Massachusetts on the Verizon

Carrier files second Section 271 application amid CLEC complaints The trickle of applications to sell in-region, long-distance service will turn into a flood during the next year as RBOCs strive to add more services in states where they are best known.

"Verizon is leading the way," said analyst James Mendelson of The Strategis Group. Late last month, the New York-based RBOC asked the FCC to let it sell long-distance service in Massachusetts. The FCC approved the carrier's application for New York in December 1999 when it was just Bell Atlantic.

The FCC will have its hands full with a new slew of Section 271 applications, named for the part of the Telecommunications Act of 1996 that allows RBOCs to sell long-distance service in their regions if they first show regulators that they've sufficiently opened their local markets to competition.

The FCC has rejected five long-distance applications and approved just two - Verizon's in New York and SBC Communications' in Texas - since the Telecom Act became law in 1996. The pace will pick up soon, analysts and executives say.

"What's going to be different about 2001 than 2000 is there will be many more [Section 271] applications," said analyst Scott Cleland of The Precursor Group. Verizon plans to file long-distance applications for Connecticut this year and for Pennsylvania, New Jersey and four New England states early next year. By year's end, SBC expects to file applications for Kansas and Oklahoma, and BellSouth will file for Georgia. Qwest Communications anticipates filing for a former U S West state by next summer and for the other 13 states by the end of 2001.

"One of our goals is to move back into long-distance as quickly as possible," said a Qwest spokesman. The Denver-based carrier sold U S West's long-distance business as a condition of their merger last summer.

If these applications succeed, American consumers could see ramped-up competition and lower prices as RBOCs and their competitors bundle local, long-distance and other services. Verizon has captured about 1 million long-distance customers in New York, while SBC signed up more than 500,000 in Texas in the six weeks following FCC approval of its application in late June.

"As soon as it was clear the FCC would approve our application, the Big Three [long-distance carriers] all launched massive advertising campaigns for local service," said an SBC spokesman.

"To be a big player throughout the U.S., you have to offer long-distance," Mendelson added. "[Verizon] sees it as an easy sell to move that [local] customer to long-distance."

In the near term, the FCC will focus on Massachusetts, where Verizon says it has opened its local markets to more than 80 competitive local exchange carriers (CLECs) serving about 700,000 customers, most of them businesses. The CLECs include resellers, facilities-based carriers and DSL companies (see box).

Verizon officials predict that the carrier's application will win regulatory approval, especially given the rigorous, eight-month testing of its operations support systems (OSS) by independent auditor KPMG Peat Marwick. The OSS is physically separate but "functionally identical" to the generally praised system in New York that helped Verizon win Section 271 approval there, according to the company's FCC application.

"These test results are confirmed by actual market experience," the application reads. The carrier says it handles 1400 local rivals' orders daily.

Some CLECs operating in Massachusetts say that local markets still aren't competitive, especially for residential customers. Verizon controls 4.4 million, or 86%, of the state's approximately 5.1 million access lines, according to the Massachusetts Department of Telecommunications and Energy. In addition, some CLECs say that Verizon doesn't meet all the requirements of the Telecom Act's 14-point checklist, which is designed to ensure that CLECs are treated fairly when they interconnect with local incumbents' networks.

"Their performance is horrible," said Jason Oxman, senior counsel of Covad Communications, a California DSL company that leases unbundled local loops from Verizon. In July, Verizon's on-time provisioning rate for DSL loops was 51%, he said. Also, KPMG tested only 45 DSL-capable loops, "hardly sufficient to see if [Verizon] can handle commercial volumes," Oxman said. "We don't think they're ready for prime time with this application."

Verizon leased 56,000 local loops through July, including more than 13,000 DSL loops, according to its application to the FCC. In June and July, its on-time performance for delivering DSL loops met or exceeded 95% of the criteria in a state performance plan, the company claims.

Another issue, CLECs say, is that unbundled network elements cost too much. "Pricing is a major roadblock" to entering the Massachusetts market, said a WorldCom spokeswoman. However, Verizon says that its discount rates for CLECs are among the highest in the nation and that state regulators properly followed FCC guidelines in approving the rates.

It's up to the FCC to sort through the conflicting claims and reports. The agency has until Dec. 20 to approve or deny Verizon's Massachusetts bid. The U.S. Department of Justice and Massachusetts regulators will weigh in with their recommendations by the end of October.