SBC FILES FOR CAL. 271 DESPITE MAJOR QUESTIONS ON PUC SUPPORT

As expected, SBC filed its petition with FCC for Pac Bell Sec. 271 interLATA authority Fri. SBC said filing made “very strong case” for Pac Bell entry despite fact that PUC didn’t clear it on 2 checklist items. SBC said Pac Bell faced more local competition in Cal. than any other bell company when it received FCC interLATA approval. About 100 operational CLECs in Cal. serve 13% of state’s local access lines. Pac Bell said it was optimistic FCC would approve its application so it could begin long distance by Christmas. Favorable decision would affect 10 million SBC Cal. access lines, 30% of SBC’s total access lines nationwide. FCC set Oct. 9 for recommendation from Cal. PUC and comments by 3rd parties, Oct. 29 for evaluation by Justice Dept., Nov. 4 for reply comments, Dec. 19 for final decision.

Federal-state conflict is possible because PUC in its decision found Pac Bell hadn’t complied with 3 of 4 requirements in Cal. Sec. 709.2 for its intrastate long distance certification, part of state law passed in 1994, 2 years before federal Telecom Act. Law’s public interest requirements were aimed mainly at dominant Pac Bell to ensure that its entry into intrastate, interLATA long distance business wouldn’t result in discrimination against intrastate competitors.

PUC cleared Pac Bell on 12 of 14 Sec. 271 checklist points’ including those related to its operation support systems (OSS). But PUC and Pac Bell will let FCC decide whether carrier complies with Point 11 (number portability) and Point 14 (resale). PUC said Pac Bell didn’t comply fully with Point 11 because it hadn’t implemented mechanized enhancements to its portability administration center that would delay disconnection from old local provider until new provider verified that it had completed its installation work. Intent is to ensure customer doesn’t accidentally lose dial tone during changeover process. PUC didn’t fully clear Pac Bell on Point 14 because it hadn’t dismantled restrictions on DSL resale imposed by itself and its DSL affiliate, SBC Advanced Solutions. However, Pac Bell said PUC’s interpretations of Points 11 and 14 imposed portability and resale conditions that went well beyond what FCC had required of other Bell companies that won long distance approval. Both sides agreed to disagree and refer those issues to FCC. Dissenting PUC Pres. Loretta Lynch said she was deeply troubled that agency majority voted to forward affirmative recommendation of “substantial compliance” to FCC despite finding that Pac Bell failed to comply with 14% of federal requirements and 75% of state requirements.

On state law question, PUC said Pac Bell met one state law requirement, to open its local markets to CLECs, but failed on those that it take steps to: (1) Ensure against anticompetitive behavior in intrastate long distance markets. (2) Ensure against improper cross-subsidies between local and long distance entities. (3) Ensure that its long distance entry doesn’t harm overall competitiveness in Cal. telecom market. PUC Comr. Geoffrey Brown, lead commissioner on long distance case, said Pac Bell would have to correct its deficiencies under state law before it could sell intrastate long distance. He said Pac Bell must eliminate barriers that could hinder interexchange competition and must prove that its entry into intrastate long-distance was in Cal. public’s interest. He said Pac Bell’s record in case represented “a good, strong start for them, but there’s things that still have to be done” before it could offer in-state long distance. PUC order didn’t prohibit Pac Bell from providing intrastate long distance, but did clearly indicate that if carrier were to apply for intrastate interLATA certification today, it would be denied.

PUC order addressed several issues raised by competitors and consumer advocates in context of state Sec. 709.2 compliance. PUC directed Pac Bell to submit report within 6 months on feasibility of structurally separating itself into independent wholesale and retail business units. It directed its staff to submit report within 5 months on whether 3rd party should be commissioned to handle long distance carrier changes. PUC compromised on joint marketing concerns, saying Pac Bell could jointly market long distance and local if it kept detailed track of time it spent on marketing long distance affiliate’s services and adhered to PUC-approved sales scripts to disclose customers’ right to choose other long distance carriers. Company also would have to continue obtaining separate intraLATA and interLATA authorizations for presubscribed long distance service.

Pac Bell spokesman said carrier believed FCC grant of long distance authority under Telecom Act would trump state’s long distance law and allow it to begin selling intrastate as well as interstate long distance service. Providing intrastate long distance is critical to Pac Bell’s Cal. long distance success. Interexchange traffic statistics compiled by FCC show intrastate calls account for 55% of total Cal. interLATA long distance traffic compared with 30% average of most other states.

Cal. consumer groups and competing IXCs said that if it appeared FCC might grant Pac Bell’s request, they would expect litigation in state or federal courts over whether FCC’s 271 approval for Pac Bell interLATA service would preempt intrastate long distance entry standards Cal. PUC had applied, as telco asserted. Some outside analysts agreed matter could well end up in court, further delaying Pac Bell long distance.

Legg Mason analysts Blair Levin and Rebecca Arbogast said parties had much to sort out factually, legally and politically: “Our sense is that unless the parties can reach a compromise, litigation is likely, given SBC’s aggressive filing and the time pressures of the FCC’s 90-day deadline. Our best guess is SBC’s federal arguments will carry the day, but it’s a close call.” Commerce Capital Markets analyst Anna-Maria Kovacs said there was fairly good chance FCC would grant SBC’s application for Pac Bell despite PUC’s reservations because those state-specific concerns weren’t “directly relevant to the requirements the FCC has to consider.”

Intrastate long distance certification wasn’t issue in 21 states where Bell companies received FCC long distance approval. Elsewhere, Bells’ intrastate long distance operations were subject to same state certification requirements as all other long distance providers and had no problem complying. Unlike in Cal., others faced no state laws or regulations targeted specifically at Bell intrastate long distance entry.

WorldCom said it was “pleased” that PUC “recognizes that substantial barriers to competition remain in California” and encouraged agency to “immediately adopt safeguards to prevent Pacific Bell from using its enormous market power to harm long distance competition.” WorldCom said major barrier for IXCs was Pac Bell’s access charges, which were major cost IXCs faced. It suggested PUC look at cutting Pac Bell access charges at least in half to bring them nearer to true cost and minimize unfair competitive advantage SBC would gain by paying access charges to itself.

AT&T said Cal. PUC’s recommendation could create dilemma for FCC because state hadn’t held that Pac Bell’s long distance entry would be in public interest of Californians even though it supported Pac Bell’s petition. AT&T said Telecom Act’s Sec. 272 required public interest finding. It also said Pac Bell asserted that it needed long distance to compensate for local market inroads by CLECs due to low UNE rates, but meanwhile its parent SBC was trying to raise UNE rates across country.

Cal. consumer group TURN said PUC had laid itself open to litigation because it decided to support Pac Bell’s interLATA bid to FCC despite fining Pac Bell $52 million over last 12 months for anticompetitive marketing practices and concluding that company hadn’t met all federal tests and failed state public interest test that its entry not harm competition.