Resellers Left in PIC-C Dust

By Khali Henderson

Posted: 04/1998

By Khali Henderson

Tom Coughlin is sure he’s got a story worthy of "60 Minutes."

It’s not about his Cleveland-based long distance resale company, VISTA Communications,
although the entrepreneurial CEO probably wishes it was. It’s not even about the
phenomenal growth of the long distance resale industry in general, although the
Telecommunications Resellers Association (TRA) board member probably wishes it was.
Instead, it’s about a predicament that he finds his company (and hundreds of other long
distance resellers) in that he cannot explain.

"It makes no sense," Coughlin says.

"It" is the preferred interexchange carrier charge (PICC) for multiline
businesses. PICCs are new assessments paid by long distance companies to local telephone
companies effective Jan. 1 as mandated by the Federal Communica-tions Commission (FCC) in
its Access Charge Reform Order issued May 16, 1997. In 1998, the maximum PICC for a
primary residential line and a single business line is 53 cents per month. For non-primary
residential lines, the maximum PICC is $1.50 per line, per month. The charge is expected
to decrease over time. For multiline businesses, the PICC is $2.75 per line per month. The
multiline business PICC is expected to increase by $1.50 per year for 1999 and 2000, but
is expected to dip below $1 in 2001, according to FCC projections.

PICCs were implemented as an interim step in bringing access charges to a cost-based
and cost-causation level required by the Telecommunications Act of 1996. As the local
exchange carriers (LECs) reduce access charges, the flat-fee PICC is designed to recover
the interstate portion of local loop costs not covered by subscriber line charges paid to
the LECs directly by end users. The Access Reform Order does not require long distance
companies to add the PICC to their subscribers’ bills.

Many resale carriers–such as VISTA–which serve small- to mid-size businesses don’t
view it as a choice, however. Coughlin explains: If the average automatic number
identification (ANI) bills $16 per month in long distance, the reseller only gets $4.80
per ANI, assuming an industry-average 30 percent margin. If a reseller only receives $4.80
per line, it cannot absorb the $2.75 per line charge and survive.

The scenario can be even worse depending on the reseller’s customer profile. In VISTA’s
case, for example, many of its 200,000 small business customers have many lines but low
long distance usage. A $40 long distance user with five lines, for example, would incur a
$13.75 PICC or a 34 percent increase in its long distance bill if the PICC were passed
through by the long distance carrier. While the carrier cannot expect the end user to
endure a 34 percent increase quietly, it also cannot absorb the PICC given a $12 margin
(again, based on 30 percent). In this case, the reseller might choose to do what VISTA has
done: "Rather than hit one customer (harder than another), we have taken an average
across our base and are charging everyone $5.50 per month," says Coughlin. (Not
surprisingly, this is the exact charge AT&T plans to add to its customers’ bills.)
Coughlin’s illustration echoes what the long distance carrier associations, namely the
Competitive Telecommunications Association (CompTel) and the Telecommunications Resellers
Association (TRA), have been arguing since PICCs were ordered: PICCs unfairly burden small
carriers and, in turn, the small- to mid-size business customers they serve. Both groups
filed petitions for reconsideration with the FCC on this matter, requesting that the
multiline PICC be lowered to match the 53-cent PICC for primary residential lines.

Graph: Big Three Pass-Through Policies

If you run the numbers as we did (see matrix) and assume a 1.5 cent reduction in access
charges plus PICCs, access charges for multiline businesses don’t begin to decrease under
the new system until long distance usage levels of about six hours, or around $36 per line
per month. TRA claims that for many of its members the outlook is even more bleak. The
resellers’ association says non-facilities-based and partially switch-based resellers–a
majority of its company membership–are further harmed in that they are not guaranteed the
benefits of access charge reductions since they do not purchase access directly from the
LECs. Instead, they buy end-to-end service (including access) from their network provider
at a negotiated usage-sensitive per-minute rate. Under existing contracts, underlying
carriers are not obligated to pass along any reductions in access charges to their
reseller customers but are allowed to pass-through any new levies or assessments. In its
petition for reconsideration, TRA has asked the FCC to require underlying network
providers to pass through access charge reductions to their resellers.

"Because access charge reductions are not being passed through to many non
facilities-based and partially switch-based resale carriers, the FCC’s reforms have served
only to dramatically increase the operational costs of these small- to medium-sized
providers, undermining their competitive viability and adversely impacting the primary
customer base–small- to medium-sized business," TRA said in a statement Feb. 9.

Again, looking at the numbers in our scenario, it appears that without the benefits of
access charge reductions to compensate, at least in part, for the new PICCs, resale
carriers’ two-line business customers would need to have long distance calling volumes in
excess of 6,000 minutes (around $600 per month) just to break even. In the real world, a
two-line office would need to use the long distance service 57 percent of one employees’
entire work month, assuming an eight-hour day and 22 working days per month. Two-line
businesses with this level of usage are rare.

PICCs also change the dynamics of sales and pricing for carriers in tiers II-V (annual
revenues less than $1 billion) which have to meet or beat the Big Four. Assuming that
$5.50 becomes the de facto PICC pass-through to the end user, the economics look different
still. For example, a $100 per month account with five lines puts carriers nearly 7
percent ahead on access charges.

But a $100 per month account with 10 lines puts carriers 7 percent behind. Resellers
without the benefit of pass-through of access charge reductions lose big. (See Table:
Sample Scenarios with $5.50 Multiline Business PICC.) In reality, however, few resellers
will not benefit from access charge reductions as a majority of the underlying network
providers, including WilTel (WorldCom), Frontier Corp. and Cable & Wireless Inc., have
said they intended to pass-through such reductions.

These analyses do not take into account any of the administrative costs of processing
the PICC. Coughlin, whose company just sent out its first wave of invoices with the new
$5.50 PICCs, is expecting a lot of confused and angry callers. "VISTA signs up 10,000
customers a week. It’s the ones we just signed that didn’t have the PICC on their last
bill from a major carrier that will blame it on us," he says.

Rob Mocas, president of Easton Telecom Inc., also based in Cleveland, confirms
Coughlin’s fears. Call volumes to his company’s customer service center are up 200 percent
to 300 percent with questions about this month’s bills’ new charges–PICCs as well as the
new 4 percent Universal Service Fund charge, also mandated in the FCC’s Access Reform
Order effective Feb. 1. Easton is passing through the PICC to subscribers on a per-line
basis as assessed.

A public relations nightmare may be at hand for competitive long distance companies,
especially resellers. While the larger and long-lived companies will weather the storm on
their credibility, the smaller ones might only appear suspect once users’ receive bills
with "surprise" charges. To make matters worse for all interexchange carriers
(IXCs), the United States Telecommunications Association (USTA)–the LEC mouthpiece–has
mounted a consumer education campaign, telling end users to expect decreases in their long
distance bills as a result of reductions in access charges made by the LECs. Futhermore,
USTA is positioning such reductions in access charges as compensation for increases made
to subscriber line charges without taking into account the addition of the PICC. At the
same time, the FCC is taking no credit for any consumer backlash generated by the PICC
which it mandated, saying in a consumer information brochure: "The FCC did not tell
the long distance companies how to adjust their customers’ rates in response to changes to
access charges." PICCs are so popular no one wants to take credit for them.

"If the purpose of access charge reform was to lower access rates, why are the
LECs still making $2.75? (The LECs) want us to eat this charge. Otherwise, why wouldn’t
they bill it directly? We (IXCs) are going to take the heat, and it’s all
pass-through," says Coughlin.

The impact of PICCs is a dramatic story, for certain. But it isn’t the one Coughlin
wants to tell. It’s the story behind the story that Coughlin is looking at: How did this
access reform system come to be? "Either the LECs have a lot more clout (with the
regulators) than we thought or the major carriers rolled over in order to get something
else (from the LECs)," he says.

Just for fun, let’s entertain this question. Could the LECs have more clout? An 11th
hour managers’ amendment to a 1995 House of Representatives bill negating months of
negotiated industry reforms to favor LECs should answer that one. On the other hand, could
the major IXCs have sold out their smaller brethren? While causing superficial damage to a
multibillion-dollar corporation serving the world’s largest companies, this two- to
three-year interim system appears able to cause significant financial and or competitive
disadvantage to a certain class of competitor–the small- to mid-size long distance
carrier serving small- to medium-sized businesses with less than $500 per month in long
distance expenditures. This profile fits hundreds of companies that today make up the long
distance industry. Could their demise be reason enough? Certainly, it’s not without
precedent. AT&T’s explicit and implicit resale policies have been cited as the death
of many a software-defined network (SDN) reseller over the years. Is this setup (two
ready-made scapegoats and plenty of empathy pains) too tempting? Just asking.

A frequent contributor to PHONE+, Khali Henderson is a principal with Marcom
Support Services, a marketing communications firm serving firms in the telecommunications
industry. She can be reached at [email protected].
 

Any views expressed in this article are those of the author and do not necessarily
represent the views of PHONE+ magazine or its publisher.