From cost recovery to competitive edge

When Congress mandated local number portability in the Telecommunications Act of 1996, it recognized that network conversion costs would be high. Lawmakers also knew that LNP was necessary because few consumers-and even fewer businesses-would be willing to endure the inconvenience of changing phone numbers to change carriers.

In considering the bill for LNP, telecom providers should keep in mind that the costs associated with long-term LNP solutions will pay dividends by allowing carriers to prosper in a more competitive marketplace. By all estimates, the market for local telephone competition will be profitable-and crowded. An analysis prepared by The Gartner Group and Dataquest estimates that open competition in the domestic local telephone market will result in basic service opportunities of $4.49 billion this year and $6.19 billion in 2000. LNP is the key to opening the market, and one way or another, every carrier will pay for it. Whether those costs take the form of unrecoverable expenses or long-term investments is up to each carrier.

Some LNP expenses such as money spent for network upgrades can be recouped. Moreover, capital investments do more than hold down LNP costs in the short term. They also open the door for long-term profits by allowing small and medium-sized carriers to offer the same Advanced Intelligent Network (AIN) services as large providers. Forward-thinking carriers will use LNP to spur the capital investment they must make to stay competitive in a crowded market.

Porting telephone numbers In the FCC's Third Report and Order regarding LNP, regulators laid out the methodology by which carriers can recover costs. The report had far-reaching implications for the regional Bell operating companies and other incumbent local exchange carriers because it dictated how they could recover costs through tariffs paid by end users. Less attention has been paid to how the ruling will affect small and medium-sized companies competing in the local exchange market.

In discussing the costs of LNP, it helps to review how numbers are made portable, or are "ported," from one carrier to another. Porting sounds simple until one considers that the phone number itself is pivotal for most telecom operations. Back office systems use phone numbers to identify customers, and all routing is based on a customer's phone number-which directly corresponds to a physical switch in the local network.

Porting numbers severs the direct relationship between a customer's phone number and a physical switch. It requires the creation of a new set of routing numbers called location routing numbers (LRNs) and a database that matches ported telephone numbers with corresponding LRNs. To ensure uniform service availability, the FCC created seven regional data clearinghouses called number portability administration centers (NPACs) to oversee carrier and service bureau LNP databases.

When a local carrier wins a new customer who wishes to retain an existing phone number, the decision affects all routing in the public switched network. The regional NPAC LNP database officiates a download of routing information to the LNP-enabled service control points (SCPs) of carriers and service bureaus throughout the region. Once LNP is available in an exchange in a given area code, each call to that exchange requires an additional routing step to determine the true destination carrier, regardless of whether the terminating number has actually been ported. This additional routing step is a major burden that cannot be avoided.

The company responsible for the additional routing step is the N-1 carrier, where "N" is the last carrier to route the call. Thus, the N-1 carrier is the next-to-last carrier handling the call. For example, the N-1 carrier on a long-distance call will typically be the long-distance provider. It is important to note that all carriers, even wireless carriers and new wireline carriers, are responsible for properly routing calls made to switches that are open for porting, whether they have upgraded to support LNP or not.

All costs associated with LNP stem from this fundamental change in call routing. The Third Report and Order authorizes incumbent LECs to charge non LNP-compliant carriers for each call requiring assistance to be properly routed. Therefore, carriers have two options: They can pay to upgrade their networks or pay fees on a per-call basis to properly route calls to switches that are open for porting.

Two kinds of costs In the cost recovery order, the FCC created two major categories: shared industry costs and carrier-specific costs. Shared industry costs include the capital costs for setting up the NPAC and recurring NPAC charges such as upload and download costs. Carrier-specific costs include upgrades for switch software, investments made to increase SS7 connectivity, enhancements to AIN platforms and the routing fees charged by incumbent LECs.

The FCC ordered regional NPAC administrators to allocate shared costs "among carriers in proportion to each carrier's intrastate, interstate and international end user telecommunications revenues attributable to that region." The FCC reasoned that payments based on proportional end user revenues would not give any one carrier an advantage over another. Once shared costs are apportioned, they become part of each carrier's specific costs.

The FCC has taken steps to protect all carriers from undue LNP cost burdens. Small and medium-sized carriers have been given the most leeway in determining how they want to recover costs. In fact, the FCC did not specifically address how non price-capped carriers may recover costs, except to say they may recover costs directly related to LNP in any lawful manner.

The commission further protected carriers by directing the NPACs to amortize bills for non-recurring capital costs in order to blunt their effects. Incumbent LECs that are subject to rate-of-return or price-cap regulation will recover their costs through tariffs on end users. The tariffs must end after five years.

One LNP cost that will be felt industrywide is the expense incurred in upgrading back office operations support systems (OSSs) to make use of LNP data. Like call routing systems, OSSs use telephone numbers as the basis for most functions. LNP analysts have found that up to 40 different OSSs need LNP information to operate properly (Table 1).

For example, a long-distance carrier that fails to update its customer care system might not be able to find customers who change local service providers. In addition, without LNP information in its billing system, the carrier might not be able to collect for long-distance calls placed by those customers.

Another operational area with a crucial need for LNP data is network troubleshooting. Without current data, technicians will be unable to solve routing problems arising from porting. Worse still, it may take them several hours to learn that the problem is LNP-related. This type of wasted effort will breed discontent among technicians and frustration on the part of customers. In a highly competitive environment, rapid resolution of problems is a hallmark of excellent customer service.

The 'no-decision' decision Carriers that allow the local terminating carrier to perform default routing for them are most at risk for LNP cost overruns. In the initial filings, the default route tariffs range from 0.5 cent to 1.2 cents per call. Based on an average of 40 outbound calls per subscriber line per month into a ported metropolitan area, a medium-sized carrier with 500,000 subscriber lines could quickly incur charges of up to $1 million per year. These charges are not static by any means; LNP call volumes increase daily. Wireless carriers also are vulnerable. An estimated 80% of outbound wireless calls terminate on a wireline network, so wireless carriers cannot dismiss default route charges as trivial (see story on page 44).

Paying default route charges is not an advisable long-term solution. While LNP call volumes are low, carriers should use the opportunity to plan for a long-term solution. NPACs are porting numbers at a staggering rate, so it is safe to say that all carriers should already be preparing to transition from default routing.

According to NPAC statistics, the number of telephone numbers ported each month doubled on average throughout 1998. While 554,119 numbers were ported all last year, more than one-third of those were ported in December alone (Figure 1). Because it takes between six and nine months to choose and implement an enterprisewide LNP solution, it is vital for carriers to begin long-term planning now-before default route charges become excessive.

During the transition to a long-term solution, carriers may choose to outsource major LNP operations to a service bureau. Service bureaus perform call routing transactions on a contract basis using their LNP-enabled SCP and a local service management system linked to the NPAC. Based on volume, the service bureau solution may work for a small communications company, but only if the service bureau also feeds LNP data into the carrier's back office systems. Even if the service bureau is downloading LNP data to the back office, the carrier must still pay the NPAC for the use of licensable LNP information.

For "porting" your own numbers, companies also offer local service order activation on a service bureau basis. In many cases, a service bureau solution will still require manual entry of certain LNP data across multiple OSSs, a process that should be automated as part of a long-term solution.

An end-to-end LNP solution is an application that takes full advantage of the capabilities and infrastructure of AINs and SS7 intelligent networks. The end-to-end solution requires upgraded infrastructure consisting of a service switching point (SSP) that triggers specialized SS7 routing and an SCP that can handle all LNP application processing. This type of upgrade represents a challenge because it involves very expensive pieces of hardware. The good news is that the hardware adds intelligent network/AIN capabilities that allow carriers to offer a wide array of subscriber services that increase revenues to a point where the costs for LNP are outweighed by the revenue of AIN services (Figure 2).

An enterprisewide LNP solution increases overall efficiency by automatically disseminating LNP data to all mission-critical OSSs. When service order activation, local service management and troubleshooting systems have automatic access to LNP information, errors are reduced and service levels increase. In addition, an end-to-end LNP solution brings the level of network intelligence needed to compete at the next stage.

Incumbent LECs met the FCC deadline to begin porting in the nation's top 100 metropolitan areas by Dec. 31. Considering the rate at which porting is increasing, the total number of ported telephone numbers most likely will be in the millions by the end of the year.

Dealing with LNP will most certainly cost carriers. However, it is pessimistic to view LNP as just another expensive federal mandate. LNP is most accurately viewed as the catalyst for improvement that will be fundamental to future success. With cost-recovery rulings in place to ease long-term LNP investments, and the offerings of AIN services, carriers are sure to be competitive in the future.