==Phrack Inc.== Volume One, Issue Four, Phile #7 of 11 Centrex Renaissance "The Regulations" By Leslie Albin * (See Note) From: On Communications (October 1985, Vol. 2,No. 10) By Jester Sluggo Regulatory changes across the country have made new bargain available to telecommunications users. Centrex -- the homely old central office service AT&T planned to bury only a couple of years ago -- has been regroomed, revitalized and often rebaptized. As Centrex, Centron, Caroline or Essx -- the various regional trade names of Centrex service -- it is cheaper and more powerful than ever in mosy parts of the country. The bargain will only get better in regions where the Bell operating companies (BOC) have seized on Centrex not only as a logical step in their progression toward an integrated services digital network, but also as a key to the lucrative telecommunications aftermarket -- as long as those regulatory changes do not shift. The Centrex service the regional BOC's were left with after divestiture was deliberately undernourished, as part of AT&T's migration strategy to bolster sales of Western Electric private branch exchanges. Centrex was lacking in technology and marketing innovation, and users were abandoning it. But, in a little more than a year and a half, the RBOC's (Regional Bell Operating Companies) have managed to win over state regulators to the idea of a thriving Centrex, gaining their approval of trunk equivalency rates, innovative tariffs, rate stabilization plans, actual detariffing and -- in one case -- complete deregulation. At the federal level, challenges to this revitalization have been rebuffed or have stalled before the FCC, and the RBOCs are pitching for greater leeway in providing the customer premises equipment to go with their Centrex service. "The regulators have been bending over backward to give Centrex every competitive advantage," said Albert Angel, a lawyer with the Washing D.C. firm of Wood, Lucksinger & Epstein, which represents the North American Telecommunications Association (NATA). "Ultimately, there will be a clear finding that the preferential treatment of Centrex is not justified," added Angel, and should that happen, Centrex customers -- even those with price stability packages -- could find themselves committed to a service beset by escalating rates. Most of the federal issues involving Centrex regulation developed as a response to actions taken in the states. For instance, NATA has sternly objected to "trunk equivalency" rates authorized by a number of state commissions. The concept evolved when the FCC imposed its $6 monthly customer access line charge on new Centrex lines along with regular business lines. Because Centrex uses lines much less efficiently than a PBX does, "the net impact is very different on a Centrex subscriber than it is on a PBX subscriber," said Greg Laken, division manager of Centrex and central office services for Bell Atlantic Corp. Centrex requires one twisted pair for each station, whereas a PBX requires one trunk for six or seven stations. Trying to keep Centrex viable with a built-in customer access line charge burden six to seven times greater than that incurred by a comparable PBX would have been a tough proposition. Bell Atlantic's BOCs, like virtually every other BOC in the country, won permission from state regulators to offset the higher line charges for Centrex so that customers would pay at the same level as owners of similarly sized PBXs. To NATA, this amounts to nothing more than "taxing all other customers for the benefit of Centrex customers," NATA attorney Angel said. But the FCC decided in summer 1985 that the trunk equivalency rates do not undermine its access charge policy. and the lower rates for Centrex users remain in effect. Beyond whittling down customer access line charges, a number of BOCs have had fresh Centrex tariffs approved by state commissions that chop the service's rates and offer innovative pricing schemes. Bell Atlantic's BOCs, for instance, have won approval for tariffs cutting Centrex rates 30% to 35%. "The net effect," said Lakin, "is that it is a very price-competitive entry." To NATA, the service's price competitiveness arises from the BOCs' continuing monopoly position in the local market, although BOC officials state firmly that Centrex is not priced below cost and, in fact, generates revenue to subsidize other services. According to Angel, a Washington, D.C. residential customer pays a cost-justified rate of between $15 and $17 for the local loop and central office switching capability. A Centrex customer using an identical local loop connected to the same central office pays only $12. Many of the new tariffs being filed by the BOCs recognize two of Centrex's traditional headaches: instability and distance sensitivity. Now many of the new tariffs offer users price guarantees and incentives for signing the long-term contracts that give telephone companies some stability in their Centrex base. By locking in rates and either capping the associated costs or typing their increase to the Department of Labor's cost-of- living index, BOCs have been able to offer customers much of the same predictability that a PBX does. Most tariffs give customers the choice of three-, five- or seven-year contracts, the incentives rising with the length of the agreement. Centrex customers in the Chicago Loop area, for instance, were paying a $12.52 per-line monthly charge if their system used 250 lines. Under a tariff approved last fall, however, those customers saw the monthly charge drop to $10.94 and could drive it down even further by signaling long-term contracts: $10.09 per-line under a three-year agreement, $9.84 under a five-year agreement and $9.54 under a seven-year agreement. "Slightly less than half of our 400,000-line total base has gone on contract," said Lee Armagost, Illinois Bell's division manager for tariffs and costs. And the concepts success is continuing." For all of the BOCs' success in winning lower Centrex rates, some companies have fared even better -- they have convinced state regulators to detariff Centrex service for new customers and, in one case, to deregulate it entirely. Northwestern Bell seems to be the current detariffing and deregulating champion among the BOCs, having won approval for detariffed Centron service in all of its states except Iowa. Iowa simply deregulated it. While detariffing allows the BOCs more freedom to negotiate with large Centron customers, deregulating takes Centron assets, expenses and revenues right out of the rate base and removes the service from the regulators purview. According to Tom Smith, vice-president and chief executive officer of Northwestern Bell Iowa, the company's first move toward deregulation occurred in 1983, when the Iowa State Legislature passed a Bell-inspired bill that called for competitive services to be deregulated. The following year, Northwestern Bell succeeded in getting in getting more legislation passed that declared Centron ready for detariffing because of its competitive nature. After reviewing the legislature's actions, the State Commerce Commission decided that if the lawmakers were convinced Centrex was competitive and services were to be deregulated, it would skip over the detariffing of Centrex and simply deregulate it, Smith said. What followed was what Smith called "nine months of intensive work," as regulators, company officials and consultants from Anderson & Co. sorted out the procedures for carving Centrex away from the rate base and set up safeguards against cross- subsidies. "A central office is not something that has this little compartment that says 'for service A' and that little compartment that says 'for service B'" Smith said of the accounting problem. NATA agrees with that description and, according to NATA attorney Angel, argues that because competitive Centrex services must operate commingled with regulated facilities, the FCC should halt the detariffing and deregulating of the service or order it to be sequestered in a separate subsidiary with other competitive products. But the FCC has not acted on NATA's complaint. Meanwhile, the first customer has signed up for Iowa's deregulated Centron -- the state of Iowa itself. The state had solicited bids to replace its Capitol Hill complex's Centrex service in Des Moines when deregulated Centron became available. The new rates negotiated by Northwestern Bell and the state's staff produced a savings of about $1 million for the state over the three-year life of the contract, according to Glen Anderson Jr., director of state communications for Iowa. While Anderson called the deregulated Centron service prices "a dramatic savings," he also pointed out another incentive for signing up. "The other factor was political," he said. "We did not have an appropriation to proceed with the procurement of a switch." When the Centron agreement runs out, the state will be in the market for a PBX again. A member of Anderson's staff said the staff remains convinced it can enhance its own program with its own switch. At some BOCs, the once feature-poor Centrex has caught up with PBXs in many respects. Where telephone companies are pushing digital capabilities onto their networks, they are also pushing digital capabilities onto Centrex. Pacific Bell, for instance, can offer fully digital Centrex service from many of its metropolitan central offices. A number of BOCs concur with Bell Atlantic's position that digital Centrex is a natural rung on the ladder to an ISDN -- among them Pacific Bell and New York Telephone Co. Many are upgrading Centrex service with PBX-like features short of fully digital service, including several versions call forwarding, call waiting and speed dialing. Given the current strictures in the FCC's Second Computer Inquiry and the Modified Final Judgement, the expanded features list was bound to be called into question. NATA, which has been leading the charge against the changes in Centrex service, is fighting its battle on four fronts at the FCC: 1) Last fall, it asked the FCC either to halt the detariffing and deregulation of Centrex by the states or order a separation of commingled facilities. The FCC has not acted on the complaint. 2) Soon after filing that complaint, NATA filed another -- this one questioning the provision of competitive, enhanced features by a regulated, basic telephone company. The FCC acted on that complaint last summer, deciding that features such as speed dialing, call forwarding and customer station changes are adjuncts to basic service and can be offered by a regulated telephone company under Computer II. Only customer-dialed account recording was found to be and enhanced service, but the BOCs can request waivers to continue offering it. Until the waiver requests are considered, the FCC has granted immediate, temporary waivers so the BOCs can continue providing customer-dialed account recording to existing customers -- including the U.S. Army. Meanwhile, the BOCs and NATA are seeking reconsideration of the FCC's decision in petitions the FCC will address this month or next, according to the FCC staff member handling the issue. 3) Late last year, NATA asked the FCC to to stop Ameritech and Nynex Corp. equipment subsidiaries from selling basic phone services, including Centrex, through their unregulated customer premises equipment subsidiaries. When the FCC agreed to permit the joint marketing, it did so with the provision that non-Bell companies would also be signed up as sales agents for the basic services. As evidence of the problem, NATA pointed to the sparse number of non-Bell sales agents being signed up and the revenue moving from the BOCs to their sister customer premises equipment subsidiaries in the form of sales commissions. The FCC has not acted on the complaint or NATA's original petition seeking a reversal of the sales agent decision. Bell Atlantic, backed by the majority of RBOCs, is seeking FCC permission for an inverted version of the sales agent decision that would let Bell Atlantic serve as sales agent for another vendor's customer premises equipment when submitting Centrex bids. 4) In July 1985, NATA filed an even more sweeping complaint, a Centrex pricing action that argues that the BOCs are using their monopoly power to favor Centrex over other customers and to the detriment of PBX suppliers. The complaint bridges a number of issues, including trunk equivalency rates, pricing below cost and Computer II concerns. The BOCs argued that Centrex is a state concern and, although the FCC has preempted state jurisdiction in other matters, the FCC paused to consider the jurisdictional question -- a pause that could last six months or extend "indefinitely," according to lawyers working on the matter. NATA attorneys do not seem daunted by the chilly reception they've gotten at the FCC, apparently expecting the temperature to rise as regulators worry less about the viability of the divested BOCs and begin to examine the economics of Centrex. "All rates apart from Centrex are rising dramatically. Centrex rates are decreasing," NATA attorney Angel said. "The BOCs would have you believe that Centrex provides a subsidy to other services. But, in fact, documented studies show just the opposite, that Centrex derives a subsidy." If Centrex is priced below cost, why are the BOCs so delighted with it? According to Angel, the answer lies in the financial structure of a regulated utility. "Centrex uses many more loops than necessary. This leads to new construction budgets, which lead to new investment, which leads to a rate of return for the investors." Investors, Angel added, "make make money by putting loop and plant all over the place." NATA's objections to the recent changes in Centrex rates and services, objections that do not extend to opposition to traditional Centrex, have generally been characterized by BOC officials and regulators as protectionist actions taken by a PBX industry that did not really want the full competitive environment for which it clamored. "NATA is frequently described as the whiner in the corner, as though it holds all the cards," Angel said. The seven RBOCs are far better financed, he added, yet, "they have been successful in painting themselves as the underdogs." * Note: Leslie Albin is a freelance writer based in Chevy Chase, Maryland. Watch for Part 1 of Centrex Renaissance: "The Technology". Written by John D. Bray. The above text was written primarily for people in marketing telephone technologies. In the interest of the phreaking world, I hope that you can focus on the business side of telecommunications which may be in your future. There are more to PBX's than 0-700-456-1001. Any comments, questions, or corrections can be e-mailed to me at Metal Shop Private, or to: J. Sluggo P.O. Box 93 East Grand Forks, MN 56721 This file is dedicated to Bambi for bringing me my fondest memories -- There is "No One Like You!" -- The Scorpions. / \ / luggo !!  Downloaded From P-80 International Information Systems 304-744-2253 12yrs+