Long in coming:Issues remain unresolved as telecom act's second anniversary nears

Competition in local telephone markets is developing slowly but surely, yet serious problems must be resolved before true rivalry can flourish, say regulatory experts. Nearly two years after Congress adopted and President Clinton signed the 1996 Telecommunications Act, expectations have headed south.

In contrast to late 1996, when politicians and others decried the dearth of competition, a more realistic view now holds-that local competition will evolve after regulation and capital markets have done their part.

"We're pretty much where we should be," said Larry F. Darby, a Washington-based telecom consultant. The telecom act has a grand goal: to break up local telco monopolies by letting interexchange carriers and other companies into the $100 billion business. In return, the Bell regional holding companies that dominate local service are allowed to sell long-distance in their territories after they meet certain legal requirements.

Realizing that goal is proving to be tough. On the plus side, the FCC has written a slew of rules under tight deadlines. In addition, local telcos and IXCs have signed hundreds of interconnection agreements, a necessary precursor to competition.

On the minus side, all the FCC's major rules are being challenged in court. No RHC is selling in-region, long-distance service, although Ameritech, SBC Communications and BellSouth tried last year (see timeline).

And operations support systems still have many bugs. "Under the current dynamic, there's a stalemate. There will be little local competition and little Bell entry into long-distance through the FCC," said Scott Cleland of the Legg Mason Precursor Group.

Cleland and other experts don't blame the FCC so much as the telecom act's conflicting goals of fostering competition while preserving universal service. In practice, the law asks phone companies to pay for too much capital-intensive expansion into new markets and new subsidies for local phone service before all the complex cost mechanisms have been worked out, Cleland explained.

"You're trying to fund these programs at the same time you're trying to stimulate investment. It's a problem," said Brian F. Fortes, senior vice president for policy at the Cellular Telecommunications Industry Association.

Despite this conflict, no one expects Congress to amend the act this year. "Politically, it's very difficult. You open a can of worms," Cleland said.

"Local competition will develop eventually-most likely through facilities construction rather than resale or bundled network elements-because it's in the long-term interest of the RHCs and IXCs to be in each other's market," Darby said.

Local phone markets will grow at least 4.5% annually for the next several years, Merrill Lynch forecasts. For the near term, analysts expect growth to occur in high-margin sectors-business services, the Internet and other data services-rather than in low-margin local phone service.

Despite that financial picture, new entrants are making their mark in local phone markets. Competitive local exchange carriers now have 1.1 million lines in service and $1 billion in local revenues, according to Merrill Lynch. CLECs and IXCs together could double their market share this year to about 5.1%, or $8.5 billion in revenues, the brokerage firm estimates.

Still, there's much to overcome in 1998. The chief obstacles are to resolve several pending lawsuits and to iron out exact requirements for RHCs' long-distance entry. "There's a lot of money on the table. There's a huge incentive to fight and to litigate," said Paul Glencher, an analyst at Washington Research Group.

Although the lawsuits were expected, "I think we'd be a lot further down the road without these constant court challenges," said Heather Gold, president of the Association for Local Telecommunications Services, which represents CLECs.

The RHCs have the most to gain this year, it seems. SBC hopes the new FCC will take "a more reasoned approach" toward RHC entry into long-distance, a company spokesman said.

COURT RULES FOR FCC The U.S. Court of Appeals in Washington has ruled that the RHCs must form separate affiliates to enter the long-distance business. Bell Atlantic had challenged the 1996 Telecommunications Act's affiliate requirement, which seeks to prevent RHCs from using local service revenues to subsidize new business ventures in long-distance, alarm monitoring, manufacturing and other in-region services.

STATE TARIFFS CHALLENGED The Telecommunications Resellers Association is asking the Michigan and Wisconsin public utility commissions to investigate new tariffs filed by Ameritech. The per-line charges, paid by long-distance carriers for intrastate calls starting Jan. 1, legally allow Ameritech to recoup income lost to federal access-charge cuts. But TRA complains that Michigan and Wisconsin OKd the charges-including an exorbitant $2.40 per line in Michigan-without cost justification or public comment.