Revamping services: Pennsylvania PUC decision separates operations

Structural separation - the splitting of a telco's wholesale and retail operations - may not be as draconian as Bell Atlantic-Pennsylvania fears or as helpful as competitors hope.

The Pennsylvania Public Utility Commission, in a far-reaching decision on local telephone competition, last month became the first state agency to order an RBOC to form two separate affiliates to serve retail and wholesale customers.

"It's not unprecedented, but it hasn't happened to a Bell company," said Terry Monroe, vice president of state affairs for CompTel.

Predictably, Bell Atlantic lambasted the PUC decision as a costly burden, while AT&T called it a bold move to force the RBOC to treat rivals as it treats itself for network access.

"It's a very significant development. The Justice Department and the FCC have long contemplated a policy to separate retail and wholesale operations. They were not confident of their legal authority to do it," said Scott Cleland, an analyst with Legg Mason Precursor Group.

Whether the Pennsylvania decision, announced in an Aug. 26 motion, will survive a court challenge is unclear. Bell Atlantic likely will appeal the decision after the PUC issues a formal order in late September.

"Based on what we've seen in the motion, we're going to need to exercise our options. Litigation is one of those," said Ron Weigel, Bell Atlantic's director of government relations in Pennsylvania.

If structural separation stands, Bell Atlantic-Pennsylvania must form separate affiliates to sell services to retail and wholesale customers. "The idea is to guarantee they've created a level playing field and followed all the procedures to create competition," said a spokesman for the PUC.

"What the commission found was [that] the only way there will be fairness and equity in provisioning is if Bell Atlantic has to get loops [and other network elements] from the same people as other carriers do," said Jim Ginty, president of AT&T-Pennsylvania. "The standard in the [Telecom] Act is there should be no discrimination."

But separation would force Bell Atlantic-Pennsylvania to duplicate administrative functions and incur unnecessary costs, Weigel said. The carrier has a "functionally separate" division to serve competitive local exchange carriers (CLECs), but otherwise is an "integrated operation," he added.

Bell Atlantic's gripes may be overblown, said Daniel Ernst, an analyst at Ferris Baker Watts. "As long as the subsidiary can sell all services...then Bell Atlantic is not at a disadvantage. If the subsidiary can't do it, then it's not in a good, long-term competitive position," he said.

Details about how Bell Atlantic will separate are up in the air, but the company must submit the plan to the PUC, which then will hold hearings.

"This is not divestiture," requiring two separate public companies, Ginty said.

The big question is whether CLECs in Pennsylvania would get better treatment from a Bell subsidiary than they get now. "It shouldn't affect the competitiveness of the CLECs anyhow because they're good at what they do," Ernst said. The state has more than 100 CLECs licensed to compete against Bell Atlantic, which controls 80% of the state's local exchange service, GTE, Sprint and more than 30 small Independents. AT&T says it plans to target residential customers in Bell Atlantic territory this year; so far, the company has served only businesses in the Philadelphia and Pittsburgh areas.

Structural separation is not a new regulatory idea. Connecticut regulators in 1997 approved Southern New England Telecommunications' request to split - but only if retail customers could choose new carriers by ballot, an event that may be held next year, said a spokeswoman for the Connecticut Department of Public Utility Control. In addition, New York incumbent Rochester Telephone, now Frontier Corp., voluntarily separated in the mid-1990s, Monroe said.

On the federal level, SBC Communications and Ameritech have agreed to sell high-speed data services through a separate affiliate as a condition of their merger.

The FCC also is considering making RBOCs sell high-speed data services through separate subsidiaries, but so far it has taken no action.

The Pennsylvania PUC Decision

- Orders Bell Atlantic to separate its retail and wholesale operations

- Lowers access charges by $78 million during two years in Bell Atlantic territory; restructures access charges elsewhere

- Creates $30 million universal service fund

- Reduces the cost of leasing by 16.5% for Bell Atlantic's unbundled network elements

- Caps Bell Atlantic rates for basic local service until Jan. 1, 2003; caps rural telcos' rates at $16 per month for the same service until the same date

- Sets road map for Bell Atlantic to gain long-distance approval