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Long-Distance Tariffs Under New Scrutiny

Accusations against WorldCom have some observers asking whether the system governing fees is broken.

August 11, 2003|From Associated Press

When it comes to connecting telephone calls, not all calls are equal: Long distance drew the short straw.

Under the Byzantine regulatory system that has evolved since the breakup of AT&T Corp.'s national monopoly, long-distance companies pay a per-minute fee to the local carriers that own the wires on either end of a long-distance call.

A fee also may be charged for completing calls among competing local carriers as well as between cell phones and land lines -- but those charges typically are a fraction of what long-distance companies must pay for every minute their customers talk.

Welcome to the most recent woes of WorldCom Inc.

For in that tangle of tariffs resides the incentives for the as-yet-unproved deceptions in routing long-distance calls that many of the nation's biggest telephone companies have alleged against WorldCom.

Whether those allegations eventually prove true, the newest drama surrounding the company, which is in the process of changing its name to MCI, raises questions about whether the 20-year-old regulatory system governing access fees is broken.

"If there were normalcy in the rates, then whether it's wireless, interstate or intrastate, if it comes on my network and there's an equal charge for those calls, you wouldn't have incentives for aggressive behavior -- or worse," said Robert T. Anderson, president of the National Exchange Carrier Assn., which represents 1,200 independent companies that provide local phone service to small, mostly rural communities.

Robert Quinn, an AT&T vice president for government affairs in Washington, said that although the system fundamentally makes sense, more recent policy goals of the Federal Communications Commission have skewed it.

Fixing the tariff system would be no simple matter. The disparity in rates stems from government initiatives still considered worthy.

High among those goals has been to ensure universal telephone access, especially for sparsely populated and poor communities by subsidizing the cost of local service in those areas. Another key goal is to allow newer forms of communication such as cellular and Internet service to develop in a competitive market.

Before the breakup of the national Bell system, AT&T was required to compensate independent telephone companies for completing long-distance calls.

However, those fees were set well above the actual cost of completing long-distance calls to offset the hefty cost of providing local service in those communities.

While the FCC has repeatedly flexed its regulatory muscle to promote competition in long- distance, wireless and Internet service, it has allowed the market for connecting a long- distance call to a local network to resemble a Soviet-style planned economy.

Here's how that works: Local companies forecast their operating costs for the coming year, and the FCC and state governments mandate their profit margin. For interstate calls, the allowed rate of profit stands at 11.25%, a rate many states also use.

Because they are far more profitable than the independents, the post-AT&T monopoly regional Bells typically get paid only a quarter of what the smaller phone companies get to complete a long-distance call.

And because they are now allowed to sell their own long-distance service in a growing number of states, the built-in profit on access fees gives the Bells a cost advantage in competing with the likes of AT&T and WorldCom.

Factoring in the growing loss of business to wireless phones and various forms of Internet-based communication, it's easy to see why long-distance companies strive to bypass the local carriers.

But it also can mean "gaming" the system with schemes to avoid access charges through routing strategies that disguise long-distance calls as local. Anderson of the National Exchange Carrier Assn. said the temptation to do so has grown especially acute because of cutthroat competition.

Not everyone agrees, however, that the incentives to cheat have grown.

"Today, access fees have come down so significantly, and there's other ways to make long-distance calls," said Richard Siderman, a telecommunications industry credit analyst at Standard & Poor's.

"So to the extent that access fees were a big factor 10 years ago," he said, "their importance has been reduced."

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