Jockeying for position, Carriers race for the winner's circle of access charge reform >BY CAROLYN HIRSCHMAN, Special to Telephony

The Federal Communications Commission this month is expected to wade into the muddy waters of access charge reform, pitting local telcos against long-distance carriers and Internet service providers.

The FCC could initiate access-charge rulemaking Dec. 13, but final rules aren't likely to be hammered out until spring. "They should be spelling out a couple of alternatives and indicating which way they lean," said Frank Gumper, Nynex vice president of federal regulatory planning.

Access charge reform, along with universal service and interconnection, is one of three major issues facing the commission as it implements the Telecommunications Reform Act of 1996. Industry forces are already jockeying for position.

Access charges are per-minute fees that long-distance and cellular companies pay local telcos to originate and terminate phone calls on local networks. The charges began in 1986, in the wake of the AT&T breakup, to help pay for universal service-the provision of affordable, ubiquitous residential phone service.

It's widely acknowledged that the $30 billion in annual access charges are artificially inflated. The FCC will suggest a plan to lower them closer to actual cost, but the big questions are by how much and how fast. The Telecom Reform Act sets no mandates, so it's up to the FCC to come up with answers.

"The dynamic is positive for the long-distance industry and negative for the local telcos. The FCC is clear in believing that access charges are too high," said Scott Cleland, managing director of the Schwab Washington Research Group, which advises institutional investors. "The political reality is that too-fast, too-deep access charge reform causes rates to go up, and the politicians promised that rates would go down," he said.

The long-distance companies stand to save billions of dollars by having access charges reduced as much as possible. The Bell regional holding companies say it's OK to lower charges as long as they can recover their costs.

How far should access charges fall? One estimate pegs today's rates at 2¢ to 4¢ a minute. The Bell companies put the actual cost at 1.5¢, but AT&T says it's less than 1¢. "The FCC will probably come down somewhere in between," said Ken Johnson, a regulatory analyst at the Organization for the Promotion and Advancement of Small Telecommunications Companies.

Some telcos would like the FCC to stay out of the issue altogether. "It would be better for market forces to determine where access charges should go rather than regulatory fiat," said Patricia E. Koch, assistant vice president of external affairs for Bell Atlantic.

Any lowering of access charges will have two dramatic effects: a drastic fall in revenue for local telcos and a gaping hole in the universal service fund. To cushion the blow, access charges are expected to be cut gradually rather than all at once.

The Bell companies are unlikely to make up the revenue shortfall by raising consumer rates because that could hurt them competitively as new entrants offer local phone service. They could sell new products and services and enter new territories, as permitted by the Telecom Reform Act. But these options are limited for small carriers, Johnson said.

Another problem is what to do about universal service. The national fund that subsidizes phone service in remote areas is largely paid for by access charges. If access charges fall, so does the size of the fund. But no one is sure how much universal service actually costs because the subsidies are hidden. The FCC is working on a system of explicit subsidies.

Local telcos won't bear the entire burden, at least in the long run. As other companies enter the telecommunications market, they should also make "an equitable and nondiscriminatory contribution" toward universal service, a panel of federal and state regulators recommended to the FCC last month.

Besides the size and timing of access charge cuts, two other tactics are under discussion, according to industry sources. One would assess charges by subscriber line, not minutes. Telcos favor this non-traffic-sensitive system, but long-distance carriers prefer lower per-minute charges, said Nynex's Gumper.

Another tactic would yank the access charge exemption that enhanced service providers (ESPs) now enjoy. ESPs include ISPs, answering services and others that "enhance" local phone networks.

Some local telcos want the ESPs-especially the ISPs that are heavy network users-to start paying access charges. But the ISPs say they are being singled out unfairly and that they'd have to pass on higher costs to customers, threatening their industry's growth.

The exemption was granted to let a fledgling Internet industry prosper, but local telcos say the industry has matured and is growing so fast that it's clogging local networks, especially in the evening when Internet use is highest. They want the FCC to consider having Internet and on-line providers pay access charges-perhaps lower than those paid by interexchange carriers-to help defray the cost of network improvements.

The Bell companies don't want to kill the Internet-many began offering their own service this year-but want to have ISPs lend a financial hand for network upgrades, said Jim Diestel, Pacific Bell's director of advanced services industry marketing. "We should be able to recover our costs. Other members of the [Internet] industry should be able to make a fair profit," he said.

For their part, ISPs don't want to pay a cent in access charges and last month formed a coalition with computer, software and on-line companies to fight the telcos. The Data Coalition is conducting its own studies of Internet-related network congestion and possible technical solutions.

The federal-state joint board on universal service has recommended that ISPs remain exempt from access charges unless they provide telecommunications services.

Carrier seeks pay phone autonomy BellSouth is seeking Federal Communications Commission approval to set up a separate subsidiary for its pay phone operations. The move would give the carrier greater flexibility to compete with 2000 independent pay phone providers, BellSouth officials say. Concert takes a bow before regulators MCI and BT finally filed their merger application with the last week. The new company, to be called Concert plc, aims to benefit consumers by fostering greater international competition and offering innovative communication services at competitive prices, especially in the U.S. local telecom market, according to the merger application.