Unfair Advantage For Ameritech

November 22, 2002
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A 235 percent increase in the rate SBC Ameritech charges competitors to lease space on its telecommunication network would essentially crush competition in Michigan for local telephone services, competitors say.

SBC plans to soon re-file a request with state regulators to significantly raise its wholesale lease rate, calling the existing rate an “unreasonable financial burden” that subsidizes competitors.

The Michigan Public Service Commission — citing procedural issues and a need for more data — in August rejected an earlier request to raise the wholesale fee from $14.44 to $34 per phone line, although regulators left the primary issue of the proposal’s merit undecided.

Firms that have just recently entered the local telephone market contend SBC Ameritech’s wholesale fees are already too high. If the wholesale rate increase is approved and implemented, they contend it would force them out of the local telephone business and bring emerging competition to a halt, competitors say.

“The intended affect would be to crush competition in Michigan,” said Jerry Finerock, vice president of regulatory affairs and the founder of LDMI Telecommunications Inc. in Hamtramck.

The company has 75,000 dedicated phone lines it leases from Ameritech and about 5,000 local telephone customers statewide. LDMI and others would have to abandon the local telephone business if state regulators approve the wholesale rate increase, Finerock said.

“Our ability to compete and provide local telephone service in Michigan would be destroyed,” said Finerock, who’s also the president of a coalition of local phone service providers, the Competitive Exchange Carriers Association of Michigan.

Under terms of the federal Telecommunications Act of 1996, phone companies with a monopoly position in a state are required to allow competitors access to their networks. That has given birth to new competitors who lease space on the network and sell local phone service to retail customers.

In arguing that SBC Ameritech’s claims are unfounded, competitors point to wholesale rates in other states — $12.69 per line in Illinois, where SBC Ameritech is seeking a similar increase in its wholesale rate, $12.42 in Indiana and $13.84 in Ohio. Regulators in New Jersey and California also recently ordered their dominant phone companies to reduce wholesale rates.

“The trend in the industry is for those rates to come down, not more than doubling,” said Mike Pruyn, public relations director for AT&T in a five-state region that includes Michigan. “Basically, this is an attempt to squash competition just as it starts to get going in Michigan.”

AT&T entered the residential local telephone market in Michigan in February. By mid-year it surpassed 100,000 local phone customers.

What competitors claim is an attempt to drive them out of business is merely an end to what SBC Ameritech considers a “competition subsidy.”

SBC Ameritech in August claimed it loses $20 per phone line it leases to local service competitors and that the current fee, calculated under a federal formula and established by state regulators, is now 58 percent below what it costs to provide the service.

Competing local exchange carriers, known as CLECs, “contribute only a fraction of the cost to provide the very services they use to compete against SBC,” the company stated in its Aug. 30 filing to the MPSC.

SBC Ameritech Michigan President Gail Torreano said at the time of the first filing that today’s wholesale rates “are nothing more than a massive subsidy from us to our competitors.”

That view has not changed, SBC Ameritech spokesperson Denise Koenig said. The issue comes down to paying to maintain the telecommunications network, according to Koenig.

“The current price drains away the dollars needed to maintain and improve the telecommunications network. If we can’t recover our costs, ultimately it suffers,” she said. “Obviously we welcome competition. But what this has to do with is creating the right kind of sustainable competition in the long run for Michigan.”

SBC Ameritech contended in the August MPSC filing that the current wholesale rate in an impediment to local phone competition because it alleviates the need for competing carriers to invest in their own infrastructure and technical expertise. The present rate is “prompting a proliferation of technically unsophisticated, under-funded, non-facilities-based competitors that rely solely on SBC’s network,” SBC Ameritech’s earlier filing to the Public Service Commission stated.

“While there are substantially more carriers in the Michigan market now than even one year ago, the majority of these new market entrants are not investing in Michigan’s infrastructure,” the filing stated.

AT&T’s Pruyn responds that competition is just emerging and it’s unreasonable to expect competitors seeking to penetrate a monopolized market to immediately begin building its own infrastructure.

Leasing space on SBC Ameritech’s network is a prelude to AT&T eventually building its own system — phone lines and switching stations — “where it makes economic sense,” Pruyn said.

“This is initially our way to get into the market. Ultimately, where it makes sense, we want our own facilities so we’re not dependent on our competitor,” Pruyn said. “It would be totally impossible to replicate what Ameritech spent a hundred years-plus building. It takes time, needless to say.”

The MPSC, in dismissing the previous rate hike request on Sept. 16, recognized that SBC Ameritech’s costs “may have changed” since the wholesale rates were last examined in 1999 and directed the company to document cost changes in a new filing. Commissioners also decided to open their own review of SBC Ameritech’s charges.

“The Commission is very aware of the importance of this docket and the potential consequence to both competitors and Ameritech Michigan,” the MPSC stated in its Sept. 16 ruling.

SBC Ameritech dominates the local telephone market in Michigan, with more than 5 million of the 7 million phone lines, a 72.2 percent market share.

The 100-plus CLECs licensed in Michigan held 12 percent of the phone lines as of April 2002, up from a 4 percent market share in 1999, according to an MPSC report published last spring on the status of telecommunications competition in Michigan.

Despite that “positive trend,” the MPSC report concluded, “a truly competitive marketplace remains a goal, not a reality.”

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