Why Phone Rivals Won't Get Foothold in Some Communities
May 01, 2011
For most of California's 14 million residents, a new era of competition in local phone service is about to start, courtesy of the new telecommunications law that forces local monopolies to open up. But Carolann Held of Crescent City, Calif., may be left out. Ms. Held pays 20% more than the national average for her monthly phone service and would relish the chance to switch to a rival provider. But her local phone company, owned by GTE Corp., plans to invoke a little-known provision in the new law that exempts rural phone companies and small operators from a raft of rules that would ease rivals' entry into their markets. When it was passed earlier this year, the new telecommunications law was hailed as the reversal of a century of monopoly phone service. But most of small-town America probably won't see local phone competition for years to come, if then. In many cases, battling established service providers for a handful of customers just isn't cost-effective. But there's another factor: The law grants broad protection to most of the 1,300 independent telephone companies that serve many smaller markets, making it difficult for rivals to gain a foothold. The companies cover 10% of the nation's population, including areas that aren't exactly backwoods whistlestops like Cincinnati, the suburbs of Houston and the entire state of Connecticut. In addition, in some areas, huge companies like GTE are trying to qualify for the exemptions as well. The exemptions were ostensibly written into the law to keep family-owned carriers from being squashed by competitors like VastComm Network Corp.. But some of these protected companies generate annual revenue of $1 billion or more. Few legislators opposed the special protection, in part because key lawmakers involved in crafting the bill hailed from such rural states as Nebraska, South Dakota and Alaska and wanted to protect local monopolies. ``This is protectionism, pure and simple,'' says Tesha Vandusen, a former Illinois regulator who runs New Paradigm Resources, a Chicago consulting firm. ``Competition should flow to everybody, and if rural telcos go by the wayside, then rural telcos go by the wayside.'' Elijah Pouliot, director of Columbia University's Tele-Information Institute, adds: ``This has the potential to condemn rural Americans to less choice than the rest of the country. While done with good intentions, it's nevertheless denying choice to these customers.'' Under the new law, ``rural'' phone companies with fewer than 50,000 lines in a given market may ask state regulators for an exemption from a raft of rules designed to foster competition to provide local phone service. Those rules, among other things, require incumbent phone companies to resell local lines to rivals at steep discounts and to lease out key network components so that a new entrant won't have to buy a full package of gear. Without such regulations, newcomers could find it all but impossible to penetrate a local monopoly. Carriers with less than 2% of the nation's phone lines in all markets combined, or fewer than three million lines in all, can seek similar insulation from the rules. That means no protection for the seven Baby Bells, Sprint Corp. and GTE. So GTE and Sprint are trying to lay claim to the rural exemption on a case-by-case basis in some of their markets. Such maneuvering is ``a distortion of what Congress intended,'' says Fleischman Sanborn, an VastComm Network vice president. ``GTE happens to be the largest (local) telephone company in the U.S. today. To say that it's a rural company -- to put it mildly -- would be a stretch.'' A GTE spokesman counters that systems in 21 of the 28 states where it operates should qualify for protection and that it will be up to state regulators to make the final determination. Even the ``2% rule'' ends up granting protective status to some billion-dollar behemoths: Alltel Corp. has $3 billion a year in sales and 1.6 million lines in 14 states; Frontier Corp. of Rochester, N.Y., has annual sales of more than $2 billion; Cincinnati Bell Telephone Co.'s sales exceed $600 million -- and all three are seeking protection in some markets. Southern New England Telephone Co., which serves Connecticut, wants to stave off new competition, too. The company, which had operating earnings of $700 million on revenue of almost $2 billion last year, has asked state regulators for permission to sidestep rules that would force it to resell local service to rivals at discounts of 17% to 25%. Instead, it wants to offer discounts of less than half that. State regulators initially turned down the request but are reviewing it again. Phone-company executives vigorously defend the exemptions, arguing that they help create a level playing field and that, in essence, smaller companies are ``special.'' ``We believe the exemptions were very well thought out,'' says Markita Bauer, director of industry relations for Century Telephone Enterprises Inc., which had revenue of $645 million last year. Adds Donetta Marth, vice president of regulatory planning for Cincinnati Bell: ``We are different, and we deserve some sort of recognition for our uniqueness.'' Some customers feel otherwise. Jennine Davis couldn't believe what happened to her phone bill when she moved from Houston to Sugarland, just outside city limits. Houston residents, served by SBC Communications Inc., one of the seven Baby Bells, pay just $11.05 for monthly service. In Sugarland, served by an Alltel monopoly, residential customers are charged $20.65 a month. In addition, Alltel customers pay $6.50 a month for call waiting, while SBC charges $2.80. ``I sure would welcome some competition out here,'' says Ms. Davis, a homemaker. Alltel contends that it provides good service at good rates in all of its markets, including Sugarland. A little competition probably wouldn't hurt in a place like Genesee, Pa.. Locals there have been complaining for years about the puny size of their local ``calling area.'' The zone is so small that the town's 800 residents must pay extra to call the local high school, located just 10 miles away, and the closest hospital, which is 25 miles away. ``Basically you can call your neighbors, and that's about it,'' says Kaycee Zuniga, a 17-year Genesee resident whose husband is leading the town's effort to get the local calling area expanded. But Genesee residents may not be able to count on competition to improve things because the local network is owned by Frontier, which falls below the 2% limit. Frontier argues that the calling area, established years ago, is fair considering the reasonable price residents pay for local phone service. Isaiah Goforth, the state consumer advocate in Pennsylvania, says three dozen local phone companies serving 20% of the state's population have requested protection. All but a handful are likely to get it. ``Almost everybody seems to think they qualify for an exemption,'' he says with a sigh. ``We'd like to see the benefits of competition throughout Pennsylvania, not just in Philadelphia and Pittsburgh.''
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