Industry Responds to SEC Probe

The Security and Exchange Commission’s (SEC) informal investigation into the way carriers count their customers brought strong reaction from industry watchers who’ve tried to get the real numbers for years.

Industry analysts have used subscriber numbers to predict carriers’ financial performance, while some billing vendors have based their prices on the number of customers their carrier clients need to bill each month.

The SEC sent letters to at least 20 of the largest carriers asking how they calculate the number of customers they serve. These providers, which include Verizon, AT&T, Cingular, and cable operators Cox and Comcast received the SEC requests. One telecom analyst said the SEC investigation was a long time coming.

“We had real issues with this over the years, how carriers counted customers,” says Craig Clausen, senior vice president of New Paradigm Resources Group (NPRG), a telecom analyst firm. He says the RBOCs were “pretty forthcoming” about their customer counts, but CLECs “felt they should fiddle with the numbers.” Some CLECs, he says, would count customers through “access line equivalents.”

“If they had a T1 going into a building, they’d multiply by 24 to get a customer number. When CLECs would count customers, there was no consistent recording; there was no accurate, true metric to give a good picture of how the company was doing,” Clausen says.

Startup CLECs and wireless carriers that could show a high-growth customer base could draw investors looking to shovel money at telecom firms when the market was hot a few years ago. These days, stock prices can rise and fall based on the number of customers a wireless carrier can claim.

Counting wireless subscribers should be a simple matter, he says. “A cell phone is a cell phone, one customer. It’s easy to count.”

In an industry segment high in churn, it’s the timing of the wireless count that makes the difference. “It’s not how they count it but when they count it. People sign up for the wireless service, they can’t pay for it, yet the carriers may leave those customers on their books for a while.”

Part of the difficulty stems from providers that sell multiple service offerings. Do they count a customer who signs up for voice, video and data as three accounts, or one customer? While each carrier seems to have its own method of counting customers, the cable industry standard has them count the number of customers in one pile, then supply another number that reflects the number of revenue-generating units—the number of combined services for which customers sign up.

“We’ve moaned that they need to be a little clearer about how they’re measuring it and when they’re measuring [customer count]. We want to give people good numbers to be able to compare apples to apples,” Clausen says.

OSS vendor NetCracker says some vendors base their prices on the number of accounts the carrier wants to support and bill for. Though NetCracker bases its pricing on the number of carrier employees using its software and services, “It has a significant tie on the billing vendors where it has a direct impact on what they charge,” says Julie Wingerter, vice president of strategy at NetCracker.

Meanwhile, carriers have begun to reduce the number of subscribers they’ve claimed in the past. MCI, for instance, regularly claimed 20 million subscribers but reduced it to 15 million subscribers after press inquiries.

FCC Clarifies Some Interstate Access Rules

The FCC clarified several rules governing interstate access rates in the June 24 Federal Register. The commission first and foremost determined that it won’t cap CLEC access rates for toll-free traffic at the rate the ILECs charge. The ruling upholds the commission’s 2001 rules that don’t let CLECs tariff interstate access charges above the competing ILEC’s rate.

The order also struck down the IXC practice of refusing to provide access for CLECs based on missing billing name and address (BNA) information. While competitors must do their best to provide that information, the commission ruled, “CLECs persuasively argue that this proposal would encourage IXCs to find inadequacies with CLECs’ BNA information in order to avoid accepting (and paying for) access service.”

The commission also ruled on several other access rate questions in the June 24 Register, including:

• A CLEC can charge the full benchmark rate if it provides an IXC with access to the CLEC’s own end users. When the IXC is not serving the CLEC end user, it should be no higher than the rate charged by the ILEC for the same functions.

• Any pre-subscribed IXC charge (PICC) imposed on a CLEC qualifying for the rural exemption may be assessed in addition to the rural benchmark rate if and only to the extent that the competing ILEC charges a PICC.

• The rate that a CLEC charges for access components when it is not serving the end-user should be no higher than the rate charged by the ILEC for the same functions.

Congress Introduces VoIP Legislation

A handful of lawmakers have introduced bills in both houses of Congress to prevent the nascent VoIP industry from becoming enmeshed in the kinds of regulatory rules that have burdened the PSTN. The bills at the same time seek to find ways to allow law enforcement agencies to tap into networks without requiring VoIP providers to build interfaces such as those required under CALEA. The bills also seek to define how and where VoIP providers might be required to pay into the USF.

A law enfircement official told the Senate Commerce Committee discussing one of the bills that unregulated VoIP would be a “haven” for terrorists unless the government requires special wiretap interfaces to be built in VoIP networks.

Under Sen. John Sununu's (R-N.H.) “VoIP Regulatory Freedom Act,” however, VoIP providers would have to honor wiretap orders without designing special interfaces to support eavesdropping equipment.

Rep. Charles Pickering (R-Miss.) has introduced a bill of the same name in the House that explicitly extends CALEA design rules to Internet telephone providers. Both versions would pre-empt the FCC’s rulemaking process on VoIP wiretapping, but the commission has yet to rule on whether to expedite that decision.

Senators also grappled with requiring VoIP providers to pay into the Universal Service Fund. Sununu's bill would require VoIP providers to pay directly or indirectly into the USF, says Glenn Richards, partner at Shaw-Pittman, a communications lawfirm in Washington, D.C. He’s also legal counsel for the Voice on the Net Coalition, an organization of VoIP providers. Though the words “directly or indirectly” aren’t defined, VoIP providers are already indirectly paying USF fees. “They are paying [USF] through the interconnection agreements they have with [carriers] that charge them as users of the PSTN,” Richards says. “The FCC hasn’t determined that they have to pay them directly yet, so it’s doubtful that they’re volunteering to pay it directly.”

The bill also prohibits state and local regulation and taxation of VoIP.

In other news, two House members in early July introduced a bill that would give the FCC oversight of VoIP networks, wresting control of VoIP from the states. Reps. Rick Boucher, D-Va., and Cliff Stearns, R-Fla., want the FCC, not state utility commissions, to oversee VoIP rulemaking. Their bill is in response to a multi-state push to extend state sovereignty over Internet phone calling.

The Boucher-Stearns Proposal, as it’s known, would declare VoIP service an interstate service and subject only to FCC jurisdiction. They point to the years-long battle between states and the federal government over rules governing the PSTN, which has been hamstrung by unending court cases and legal posturing.

Their proposal, however, does allow for increasing the amount people pay for certain VoIP services by allowing E-911, USF fees and access charges to be levied for VoIP traffic.

FCC Eliminates Pick

and Choose

CLECs can no longer “pick and choose” the parts of interconnection agreements they want to use now that the FCC has ruled out the practice. The decision ends the right of CLECs to select any portion of a pre-existing agreement struck between an ILEC and another CLEC in establishing its own interconnection agreement with the ILEC. The “all or nothing rule” forces CLECs to accept such interconnection agreements in their entirety.

Competitors say the decision further erodes negotiating power when seeking agreements to help them provide their customers with new products and services. CLECs will also have to pay more money to lawyers now that they have to negotiate more inclusive agreements.

“It is the smaller competitive carriers—who have no market power—that needed the negotiation rights that Congress put in the 1996 Act, and that the Supreme Court unanimously affirmed,” says John Windhausen, president of ALTS. The FCC’s new interpretation of Section 252(i) of the ’96 Telecom Act does not, in the words of the FCC, “compel” pick and choose rights, the commission said in explaining its decision. It also believes the new “all or nothing” rule promotes more “give and take” in negotiations and will reduce negotiation time and areas of dispute.

ILECs have complained that the pick and choose option gives CLECs the best of both worlds: access to the network without investment beyond a lease payment. “The FCC’s decision will help bring the telecom industry closer to a market-driven environment because it will encourage companies to negotiate commercial agreements in good faith instead of allowing some carriers to exploit the system,” a spokesman for The United States Telecommunications Association said.