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A Ceasefire in the Phone Wars?

By Catherine Yang For years, the most contentious issue in telecom has been how much the long-distance carriers should pay local phone companies for helping connect their calls. Such access charges add up to $11 billion a year, making it one of the largest expenses for carriers like AT&T (T), which have filed endless complaints alleging they are being overcharged.

Now, peace may be at hand. BW Online has learned that the local and long-distance companies have agreed in principle to a sweeping overhaul. According to two execs close to the talks, the most radical proposal calls for long-distance companies to stop paying access fees. Instead, local phone operators, Internet phone companies, and wireless carriers would pass them along to consumers by boosting charges that already appear on customers' monthly bills.

While the tentative agreement still faces opposition from several rural companies and could fall apart, the two execs say that's unlikely. A working group of telecom companies plans to offer the proposal to the Federal Communications Commission as early as April, they say. "I've talked with the people involved, and this looks pretty promising," says Scott Cleland, chief executive of Precursor Group, an independent researcher. And even though consumer fees might rise, competitive pressures between traditional phone, cell, and Internet calling companies could limit the increases.

STREAMLINED SYSTEM. What brought the warring local and long-distance companies together is a growing competition, now looming even larger because of the rise in Internet phone calling. More and more consumers are using cell phones, and now VOIP (voice over Internet protocol) technology, to bypass local networks. That means local companies are collecting less money in access fees from long-distance companies, which charge consumers from half a cent to six cents a minute to cover what they must pay to local phone companies.

The fees, often above cost, help fund a cherished national system of subsidies, called universal service, which makes phone rates affordable for everyone, including rural Americans. Consumers also pay into a separate $6 billion-a-year fund that supports this system.

The new peace agreement would streamline the system. Long-distance carriers would stop collecting money from consumers. Instead, local, wireless, and Net companies would charge their customers directly to cover the cost of operating their networks, including the expenses of carrying long-distance traffic. That's what Internet service providers already do. Under the new plan, the phone companies could recover their costs for carrying long distance by boosting a monthly customer-line charge that local operators already levy to cover network expenses.

BIGGER BILLS? The scheme would eliminate the inter-industry haggling and gamesmanship that now dogs the industry. What's more, in today's increasingly competitive environment of cell, Internet, and traditional phone service, it would reward efficient operators and create "an incentive to serve the end user -- because that's the only place you can get money," says Robert Atkinson, research director for the Columbia Institute for Tele-Information at Columbia University.

How much customer charges would increase depends on carrier operating costs. Today, that charge is capped at $6.50. Under the new plan, an efficient Bell in an urban market might be able to get away with a $9 monthly charge. But a higher-cost rural local carrier might need as much as $20. If that's too much to ask from customers, the industry could decide to cap the charge at $9 and let companies tap the universal service fund for the rest. Under such caps, the new system would give phone companies even more incentive to adopt lower-cost technologies.

The proposal is sure to be controversial. Higher-fixed charges mean consumers who don't make many calls -- often the poor and elderly -- would end up paying more. Mark Cooper, research director of the Consumer Federation of America, complains that no customers were invited to participate in the negotiations. "Consumers don't want fixed-line charges on the bottom of their bill," he says. And if small rural telephone companies balk, farm-state congressmen are likely to question the agreement.

TANGLED WIRES. Yet regulators and telecom companies can't afford to let the issue fester any longer. Total long-distance revenues are declining at a double-digit rate. This means the access charges long-distance carriers collect on behalf of the local companies are declining at roughly the same pace. As a result, local phone companies have less money for their fixed maintenance costs and universal service.

The problem is worsening since Internet phone upstarts, such as Vonage Holdings, don't pay the same access charges even though their calls often travel over the same local network that AT&T uses for customers with traditional landline phones. The wireless companies are exempt too. "Nearly everyone agrees the current system is broken," FCC Chairman Michael Powell said at a Dec. 1 hearing on Internet calling.

At least there's one thing the long-distance companies and the Bells agree on. The current rules "don't make any sense," says AT&T CEO David Dorman.

PEACE AT LAST? Consumers still might benefit in the new system. Fixed fees on their monthly bills would rise. But communications companies must decide how high the fees should be. Consumers could pressure them to keep the fees as low as possible. If consumers believe that, say, Verizon Communications (VZ) is charging too high a connection fee for local telephone service, they could turn to AT&T, MCI, or another rival for a better deal.

And telecom companies might enjoy peace for a change. They have spent untold millions fighting over access charges before regulators and judges. A resolution would allow those companies to focus on competing in the marketplace, rather than the courtroom. Yang writes about telecom regulatory issues for BusinessWeek in the Washington bureau

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