and Wendell H. Ford (D-Ky.). Burns heads up Commerce’s subcommittee on

The senators stated in the letter that they don’t want the ILECs and their customers to
have to pay millions of dollars in "unjustified compensation" to competitors if
such calls are deemed local.

The senators also fear these payments would affect the ILECs’ ability to provide
universal service to rural customers in several states. If Internet traffic is declared
interstate, the senators said in the Dec. 1 letter, then the states could rely on the
FCC’s decision "to modify, as necessary, any state decisions which were based on a
finding that Internet traffic is local."

The senators are making a last-ditch effort to lobby the FCC on its forthcoming
decision in Common Carrier Docket No. 96-98, which concerns whether ILECs should abide by
previous state rulings requiring them to pay reciprocal compensation to CLECs for dial-up
calls to the Internet.

While the FCC has ruled that asynchronous digital subscriber line (ADSL) service is an
interstate service, it hasn’t decided whether ILECs should pay reciprocal compensation for
Internet traffic. The decision, which was expected in November, had not been made as of
press time.

–By Kim Sunderland

FCC Issues Order on Recovering Number Portability Costs

The Federal Communications Commission (FCC) has released information on how various
telecommunications carriers can recover certain costs associated with local number
portability (LNP).

In Common Carrier Docket No. 95-116, the FCC issued a memorandum opinion and order Dec.
14 addressing issues related to determining the carrier-specific costs related to
providing long-term LNP that are eligible for recovery through tariffed charges.

"We conclude … that incumbent LECs (local exchange carriers) must demonstrate
that any incremental overhead costs claimed are actually new costs incremental to and
resulting from the provision of LNP," according to the FCC order.

In May 1998, the FCC ruled that the number portability costs that carriers must bear on
a "competitively neutral basis" include the costs that LECs incur to meet the
number portability provisions imposed on them by Section 251 of the Telecommunications Act
of 1996.

The FCC said this includes the costs that other telecommunications providers–such as
interexchange carriers (IXCs) and commercial mobile radio services providers–incur in
implementing an industry-wide solution to LNP. Establishing LNP, the FCC said, includes
such costs as creating regional databases, initial upgrades of the public switched
network, and the ongoing costs of providing LNP.

With its December order, however, the FCC says that the LECs must distinguish between
network upgrade costs and the carrier-specific costs directly related to providing
long-term LNP. In other words, the costs of providing LNP, which are recoverable through
the federal charges provided in its May ’98 ruling, must be different from general network
upgrade costs.

The commission already has determined that general upgrades aren’t directly related to
providing LNP, and in this order it warns the LECs against trying to say that newly
incurred costs to upgrade their operations support systems (OSSs) are related to LNP.

To determine if these costs are eligible for federal funds, the FCC has developed a
two-part test: A carrier must show that these costs: 1.) would not have been incurred by
the carrier "but for" the implementation of number portability; and 2.) were
incurred "for the provision of" number portability service.

The FCC says this test "avoids overcompensation of LECs for their costs"
since they already recover costs of general network upgrades through the other recovery
mechanisms. The LECs "should not be allowed to recover such costs both through
federal LNP charges and under price caps or rate-of-return regulation," the FCC
filing says.

If a carrier says it passes this test and files an LNP tariff seeking federal funds,
the FCC says the Common Carrier Bureau can request that LECs file the following
information to prove they should recover these LNP costs:

  1. Any special studies that are conducted to support the reasonableness of the LECs’
    incremental overhead cost allocations;

  2. A list of overhead allocation factors used by the states in any unbundled network
    element pricing decisions; or

  3. A list of all overhead allocations used in the LECs’ other new services filings during
    1996 through 1998.

This information may be reviewed in the course of any tariff investigation once a
carrier files cost support information.

–By Kim Sunderland


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