The Little Guys Of Long Distance Are Mighty Nervous

When U. S. District Judge Harold H. Greene issued the decree that broke up AT&T in 1984, he wanted to make sure that it couldn't crush its fledgling long-distance rivals. A critical safeguard was a requirement that local phone companies charge AT&T, MCI Communications, U. S. Sprint Communications, and other long-distance companies the same amount to connect to local phone networks.

But the rules of the game will begin to change dramatically on Sept. 1, when the equal-charge provision expires. The Federal Communications Commission, eager to promote efficiency in the phone system, is expected to move toward tying connection charges more closely to the actual cost of providing the hookup.

'LIFE OR DEATH.' The switch is likely to favor American Telephone & Telegraph Co.--and have a far-reaching impact on the $54 billion long-distance industry. Why? Payments for connections to local networks on both ends of the call--known as access charges--account for up to 50% of the cost of a long-distance call. And because AT&T handles the most volume by far, it could get the best rates from local phone companies (table). AT&T estimates that it could save $400 million from cost-based fees and would pass along an unspecified portion to its customers. "This is a life-or-death issue for many carriers," says James M. Smith, president of Competitive Telecommunications Assn. (CompTel) in Washington, D. C., a trade group that represents the smallest long-distance carriers.

Because of lower calling volume, small carriers would likely see the biggest jump in costs. A study by Orlando-based market researcher Gillan Associates, commissioned by CompTel, concludes that it would take a competitor with at least 25% of the market--the equivalent of MCI and Sprint combined--to rival AT&T on pricing if cost-based fees are allowed.

AT&T doesn't buy that. Joel E. Lubin, the company's director of regulatory-policy analysis, says some rivals exaggerate the harm they would suffer. And while MCI and Sprint agree that they would be squeezed, they don't foresee a forced merger. "I would find that highly unlikely--very, very unlikely," says Donald F. Evans, MCI's director of federal regulatory affairs.

AT&T's dominance in long distance leaves the FCC in an awkward position. On one hand, the commission has long held that for maximum efficiency, the price of telecommunications services should be based on costs. Indeed, the FCC once had a rule that required access charges to be based on cost but waived it so it wouldn't conflict with Judge Greene's order. Yet the commission also wants to foster competition, and it recognizes that moving too quickly to a cost-based system could bankrupt some companies--possibly leading to less competition and higher prices. The FCC is "between a rock and a hard place," says Joel Gross, an analyst at Donaldson, Lufkin & Jenrette Inc.

Beyond the effect on long distance, the commission will also have to explore how a rule change would affect budding competition in the local phone business. If the FCC gives local companies more flexibility in access charges, they might use it to discriminate against new competitors in the local transmission business, such as Metropolitan Fiber Systems Inc. in Oak Brook Terrace, Ill., and Teleport Communications Group in Staten Island, N. Y. So analysts are speculating that any pricing flexibility granted to local phone companies will probably be coupled with freer rein for the likes of MFS and Teleport.

BIG PICTURE. Business customers, who stand to reap big savings from heightened rivalry in the local and long-distance phone markets, want the commission to address all issues of pricing and competition at once. "Rather than make a rifle-shot change, we think the agency should make a comprehensive study," says Brian R. Moir, general counsel for the International Communications Assn., which represents large users of telecommunications services.

With so much at stake, the betting is that the commission will move slowly--perhaps phasing in changes over three to five years. Richard Firestone, chief of the FCC's Common Carrier Bureau, won't reveal any plans. "You can't just give a seat-of-the-pants kind of response," he says. Fair enough: An overnight change in pricing rules might help consumers quickly, but a prudent transition probably better serves their long-term interests.

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