On equal terms, FCC seeks to deter local competitors from cream skimming >BY CAROLYN HIRSCHMAN, Special Correspondent

The government's new plan to reduce access charges could help established local telcos fend off competition from new rivals offering local exchange service, the Federal Communications Commission and industry executives say.

Incumbent local exchange carriers have long complained of cream skimming, the practice of targeting high-profit big businesses while leaving the incumbents to serve less profitable customers, such as rural areas and residential users. The FCC plan, announced May 7, is designed to reduce cream-skimming opportunities through a new subsidy system.

The desired effect is that competitive LECs (CLECs) and other local market entrants will seek a broader customer base rather than "cherry pick" heavy long-distance callers. That means incumbents can compete on a more equal footing because their cost structure will more closely match their competitors'.

"It will have an effect of making the business market less attractive to some of our competitors, so we're all for that," said Ken Rust, director of federal regulatory matters at Nynex.

The new system is better than the old one but still not totally fair, said Mary McDermott, vice president of regulatory and legal affairs at the U.S. Telephone Association, which represents LECs. "It helps to go from per minute to flat rate, but it still leaves our companies with a subsidy burden others don't have," since the incumbents are expected to serve all customers, she said.

The key to reduced cream skimming is a five-year plan to convert the current per-minute access charge to a flat-rate, per-line charge that regulators call a "presubscriber interexchange carrier charge" (see table).

The flat-rate method of cost recovery will gradually bring access charges in line with the actual cost of carrying long-distance calls over the local loop and other parts of LEC infrastructure, according to the FCC. A $1.7 billion cut in access charges for the year starting July 1 will also speed the process.

Those cuts are expected to reduce long-distance rates, but they'll also affect the dynamics of the local market as monopolies turn into competitive markets, a chief goal of the Telecommunications Reform Act of 1996. The FCC's access charge reform plan fulfills one of the act's mandates.

In the past, access charges were "traffic-sensitive" - the more time an IXC's customers spent making long-distance calls, the higher the per-minute charges the IXC paid local telcos.

Under the new system, all IXCs will pay the same flat rate for access to local networks, regardless of their customers' calling volumes. "[LECs'] pricing can now more closely match the costs incurred. That means competitors can come in and match our prices if they're efficient," McDermott said.

But some experts predict that cream skimming will not be eliminated. "I don't see this changing CLECs' business plan at all. They'll still go in looking for high-volume customers that they can pick off," said Gene Michaelson, a partner at Arthur Andersen Global Communications & Entertainment Group, Seattle.

What's good for incumbents isn't necessarily bad for CLECs, many of which are expanding by selling local dial-tone service, said Heather Gold, president of the Association for Local Telecommunications Services. Although high-volume users will remain attractive, "this changes the economics so that it's more feasible to market to low-volume customers," she said. CLECs will still be able to offer competitive rates.

EDUCATION GETS A BREAK Pacific Bell is offering 50% discounts to more than 9000 California schools, community colleges, universities and libraries for one year of high-speed dedicated Internet access. Education Exclusives is a follow-up program to Pacific Bell's Education First, which has wired more than one-third of the schools and libraries in the carrier's service territory with ISDN lines.

GSA WEIGHS MERIT OF GLOBAL LONG-DISTANCE The General Services Administration has issued a request for comments on its proposal for worldwide long-distance telecommunications service. The service would replace the agency's nationwide contracts that expire in December 1998. Comments are due by June 2.