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Long-Distance Routing Draws Short Straw

Posted on: Sunday, 10 August 2003, 06:00 CDT

NEW YORK (AP) - 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'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 may also be charged for completing calls among competing local carriers as well as between cell phones and landlines - but those charges are typically a fraction of what long-distance companies must pay for every minute their customers talk.

In that tangle of tariffs reside the incentives for the as-yet unproven deceptions in routing long-distance calls that many of the nation's biggest telephone companies have alleged against MCI.

Whether those allegations prove true or baseless, the newest drama surrounding the company formerly known as WorldCom 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 Association (NECA), which represents 1,200 independent companies that provide local phone service to small, mostly rural communities.

Federal prosecutors are now investigating complaints by AT&T, Verizon Communications and SBC Communications that MCI has been disguising and diverting its long-distance calls in a scheme to avoid normal access fees.

Notably, while it is the smaller phone companies like NECA's members whose higher fees lay at the heart of AT&T's allegations, most are not taking sides in the current dispute, Anderson said.

But, he added, "MCI has been known to be a very aggressive company. ... They're all aggressive. Some are very, very aggressive."

MCI rejects the charges by its rivals, especially AT&T, as a frivolous attempt to throw up an eleventh-hour roadblock in MCI's bid to emerge from bankruptcy with a financially and ethically clean slate only a little more than a year after its collapse in an $11 billion accounting scandal.

What's not at all frivolous - or simple - is what was allegedly flouted.

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

Fixing the "tariff" system would be no simple matter. The disparity in rates stems from government initiatives still considered worthy. Principal among those goals at the Federal Communications Commission and state regulatory agencies has been to ensure that everyone has local phone service - and to ensure that newer forms of communication like cellular and Internet service develop in a competitive market.

For decades, the government has sought to ensure universal telephone access for sparsely populated and poor communities where phone companies have a hard time making profits.

Before the breakup of the national Bell system, AT&T was required to extend its wires to such communities in return for being allowed to monopolize the telephone industry.

And where independent phone companies sprouted before the Bell system arrived, AT&T was required to compensate them for completing long-distance calls coming off the Bell network. However, those fees were set well above the actual cost of completing long-distance calls to help subsidize the hefty cost of providing local service in those communities.

Although the Bell system was broken into regional monopolies and a long-distance network to introduce competition into the telephone industry, the system of subsidizing local service has continued.

In fact, 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 percent, a rate that many states also use.

Because they are far more profitable than the independents, the regional Bells typically get paid only a quarter of what the smaller phone companies get to complete a long-distance call. And since 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, MCI and Sprint.

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, where possible, to bypass the local carriers. Often, that means using cable TV lines, wireless technology, whatever.

But it can also mean gaming the system with schemes, numerous over the years, that avoid access charges through routing strategies that disguise long-distance calls as local.

The temptation to do so has grown especially acute of late due to cutthroat competition, said Anderson at NECA.

Not everyone agrees, however, that the incentives to cheat have grown, especially with calling volumes being drained away by wireless and other types of calling.

"Today, access fees have come down so significantly, and there's other ways to make long-distance calls, so to the extent that access fees were a big factor 10 years ago, their importance has been reduced," said Richard Siderman, a telecommunications industry credit analyst at Standard & Poor's.

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