Phone Carriers Seek to Pass Upgrade’s Cost to Customers

Telephone carriers on Tuesday started asking federal regulators for permission to begin charging customers for $4 billion to pay for a politically controversial project that marks the most sweeping upgrade of the nation’s phone system since direct dialing 60 years ago.

The huge telephone overhaul, a central element of the landmark Telecommunications Act of 1996, is aimed at promoting competition by allowing customers to keep their existing telephone numbers when they switch local phone companies.

But some experts estimate that the complex and potentially risky technology behind phone number portability will cost every phone subscriber--even those not changing carriers--as much as $1 per month.

“It’s almost an insult to tell the consumers of America that they have to pay to get more competition,” said Rep. W.J. “Billy” Tauzin (R-La.), who chairs the House Telecommunications and Finance Subcommittee. “Phone rates should be going down, not up.”

On Tuesday, Ameritech Corp., a regional Bell telephone company that serves 12.2 million customers in the Midwest, filed for a $170-million rate increase over three years as compensation for establishing portability in Illinois.

The filing with the Illinois Commerce Commission comes less than a week after another regional Bell, US West Inc., sued the Federal Communications Commission in federal court over the agency’s delays in issuing rules specifying how telephone carriers can recover their cost of providing number portability. On Tuesday, the court gave the FCC 15 days to respond to US West’s complaint.

“We are spending huge amounts of money right now on number portability, and it is money that we are entitled, as a matter of law, to recover,” said Bob McKenna, corporate counsel for US West.

Telephone number portability has been touted by proponents as essential to jump-starting local telephone competition.

By law, carriers must provide telephone number portability in Los Angeles and five other big cities by March. The system must be phased in nationwide by June 30, 1999.

Congressional lawmakers and FCC officials say the technology will help level the playing field for entrenched local phone carriers and new rivals. Number portability is crucial to avoiding expense and inconvenience for phone users, especially businesses that otherwise would be forced to change advertising and stationery to include the new numbers.

But less than five months before the technology is scheduled to make its debut, it has instead served to ignite a political firestorm among beleaguered phone users who have grown irate that telecommunications reform has delivered higher phone bills rather than more phone competition.

“I’m very troubled by the phone companies’ efforts to recover incremental costs when their return on equity is approaching 30% to 40%,” said Mark Cooper, telecommunications policy director for the Consumer Federation of America, a Washington-based consumer group. Telephone companies, he added, “could well pay for number portability out of their current stream of revenues and still make a good rate of return.”

A rate boost to pay for telephone number portability would be the second major rate increase ordered this year by the FCC. In May, the agency raised rates by more than $2 billion a year for businesses and residential customers with multiple phone lines to help fund wiring of schools for Internet access and to subsidize phone service in costly-to-wire rural areas.

To provide number portability, many carriers will have to upgrade their phone switches--which can cost as much as $750,000 apiece. The new switches use a unique 10-digit location routing number, which is different from the telephone number, to tell the phone network where the phone number is currently located.

In addition, they must set up seven different regional computer databases in Canada and the U.S. to store the routing numbers. Thus, when a call is placed, the phone network will make a split-second query to the database for the location routing number and then send the call to its destination.

Offering such technological razzle-dazzle, however, comes at a time when the phone industry is coping with an avalanche of other sensitive technology issues. They include fixing telephone computers to handle the much publicized year 2000 problem and hiring a new company, Lockheed Martin Corp., to take over the administration of telephone number area codes. All this, experts say, could cause reliability problems.

Number portability “is a huge change that impacts all phases of the telephone business at a time when there are all of these other changes going on,” said Carol O’Brien, an executive for Bellcore, the research arm of the regional Bells. “There are people who are concerned that this process may not go smoothly.”

“I think that a phone outage is a real possibility,” said Alan Hancock, a senior consultant with Green River Systems, a Dallas-based firm that developed number portability software for BellSouth Corp.

The FCC has delayed issuing rules on how phone companies could bill customers for the cost of number portability. Former FCC Chairman Reed Hundt left the issue, which had been included on the agency’s October meeting agenda, for the incoming commissioners to handle.

The agency now must decide whether to limit recovery to direct costs spent on the number portability network or to also include indirect spending on equipment that has broader applications.

SBC Communications Inc., which provides service in California, estimates that number portability will cost subscribers more than 70 cents a month.

But Donna Roberts, a senior counsel for MCI Communications Corp., on Tuesday urged the FCC to be circumspect about the cost claims.

“We take issue with the claims of the [Bells] that local number portability is going to cost as much as $4 billion to $6 billion,” Roberts said. “There is a great degree of variation in what one [Bell] says and what another says is the real cost of the upgrade, and the numbers they give the FCC have changed over the last six months.”

Nevertheless, an FCC staff proposal has recommended that 25% of the expense of implementing number portability should be recovered with a new federal levy on consumers’ phone bills, according to FCC and industry sources. The remaining 75% would be the responsibility of the states, which would eventually be passed on to consumers as well.

It is unclear whether FCC commissioners favor the staff recommendation. New FCC Chairman William Kennard could not be reached for comment. But he is said to have discussed the issue with some of his fellow commissioners and to be resigned to allowing some increase in phone bills.

Agency sources believe a decision could come as early as next month, when the FCC has its last open meeting of the year.