BellSouth's Name Game

Posted: 05/1998

BellSouth’s Name Game
Will Regulators Be Caught in a "Blind"?

By Genevieve Morelli

There is an old adage that if something walks like a duck and quacks like a duck,
chances are it is a duck. This saying perfectly characterizes an evolving regulatory and
marketplace issue: the attempt by incumbent local exchange (ILECs) carriers to establish
competitive local exchange carrier (CLEC) affiliates to provide exchange and exchange
access services in the ILEC’s local operating territory. A CLEC affiliate of an ILEC
providing service in the ILEC’s local operating region using assets transferred from the
ILEC would ‘quack’ like an ILEC and, therefore, must be regulated in the same manner as
the incumbent carrier.

Among the ILECs, BellSouth is leading the effort to gain state certification for its
CLEC affiliate. It has set up an entity called ‘BellSouth BSE’ which is intended to
operate as a lightly regulated CLEC both within and outside the operating territory of
BellSouth Telecommuni-cations (the ILEC corporate entity). BellSouth BSE has obtained, or
is seeking, state certification to provide local telephone service in every state in
BellSouth’s region, as well as a number of states outside BellSouth’s local territory.
BellSouth BSE will offer integrated packages of services, including local, wireless,
Internet and (once authorized) interLATA long distance services, to large business
customers. It will offer these services primarily by reselling the services of BellSouth
Telecommunications, which it will obtain through interconnection agreements.

In on-the-record testimony in state proceedings, BellSouth witnesses have testified
that BellSouth BSE will present itself to customers using the same corporate name, logo
and other indicia of corporate identity as BellSouth Telecommunications, without paying
BellSouth Telecommunications or its ratepayers anything for this use of its intangible
assets and corporate goodwill. BellSouth representatives also have testified that
BellSouth BSE will be capitalized and funded entirely by BellSouth Corp., the holding
company that also owns BellSouth Telecommunications, and will have access to the same
capital and borrowing power as BellSouth Telecommunications. In addition, BellSouth
Telecommunications has transferred certain high-level staff members, including some who
had responsibility for negotiating interconnection agreements with independent CLECs, to
BellSouth BSE.

These factors demonstrate that BellSouth is transferring critical resources, including
financing, human resources and corporate goodwill, from BellSouth Telecommunications (the
ILEC) to BellSouth BSE (the CLEC). BellSouth is not unique in this regard. Such conduct is
typical of the ILECs that are creating CLEC affiliate companies.

The problem with this behavior is that it, in effect, could enable the ILEC to avoid
complying with important obligations contained in the Telecommunications Act of 1996 to
open its network to would-be local service competitors. In the near term, the most likely
provision to be violated is the resale requirement of Section 251(c)(4) of the act. That
provision requires ILECs to offer competing local service providers the ability to
purchase the ILECs’ local services at a wholesale discount for resale to the competitor’s
end user customers. In the case of BellSouth, the so-called CLEC entity (BellSouth BSE)
has stated that it plans to target medium-to-large business customers, including those
currently served by the ILEC corporate entity (BellSouth Telecommuni-cations). By doing
so, BellSouth Telecom-munications could effectively transfer the customer-specific
contract service arrangements (CSAs) offered to those customers from itself to a
non-regulated affiliate, thereby exempting these CSAs from the requirement that they be
offered to requesting carriers for resale. The Federal Communications Commission (FCC) has
already charged BellSouth with attempting to avoid the statutory obligation to offer its
services for resale. In its December 1997 order denying BellSouth’s application for
authority to offer in-region interLATA services in South Carolina, the FCC held that by
shifting its customers to CSAs, BellSouth was attempting to "prevent resellers from
competing for large-volume customers, thus hindering local exchange competition in South
Carolina." Shifting CSA customers from BellSouth Telecommunications to BellSouth BSE
is merely another maneuver designed to evade the resale obligation and impede the
development of local competition.

The creation by an ILEC of a CLEC affiliate that would operate within the ILEC’s local
region also could be used to evade the requirement contained in Section 251(c)(3) of the
act that ILECs offer unbundled network elements (UNEs) to competing carriers. The ILEC
would have the incentive to channel its research dollars and efforts to the CLEC. As a
result, any new services developed and offered by the CLEC through use of these resources
would be the exclusive property of the CLEC and would not be subject to the unbundling
requirements of Section 251(c)(3). By conducting business in this manner, carriers could
be denied access to ILEC local network facilities and functionalities, and the development
of local competition could be significantly impeded.

It bears noting that the concerns outlined above do not apply when an ILEC-established
CLEC affiliate operates outside the ILEC’s local service territory. Such behavior raises
no anti-competitive implications. Indeed, entry by an ILEC affiliate into the local market
of another ILEC is exactly the type of competition that the Telecom Act was intended to
promote. However, steps must be taken by regulators to prevent the abuses that are likely
to occur when an ILEC affiliate is permitted to operate within the ILEC’s local service
territory.

State regulators can prevent this abuse of the competitive process by denying an ILEC
affiliate the right to be certified as a CLEC within the local operating territory of the
ILEC. Indeed, at least two state utility commissions have already done so; state
regulators in Michigan and Texas have denied GTE’s CLEC affiliate certification to operate
within GTE’s local service region. If any state commission permits such certification,
however, the FCC must step in to prevent evasion of statutory obligations by the ILECs.
The FCC should issue a declaratory ruling that so-called CLEC affiliates of ILECs
providing in-region local service using resources transferred from the ILECs are to be
treated as dominant ILECs and will be subject to the resale and other interconnection
obligations of ILECs.

The FCC has clear authority to issue such a declaratory ruling. Section 251(h)(1) of
the Telecom Act includes in the definition of an ILEC any "person or entity that, on
or after such date of enactment, became a successor or assign" of an ILEC that
provided telephone exchange service in an area on that date or was a member of the
National Exchange Carrier Association. The plain meaning of Section 251(h)(1) requires
treating a corporate entity that is an ILEC’s "affiliate" and that provides
telephone exchange service in the same areas as the ILEC using resources passed from the
ILEC, as a "successor" or "assign" of that ILEC. An affiliate such as
BellSouth BSE should be considered a "successor" of the ILEC (BellSouth
Telecommunications) under Section 251(h)(1) when it uses the same brand name, financial
resources and human capital in providing local telephone service to certain customers in
the ILEC’s local service area. In such cases, the affiliate has replaced or
"succeeded" the ILEC. Such an entity should be treated as an "assign"
of the ILEC because the ILEC has transferred or "assigned" to it significant
elements such as financing, human capital and at least part of the ILEC’s customer base.

In addition, the FCC should hold that such in-region ILEC affiliates will be treated as
dominant carriers with respect to their provision of interstate exchange access service
and any other jurisdictionally interstate local services that they provide. As ILEC
"successors" or "assigns," these entities fall squarely within the
FCC’s existing definitions of which carriers have market power. These affiliates will be
providing the same interstate access and other local services that the ILEC itself
provides on a near-monopoly basis, and the affiliate will be largely indistinguishable
from the ILEC itself. It, therefore, should be regulated as a dominant carrier, and
subject to the access charge, price cap and other rules that apply to ILECs.

The Telecom Act’s goal to open the incumbents’ local networks to competition has yet to
be realized. Yet, the act’s promise will be fulfilled only if state and federal regulators
remain vigilant and consistently reject ILEC attempts to circumvent their market-opening
obligations. ILEC efforts to gain certification for in-region CLEC affiliates that will
operate using resources transferred from the ILEC is a creative attempt to evade the act’s
requirements. Regulators must not let the ILECs succeed in this anti-competitive effort or
consumers will ultimately pay the price.

Genevieve Morelli is executive vice president of the Competitive Telecommunications
Association (CompTel), the principal national industry association representing
competitive telecommunications carriers and their suppliers. CompTel’s 220 members include
large nationwide companies as well as scores of smaller regional carriers. For more
information, visit CompTel on the Internet at www.comptel.org