Millions At Stake As Telecom Giants Tangle Over Wholesale Rates — Sunday, February 1, 2004


There's a battle brewing in New Jersey's local phone market.

And this one could get ugly.

Two of the state's biggest employers - Verizon and AT&T - are facing off over wholesale phone rates in an arcane but high-stakes arena in which companies stand to gain or lose millions based on how regulations are crafted.

The umpire of this fight, New Jersey's state regulatory board, will open hearings this month to decide exactly what wholesale rates Verizon can charge rivals such as AT&T to lease parts of its phone network.

This marks the third time that state regulators have tried to figure out what rates to set.

How will this dogfight affect phone bills?

It depends on which side is talking.

Verizon, which wants higher rates, argues that keeping the rates at current levels will mean job losses and a lack of investment in the state's phone system.

AT&T says raising the current rates could make it uneconomical to sell local service in New Jersey, leading to fewer companies, less competition, and higher phone bills for residents. Bedminster-based AT&T hints that it may pull out of the New Jersey local market if state regulators don't leave wholesale phone rates alone.

"They are literally in a fight to the death," said Tom Nolle, president of CIMI Corp., a Voorhees-based telecommunications consulting firm.

About half a million New Jerseyans currently buy their phone service from a local phone company other than Verizon, the state's dominant provider. Verizon serves about 6.2 million local lines in the state.

The fight stems from a long and messy attempt by state and federal regulators to dismantle the Baby Bells' monopoly on local phone service and create a competitive market.

Under a 1996 federal law, Verizon and the nation's other Baby Bells were required to lease their local networks to rival companies in exchange for being allowed into the lucrative long-distance market.

It took until the summer of 2002 for the law to have any effect on New Jersey consumers.

After legal wrangling and court battles, the state Board of Public Utilities finally settled on the wholesale rates Verizon could charge its rivals. The rival companies, such as AT&T and MCI, began to enter the local market, enjoying the lowest wholesale rates in the nation.

Verizon, never happy with the low rates, argued that if rivals can get a cheap wholesale rate by leasing Verizon's network, then those companies would have no incentive to build their own networks and eventually create true competition where consumers could choose among companies that operate their own network.

AT&T and other long-distance providers countered that Verizon was simply trying whatever it could to hold on to its monopoly.

Verizon complained about the methodology used to arrive at the rates and said the monthly cost of operating and maintaining phone service on a single local line is substantially higher than the $12 wholesale rate it gets from rivals. Verizon won't reveal its actual costs but some analysts place that figure closer to $30.

The wholesale rates have been challenged in both federal and state courts, and the companies involved have spent millions in legal and lobbying fees.

Shortly after the wholesale rates were set, Verizon challenged them in New Jersey Superior Court.

In December, in a deal that raised some eyebrows among BPU observers, the board agreed to take another look at how it calculated wholesale rates in exchange for Verizon dropping its lawsuit. Around the same time, the board and Verizon reached agreement on an outstanding fine the BPU levied against Verizon for failing to properly file reports on the phone company's performance providing wholesale service to rivals.

The agreement called for Verizon to pay the BPU a $7 million fine. The cash goes to the New Jersey Treasury.

"We don't know if we're going to be raising any rates," said BPU President Jeanne Fox, who was appointed to the five-member board by Governor McGreevey. "We want to retain competition in the state of New Jersey; that's a big priority."

But, she added, "if they have to be raised based on the facts, then they have to be raised."

Specifically, the board will consider two of the elements used in a complicated calculation to estimate how much it costs Verizon to provide phone lines to rivals: cost of capital and depreciation.

In a sweeping review of the 1996 Telecommunications Act issued last year, the Federal Communications Commission issued new guidelines on how to calculate these items when determining the wholesale rates.

The BPU will sift through massive documents and listen to testimony submitted by all sides to try to reach a conclusion and either raise, lower, or maintain current rates.

Not surprisingly, there's little agreement on how the new FCC guidelines should be applied.

"If you raise wholesale prices then the next logical step is that retail rates would have to be increased," said Michael Schweder, president of AT&T New Jersey.

Schweder said he wouldn't commit to anything, but added, "What's at stake is whether one of the largest employers in the state of New Jersey will be allowed to continue to function in the local residential market."

Verizon wants the rates higher and Verizon spokesman Jack Hoey called AT&T's comment a "hollow threat."

The company says the issue is about wholesale rates and any change won't affect retail rates paid by local customers.

"It will have no effect on pricing," assured Bruce Cohen, Verizon New Jersey's general counsel.

Verizon also points to 22 other states, with higher wholesale rates than New Jersey's, where AT&T has entered the local market.

AT&T notes that it recently stopped selling two of its calling plans in Indiana as a result of a recent decision by regulators there to raise wholesale rates by about 30 percent.

Verizon's Cohen hopes New Jersey's BPU decides on an increase. "I believe that if the board properly applies the FCC guidance, it's likely that wholesale rates may be increased to a more realistic level," he said.

The state's top consumer watchdog disagrees.

"Our position is that the rates should be lowered in order to bring in competition, more choice, and encourage technological innovation," said Seema Singh, the Ratepayer Advocate.

"Raising the rates would hamper the development of competition," Singh added. "It would eliminate choice for consumers."

One thing is certain: New technologies may come along that make these battles obsolete, but it's safe to say most people will be placing calls over the traditional copper phone network owned by Verizon and other Bells for years. And AT&T and rivals that don't own those local networks will be fighting to keep rates low and regulations favorable so they can use them to reach customers.

The companies all know this, or they wouldn't be fighting so ferociously over the dollars they can make providing service over the copper network and lobbying to win the game.

Consider the recent comments by Mike Morrissey, AT&T's vice president of law and government affairs:

"We intend to remind people in all parts of government in New Jersey exactly how many employees we have in New Jersey and how much investment we make in New Jersey."

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