ILECs bind customers to long-term contracts

Competitive local exchange carriers are urging state commissions to take a fresh look at incumbent LECs' contract cancellation policies and adopt rules that would let CLECs snag more business customers from ILECs.

Florida and Ohio already have ordered the rules, which allow ILEC customers to cancel long-term contracts within a given time period. Customers still pay for breaking contracts, but not the onerous fees that CLECs say now prevent most customers from changing providers.

Currently, ILECs entice many business customers to sign long-term contracts - commonly two to seven years - in exchange for lower rates on ISDN, Centrex and other local services. Customers can terminate the contracts early, but only if they pay stiff fees, often totaling tens of thousands of dollars.

CLECs argue that because the termination penalties are so high, customers are, in effect, locked into their contracts with ILECs and prevented from switching carriers. These contract terms thwart local competition, and regulators should do something about it, CLECS say.

"It's clearly an anti-competitive tactic," said Robert McCausland, vice president of regulatory affairs for Allegiance Telecom. "Very often the customers who have more than a handful of lines have locked themselves [into a service contract] prior to the availability of competition. Often the customer had no choice because the month-to-month service was priced so high, they had to go to a long-term contract."

Now that competitors have emerged, many customers want to switch providers but can't afford to, McCausland said.

ILECs say the termination penalties are standard and have been included in contracts long before the 1996 Telecom Act. "These are standard business contracts designed to give customers the best value and to protect the company," said a spokesman for SBC Communications.

The penalties, contained in privately negotiated "contract service agreements" and public tariffed plans, are reviewed and approved by state commissions, said Sheila Harris, a regulatory affairs manager for U S West. "They would not be part of tariffed plans if they were abhorrent," she said.

But CLECs claim that customers often are unaware of the penalties until they consider switching local service providers. And when they find out, they usually stick with the ILEC. For example, an ISP in Winston-Salem, N.C., wanted to switch from BellSouth to KMC Telecom. But the ISP balked when it found it would have to pay a $365,000 termination fee, said Mike Duke, KMC's director of regulatory affairs. He would not name the ISP.

Incumbents say that government-imposed contract changes amount to an unconstitutional taking of their private property. CLECs argue that regulators should intervene because it's in the public interest to open local markets to more competition.

Some regulators are starting to listen. Spurred by Time Warner and other competitive carriers, the Florida Public Service Commission in November ordered that customers with contracts for local telecom services over the public network be given a one-time window of one year to opt out of existing contracts. Termination fees are limited to unrecovered, non-recurring costs specific to the contract.

The order, which exempts LECs with fewer than 100,000 lines, affects nearly 4000 contracts that were entered into by June 30. GTE and BellSouth have challenged the order, and it's unclear when the window will open, said a PSC staff member.

Along the same lines, in February the Kansas Corporation Commission in February will consider a proposal that gives customers a 180-day window of opportunity to cancel their contracts. Those that cancel would pay ILECs the difference between their discount rates and the higher tariffed rates, but only for the period elapsed under the contract. In contrast, many ILECs charge customers for the entire contract term.

"We were looking at long-term contracts used as barriers to entry," said Janet Buchanan, a KCC telecommunications economist. "It may be a strategic attempt to keep competition out. Fresh look eliminates that barrier."

A handful of CLECs formed a coalition in mid-1999 and have filed petitions to initiate fresh-look rulemakings in five western states: Arizona, Colorado, New Mexico, Oregon and Washington. "It's been somewhat of an uphill battle," said Gary Yaquinto, vice president of government and regulatory affairs at GST Telecom. Other states also have asked CLECs to document cases of "locked-in" customers.

The FCC has taken no action, but CLECs cite a precedent. The FCC ordered a contract-cancellation provision in the early 1990s for competitive access providers selling special access services, McCausland said.