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Ground rules are being drawn for phone market

THE BALTIMORE SUN

If the devil is in the details, the Public Service Commission case known as MFS-II comes to Maryland straight from the regulatory inferno.

After months of high-priced lawyering and days of tedious testimony, the record is finally closed in the little-known but crucial proceeding. Sometime late this fall, the PSC will render its decision in the case, which could determine whether competition thrives or withers in the state's telephone business.

At stake is how much businesses -- and, down the line, possibly consumers -- will end up paying for telephone services at a time when the proliferating use of devices such as fax machines, computers and cellular phones is escalating demand.

MFS-II is the second phase of a case in which MFS Communications Co. is seeking the right to challenge Bell Atlantic Corp.'s monopoly on the local telephone business.

In the first round, the upstart MFS rode into Maryland from Omaha, Neb., and asked the PSC to rule that it could compete with Bell Atlantic for a piece of the action in the local telephone business. It even asked for "co-carrier" status, giving it legal equality with the Philadelphia-based regional Bell company.

Bell Atlantic objected, but in April 1994 the PSC ruled in favor of the challenger.

MFS-I was an historic ruling that propelled Maryland into the front ranks of the states that are moving toward more open telephone markets. Its effect was to help spark a boom in network-building in the state, making cable-laying crews a frequent sight on Maryland highways.

That was the easy part.

The second phase deals with the actual rules and rates for interconnections between Bell Atlantic's vast network and those its competitors. It's an enormously complex case that has unleashed a flood of excruciatingly technical testimony. Mary Vaden, Bell Atlantic's director of regulatory affairs, compares it with the breakup of the Bell system -- "only more so."

MFS and Bell Atlantic are not the only companies with a stake in the case. AT&T;, MCI and the Sprint-allied Teleport Communications Group, all potential competitors in the local exchange market, are vitally interested in the outcome. And while this case focuses on MFS' entry into the business market, the precedents it sets could affect the future of competition in the residential market as well.

The decision, which is expected in late fall, could have impact far beyond Maryland. The PSC here is one of the first in the nation to tackle such issues, and its decision could influence public utility regulators in other states.

The challenge for the PSC will be to turn the existing monopoly into the proverbial level playing field -- taking into account the relative market strength of the players.

"You don't necessarily treat them equally in the beginning, but you treat them fairly," said Vivian Witkind Davis, a policy analyst at the National Regulatory Research Institute at Ohio State University.

To some extent, the MFS-II case pits Bell Atlantic against the world. It alone among the parties has a stake in the status quo. All the other players want a piece of its market.

The central financial question the PSC will decide is how much Bell Atlantic's competitors will have to compensate it when one of its customers makes a call to a Bell Atlantic customer.

Some potential competitors have proposed that the PSC adopt a system called "bill and keep," under which telephone companies complete each other's calls at no charge.

That plan is unlikely to fly. The PSC already rejected the notion during the first phase of the case, ruling that competitors will be required to contribute toward Bell Atlantic enough to cover the "common costs" of running a universal service network.

In its testimony, Bell Atlantic proposed that competitors pay 2.2 cents per minute to complete a call using its network and $18.14 per month for each customer a competitor took away. Bell Atlantic argued that it deserves such compensation because it bears the "cost of ubiquity" -- that is, the economic burden of serving every customer no matter how remote the location.

MFS and its allies contend that such rates would leave potential competitors little margin for profits, discouraging them from building networks in Maryland. They save special scorn for the monthly line charge, comparing it to a requirement that the USAir shuttle pay Amtrak $10 every time it flies a passenger to New York.

"They're asking us to make them whole for any customers they lose in a competitive environment," scoffed Andrew D. Lipman, MFS' senior vice president for regulatory affairs.

If the commissioners follow the advice of the PSC's professional staff, Bell Atlantic won't be getting much of its wish list.

"You get to a point where Bell Atlantic is charging its competitors more to terminate a call on the Bell Atlantic network than Bell Atlantic is charging its own local customers to make a call," said Michael Starkey, chief of the PSC's telecommunications division.

Rejecting Bell Atlantic 2.2-cent proposal, the staff recommended termination rate of 0.4 cents to 0.6 cents a minute. It also said it saw no merit in a monthly line charge.

Deeper differences

But the difference between Bell Atlantic and the PSC staff goes far deeper than mere rates. It involves basic questions of what must be done to encourage competition and who should pay for it.

One of the most bitter points of contention is over "unbundling," that is, the separation of the various stages of putting through a phone call into parts that can be sold separately. For instance, unbundling could let a competitor of Bell Atlantic rent the "transport" part of the network -- tying the home or business back to a central office -- without renting the use of Bell Atlantic's switch.

Many authorities on telecommunications deregulation agree that some form of unbundling will be necessary to jump-start competition in the local exchange. But Bell Atlantic has told the ,, PSC that unbundling the transport and switch functions increases the complexity and decreases the efficiency of the network -- adding considerably to the cost.

According to the testimony of Bell Atlantic-Maryland President Daniel J. Whelan, it wants those costs paid in full by the companies it labels the "cost causers," arguing that "those benefiting from the unbundling should bear the additional costs."

Such arguments brought a stinging reply from Mr. Starkey in his testimony on behalf of the PSC staff. Accusing Bell Atlantic (BA-MD) of adopting the viewpoint of a "besieged monopoly," he contended that the incumbent phone company will itself benefit from unbundling.

"If BA-MD considered MFS and other co-carriers as customers . . . and not only as competitors, the recommendations of BA-MD would be much different," Mr. Starkey testified. "Unbundling the BA-MD local distribution plant and building adequate support systems to enhance the network will undoubtedly allow BA-MD more flexibility in offering new services and will provide it with the ability to more quickly respond to the changing marketplace."

Network builder

Underlying these disputes is a basic disagreement over the question of who really built the network.

In Bell Atlantic's view, it did. Asked whether the PSC should require Bell Atlantic to provide its services to potential competitors at wholesale rates -- as long distance companies currently do -- Mr. Whelan gave a fierce defense of the company's property rights.

"BA-Maryland may decide as a business matter that it makes sense to provide wholesale services, but that decision is properly ours to make, not the commission's," he said.

That contention brought nothing but scorn from an AT&T; executive who deals with the PSC.

"They were all but guaranteed recovery of that money plus a handsome return," said Ross L. Baker, AT&T;'s director of government affairs for Maryland. "There wasn't all that much risk. . . it was built with ratepayers' money."

In deciding MFS-II, the commission will also have to grapple with a host of other prickly issues, including how to let customers keep their telephone numbers when they change carriers, whether calls between Maryland and the Washington suburbs will still be treated as local calls, and whether the new competitors' local calling areas must match Bell Atlantic's.

The case will be decided by four members of the commission because H. Russell Frisby, the newly chosen chairman of the PSC, has recused himself, citing his earlier representation of another potential Bell Atlantic rival.

The hopes of Bell Atlantic's challengers have been bolstered by the PSC staff, which backed most of their positions in principle if not in detail. It is not unknown for the commissioners to overrule the staff's position, but it doesn't happen often.

"The reason the staff would be afforded greater weight is that their role is seen as being to represent the broader public interest," said William Badger, a former commissioner.

But Bell Atlantic's Ms. Vaden expressed hope that the results will not be too unpalatable. "We feel very confident that our methodology is valid and our costs are verifiable," she said.

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