Bell Telephone Companies’ Applications to Enter Long-Distance Market

by Andy Oram
May 28, 1999

Bell telephone companies, largely to serve the growing market for data transmission and Internet access, are trying to enter the long-distance telephone market denied to them in the order that broke up AT&T in the 1980’s. One FCC commissioner has called long-distance the “carrot” that Congress offered the Bells in the 1996 Telecommunications Act, to get them to open local telephone service to competition.

To date, five applications have been submitted to the FCC to let the Bells enter long-distance (three from BellSouth) and all have been denied. This page summarizes the FCC order concerning each application and put it in the context of some regulatory and competitive history. My accompanying article explains why the political implications of these issues and how they are relevant to Internet users.

A decision to let a Bell into long-distance is irreversible and would represent a historic turning-point for telephone (and Internet) service. Thus, the FCC wants to leave the Bells no loopholes that would let them throttle local competition. A continued monopoly in local telephone service would affect much more than that market, because a Bell could overcharge that captive market to unfairly subsidize other activities and thereby undercut competitors wherever it goes.

In the Telecommunications Act of 1996, Congress defined a number of requirements that the Bells have to satisfy before entering long-distance.

The legal burden is on Bell companies to prove that they have fostered competition. In many cases, the FCC ruled that it did not have enough information in the Bell applications to decide whether they had met requirements, and in all these cases it ruled against the Bells. Ameritech spokesperson Dave Pacholczyk told me that Bells are at a handicap in terms of information. “Competitors are under no requirement to say what they’ve done; how much competition they present. Opponents of the Bells—such as AT&T—claim the Bells are holding back competition, but that’s not true; they’ve opened their markets. They are supportive of the Telecom Act. We introduced a plan in 1993 to open local markets.”

Pacholczyk presented the whole process as vague. “No one has met the FCC’s requirements yet. They have yet to articulate in an order what takes to meet the requirements for competition, or what satisfies the requirement that the move be in the public interest. While Ameritech has had meetings with the FCC, there’s no written blueprint.” But as has been mentioned, the FCC tried to lay some rules in the order that the Bells sued to overturn. In addition to the vagueness of the requirements, he criticized their size. “The fourteen points in the law are fine, but they’ve grown at the FCC to hundreds of data points.”

Selim Bingol of SBC was more optimistic—considering that SBC has a shot at success—but also criticizes the FCC. “One of the frustrations with the long-distance entry process is that it’s a moving target. Each application has further defined what the FCC is looking for. But once somebody gets in, it will open the floodgates and we’ll see a lot of competition.” Neither spokesperson would take a position on the McCain bill. But Bingol says, “There’s a lot of frustration that competition hasn’t developed as quickly as everybody hoped. The blame lies for the most part with competitors—particularly long-distance companies—that have dabbled at the fringes but haven’t pursued the local market with the vigor that they could have.”

Summaries of the five FCC orders follow.

SBC in Oklahoma

( FCC Order as an HTML file)

More than a year after the passage of the Telecom Act, the first application came into the FCC for entry into long distance. They disposed of the application in a brief order stating that it didn’t even meet the first criterion: demonstrating that there was another carrier offering residential service.

In its eagerness to prove that the Oklahoma market was competitive, SBC displayed an agreement with Brooks Fiber to let them offer residential phone service. One small problem: Brooks Fiber didn’t have any customers. In fact, it wasn’t even advertising the service or accepting orders. All it had done was connect four employees in a trial. The FCC couldn’t consider this competition. The FCC also found that several qualifying carriers were trying to get into the local market, so they rejected the possibility that competitors weren’t trying and sent SBC back to the drawing board. One week later, the SBC launched one of the lawsuits against the Telecommunications Act.

Ameritech in Michigan

( FCC Order as a text file)

Unlike SBC, Ameritech successfully demonstrated in its first application that competition existed in local residential markets. The competitors served only a few small areas, but the FCC accepted this toehold—a ruling that makes things easier for the Bells.

In another important decision for the Bells, the FCC interpreted the law to indicate that competition existed if competitors were buying lines and equipment from the Bells. Some competitors argued that competition wouldn’t really exist until competitors strung their own wires to the customers and installed all the portions of the networks they were using, an interpretation that have introduced an enormous barrier to the Bells—but the FCC turned it down.

But Ameritech did not win the prize, essentially because of weaknesses in OSS. The FCC had very little evidence to rule either way, but indicated that the burden of proof was on Ameritech to show these services were adequate. Thus, the FCC ruling is of interest mostly for the light they start to shed on their interpretation of the law. For instance, they said that testing is useful but not conclusive, because the adequacy of the services could be determined only under real-life conditions.

Certainly, there were signs of inadequacy in OSS. In an observation to be repeated with subsequent applications, the FCC noted that the electronic data interchange system set up by Ameritech tended to break down, so that 39% of competitors’ orders were processed manually. This naturally introduced delays and errors that direct Bell customers rarely experienced. After emergency calls to 911, agencies were routed to the wrong place more often for competitors’ customers than for Ameritech.

Furthermore, the FCC ruled with competitors against Ameritech in some disputes over whether Ameritech should offer access to all features of its lines and switches. Their policy made it impossible for competitors to do certain types of billing and routing. And in some circumstances Ameritech forced competitors to buy dedicated lines where the FCC believed it should allow them to share lines.

Finally, the FCC thought there was too close a tie between the Ameritech local phone service company and its long-distance affiliate. Ameritech failed on two counts: it had members on the affiliate’s board of directors, and it failed to report some early transactions in which equipment was exchanged.

It’s interesting to see that in this order the FCC deftly took back one of the powers that a court had taken away in the lawsuit by Bells and states. Despite the court ruling on determining costs, the FCC claimed that it had to make rules regarding the costs of equipment that Bells sell to competitors; otherwise it would have no standard to use in judging whether they were discriminating. Whether or not this is a persuasive argument, a higher court eventually ruled in favor of the FCC on this issue.

BellSouth in South Carolina

( FCC Order as a text file)

OSS became the bogeyman of the Bells again in this order, which contains an extensive justification worth reading about the importance of these services. One bit of technology that the FCC focused on —and that might particularly interest readers of this article—is a CGI application that BellSouth set up to handle orders. Output from the script, naturally, was sent back to the competing phone carrier as HTML, and BellSouth expected the competitor to write a program that could parse this HTML and process the data automatically. The FCC pointed out that the HTML was too hard to parse and that its structure kept changing as BellSouth upgraded their script. Perhaps an XML application will aid the Bells in getting the long-distance prize!

But other weaknesses in addition to OSS brought this application down. Citing the Justice Department, the FCC found that BellSouth’s offer of checklist items was just a “paper promise.” The FCC requires legally binding terms and conditions as proof that the Bell company will follow through and be non-discriminatory.

Once again, the FCC found that there was no real competition in long-distance. At least one would-be competitor (AT&T) was stymied in trying to rent network elements by a prior agreement that entrenched high rates; the FCC felt that BellSouth should have renegotiated the agreement. In some cases, according to the Telecom Act, it’s not enough to offer a wholesale discount; the tariff must be “cost-based,” although it can “include a reasonable profit.”

BellSouth in Louisiana, 1st application

( FCC Order as a PDF file)

This application demonstrated the same problems as the previous one in South Carolina, and was dismissed in a fairly short order. The FCC found that BellSouth had not remedied the problems in OSS, and failed to offer services at a discount when ordered in bulk by competitors.

BellSouth in Louisiana, 2nd application

( FCC Order as a PDF file)

In their second application for Louisiana, BellSouth demonstrated clear progress and received a pat on the head for their efforts. Six out of the 14 points were satisfied, such as 911 services and access to telephone poles. But the remaining problems were familiar ones.

BellSouth claimed that one of their competitors had residential customers—but the competitor said it didn’t. And Bellsouth suggested that PCS (a form of wireless telephone) represented competition. The FCC disposed of that claim with the facts we all know: that customers use PCS to supplement rather than replace wire lines, and that PCS is too expensive to be a general solution.

OSS was the biggest problem area. Too many orders were being handled manually (whereas BellSouth can handle most of its own customers’ orders electronically) and delays were being introduced into installations. Repairs ordered by competitors took nearly 40% longer than BellSouth repairs.

Once again, the company’s terms were too vague to guarantee that they company would be non-discriminatory. And again, while BellSouth claimed to offer interconnection, competitors reported unusually high occurrences of blockage (where a customer gets a “fast busy” signal and can’t complete a call). Furthermore, there was not enough separation between the parent company and the affiliate set up to offer long-distance service.

This FCC order is by far the longest of the five (371 paragraph covering over 200 pages when printed) and demonstrates that BellSouth has come far enough to deserve scrutiny over details. The future will show whether the Bells can build on this progress to attain the Grail of long-distance service.

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Andy Oram is an editor at O’Reilly Media. This article represents his views only. It was originally published in the online magazine Web Review.