RURAL ‘CONSOLIDATORS’ SEEK EASING OF REGULATORY IMPEDIMENTS

However, several have reached point where they're in regulatory no-man’s-land, stymied by regulations aimed at smaller -- or larger -- companies. Among problems facing consolidation are regulatory policies such as FCC’s new “pick and choose” rule requiring rural LECs (RLECs) to pick either traditional rate of return regulation or price cap regime used by Bells. Problem arises with company such as rate-of- return regulated CenturyTel that’s in process of acquiring Verizon telephone lines that are regulated under CALLS plan’s price cap regime. CenturyTel Vp Jeff Glover said idea of moving a CALLS unit back to rate of return regulation seems “perverse” and it seems a daunting task to move the parent company’s rate-of-return operation to price cap. Company has sought waiver from FCC but also has urged Commission to ease up on pick and choose rule, which was part of new MAG plan for rural access charge reform.

Richard Lerner, FCC Common Carrier Bureau chief of staff, said bureau is “looking at ways to eliminate the all or nothing rule” but one problem is possible cross subsidization, putting all costs in rate of return side and not in price cap portion of company. CenturyTel’s Glover responded there are safeguards against that -- mainly state regulators who conduct frequent audits of phone company operations. Glover said he also would like to see more universal service support for acquired lines, which he acknowledged was controversial. “A substantial investment is required to acquire and upgrade” acquired properties, he said. In addition, lines bought from Bells may not have same universal service eligibility and new owners may not be able to charge as high levels of access charges as they do on legacy lines, he said. AT&T Vp Joel Lubin said he’s aware of concerns facing changing rural environment and supports revising universal service mechanism. He said AT&T just wants to be sure long distance customers don’t bear brunt of any additional cost recovery for rural telephony. It’s important to “create a system with as broad base as you can,” he said.

Delay in getting state regulatory approval for RLEC’s acquisition of additional lines also can be major headache, panelists at all-day conference said. Mich. PSC Comr. Robert Nelson said NARUC study found most states take many months to approve such acquisitions, with some nearing 2-year process. He said NARUC was planning to take up the regulatory delay issue at its winter meeting in Washington next week, possibly developing best-practices model based on states such as Mich. which accomplish task in less time. Nelson said it didn’t make sense for state regulators to take so long to approve acquisition of lines by company “they know is legitimate” because it’s been operating in other states. Qwest Senior Vp Patrick Quinn said regulatory process for Qwest sales sometimes closes in year, sometimes takes even longer. In some cases, buyer has to commit to certain level of investment or offer certain services and seller sometimes has to donate some of proceeds to state commission to help with various regulatory goals.

Representatives of state and federal regulators, RLECs and Bells started meeting late last year at Legg Mason hq in Baltimore to see if they could agree on way to reform regulation to solve variety of issues impeding investment in rural areas, including consolidator problem, according to Legg Mason analyst Michael Balhoff. Balhoff predicted “coalitions will form” and end result will be good for consumers because it will encourage investment in rural America. Meetings are on-going in informal manner, said Mont. PSC Comr. Bob Rowe, who has been among attendees. Rowe said Thurs. his goal was to bring services to customers and, within reason, he didn’t care who did it, consolidators, Bells or small RLECs.

Explaining why Bells are divesting lines, Qwest’s Quinn said “sometimes the economics are better for small companies to run rural exchanges than big companies.” Bells can’t charge same level of access charges, get less universal service funding, face more regulatory scrutiny in some states, he said. “Selling access lines is part of doing business,” Quinn said: “You have to continually look at all your assets.” Eileen Odum, national operations pres. for Verizon, said it’s “not an easy decision” to divest, particularly if company has had long relationship with customers but Verizon does it sometimes to streamline operations, better target capital spending. Odum said rural exchanges comprise about 20% of Verizon’s territory but 50% of its central offices, indication that high cost of rural telephony is result not only of “loop length but also switching requirements.”

In answer to question, Odum said Verizon tends to divest on state-wide basis to one buyer because regulatory process tends to be faster that way. OPASTCO Pres. John Rose said later that smaller telcos would like Bells to offer lines in small packages. Panelists said one option is for smaller buyers to band together as buying consortium, something that has been done in Ia., Alaska and some other states.

Consolidators said it takes capital to assume control of divested lines because they often aren’t in good shape. CenturyTel CFO Stewart Ewing said new owner has to “get in there and roll out new services that customers didn’t have in the past,” such as custom calling features and caller ID. CenturyTel bought nearly 500,000 GTE lines in 2000 in Wis., Mo. and Ark. and is in process of acquiring 675,000 more lines from Verizon in Mo. and Ala. Valor Telecom is new company based on GTE lines from Verizon in Tex., Okla. and N.M., said its CEO Kenneth Cole. “The plant was between deplorable and livable.” Alltel is in process of acquiring Verizon lines in Ky., said CFO Jeff Gardner, and plans “to improve the cost structure immediately.” -- Edie Herman

Legg Mason Conference Notebook…

USTA Pres. Walter McCormick took opportunity at Legg Mason conference Thurs. to call for swift end to Bell company regulations in general. Noting there’s competition on both “intramodal” basis, meaning wireline-to-wireline, as well as “intermodal,” meaning wireline, wireless, cable and other types, he suggested perhaps “the issue has become what is the future of federal regulation.” McCormick asked: “If the consumer has choice, has the goal [of Telecom Act] been achieved?” AT&T Vp Joel Lubin said later he was “astonished” by McCormick’s statement because Telecom Act called for “quid pro quo,” long distance relief for Bells in return for them opening up their local networks to competition. They haven’t fully opened their networks so they haven’t met their requirements, he said.