CLECs in Florida say that the latest decision by the Florida Public Service Commission (PSC) will thwart their plans to offer service in areas where Sprint is the local phone company.

by Alex Goldman ISP-Planet Associate Editor [December 13, 2002]

CLECs in Florida are up in arms about a recent decision by the state Public Services Commission (PSC) in Tallahassee.

Particularly irate is Matt Blocha, president and COO of the CLEC Florida Digital Network (FDN). According to Blocha, the local PSC had made it virtually impossible to offer residential service in some areas served by Sprint's Florida ILEC.

"In Winter Park, for instance, a residential customer can get a working phone line from Sprint for $11.47 per month and pay only $51.15 for installation," Blocha said. "Under the new PSC rates, Florida Digital will have pay $17.63 per month just to lease the wires, and we will pay $119.74 for installation. It is a similar story—only worse—in some parts of Kissimmee, where Sprint charges retail residential line rates of $9.17 and business line rates of $20.14. Our wholesale rate under the PSC's new plan will be $24.68."

"It is that simple," Blocha went on. "The PSC granted wholesale rates that are higher than retail rates. They have failed consumers."

Painting by numbers
The other side of the story is that the PSC did lower rates in the most densely populated areas served by Sprint. In a press release, the PSC claims it lowered rates for consumers and competitors, but the numbers show that the PSC allowed full competition in only 5.11 percent of Sprint's coverage area, and effectively eliminated competition in 57.6 percent of Sprint's area. In the rest of Sprint's coverage area, competitors can provide services to businesses but not to residential consumers.

Some (but not all) of the prices were released by the PSC to the general public. The PSC did not release its final numbers, only an earlier draft that included four alternative pricing plans. It released monthly charges, but did not release one-time installation fees. One of the draft proposals is detailed in the table (below).

According to the draft that the PSC released, Sprint has 133 COs in Florida. They serve a total of 2,191,866 lines, for an average of 16,480 lines per CO. The four most densely populated COs serve a total of 111,921 lines, an average of 27,980 lines per CO. Sprint's smallest CO serves 744 lines.

PSC Draft Alternative 4
Zone	No. of COs	Total Lines	Percent of Total Lines	Monthly Rate
1	4	111,921	5.11	$10.82
2	28	817,425	37.29	$17.63
3	29	749,058	34.17	$24.68
4	72	513,462	23.43	$45.40
Total:	133	2,191,866	100	$26.20
Source: Florida PSC

The four most densely populated COs serve 5.11 percent of Sprint's lines. Rates in those COs have been lowered to $10.82. These four COs have been grouped into zone 1.

Zone 2 features the $17.63 per month price noted by Blocha. It covers 28 COs, a total of 817,425 lines, making up 37.29 percent of Sprint's lines. Monthly charges there are $17.63, and Blocha says that compares unfavorably to Sprint's retail residential line rates.

In zone 3, which features the $24.68 per month price, rates are so high that not only is residential service impossible—business service is also impossible. Zone 3 covers 29 COs and 749,058 lines, 34.17 percent of the total.

The remaining 23.43 percent of Sprint's area features even higher prices.

In summary, the PSC has lowered rates in the 5 percent of Sprint's area, represented by zone 1. It has made residential service impossible in the 95 percent of Sprint's coverage area that lies outside of zone 1. Competitors cannot even provide business service outside of zones 1 and 2, in 57.6 percent of Sprint's coverage area.

How we got there
The pricing decision follows two years of paperwork that has been named Order PSC-02-1128-PCO-TP. Filiings to the PSC were heated. The entire paper trail, covering hearings that began on January 5, 2001, is on record here. Competitors involved in the process include Covad, Z-Tel, and FDN. By June 19, 2002, Sprint and FDN were fighting back and forth. On that day, Sprint filed a motion to delete portions of FDN's most recent filing, because it mentioned decisions made by the FCC and by other states. FDN fought back. The PSC found for FDN, and at that point, FDN must have felt that it had won a victory.

The PSC commented, "to the extent FDN's brief contains 'facts' outside the record, this Commission is more than capable of distinguishing extra-record facts from record evidence. However, as FDN points out, it is not attempting to glean facts from the cited decisions, but is relying on the precedential and persuasive authority provided by those decisions, each of which, FDN maintains, presents factual scenarios similar to the case at hand."

FDN had argued that Sprint's cost analysis (the basis of the prices that the PSC would set) were deeply flawed because Sprint was documenting the prices of its existing network whereas the federal competition rules, known as TELRIC (total element long-run incremental cost), require that an ILEC assume that it will build a technologically advanced and efficient network. FDN argued that Sprint's Operations and Support Systems (OSS), its equipment, and even its procedures were out of date. In short, FDN argued that Sprint's entire business was out of date and fundamentally flawed.

ILECs across the U.S. tend to claim that they do not have the money to invest in an up-to-date network, but the financial numbers that these companies release suggest otherwise. Just this week, Sprint's FON division announced that operating income (profits outside of one-time items like asset sales and special accounting charges) for the year would approach $1.9 billion on revenues of about $15.2 billion. The company forecasts lower revenues in 2003 of about $15 billion, but it expects operating income to rise in 2003. The company also announced it would cut 2,100 jobs.

Understanding the system
We spoke to W. Scott McCollough, a competitive telecoms lawyer at Stumpf, Craddock, Massey & Pulman in Austin, Tex., to obtain some perspective on this fight.

A key underlying issue, McCollough explained, is the way that wholesale prices are determined. Prices cover parts of the ILEC network known as unbundled network elements (UNEs). ILECs tend to claim the prices are set too low, while CLECs complain the prices are too high. McCollough said that both are partly right.

"TELRIC requires the states to cost a loop and to price the loop so that the ILEC recovers all of its cost," said McCollough. In contrast, when an ILEC is calculating its retail rates, it can assume that some of the cost of the local loop will be paid for by companies delivering other services over the local loop, such as long distance carriers, and therefore set a lower price.

"In general, this means that the wholesale rates offered to a CLEC are higher than retail for residential but lower than retail for business services," noted McCollough.

"This is especially the case in suburban and rural areas where population is not dense and loops are longer than average. The disparity in costing and pricing rules as between ILEC retail service to end users and UNEs provided to CLECs inevitably leads to little or no competition for residential customers because the loop charge to the CLEC costs more than the full loop plus usage charge to the end user. CLECs want to compete in this sector, but the rules stack the deck against it. If the state commission wants to encourage residential competition, it must be very agressive to make sure that the ILEC does not pad its reported TELRIC loop cost to yield an even higher UNE price," he added.

Where do we go from here?
It's clear that the process is complex, the price setting methods are difficult to understand, and the results are inherently controversial. It is not clear how the process could be changed to better serve competition, ILECs, and, most importantly, customers.

It seems, in this case at least, that many customers in the area covered by Sprint's ILEC have essentially been forced to buy from their local monopoly.

Next week, we'll look at what Florida residents such as Peggy Arvanitas, an individual who has made several FCC filings, are saying about the local RBOC, Bell South, in filings such as this [.pdf].

— End