Bells Making Profits on Leases, Study Says

Times Staff Writer

The Baby Bells earn healthy profits off regulations that require them to lease their local phone networks to rivals at discounted rates, according to a study to be released today by a trade group of those competitors.

The study by the Competitive Telecom Assn. is designed to rebut the claims of Baby Bells such as SBC Communications Inc., California’s dominant local carrier, that they have to lease their lines and other equipment to rivals at prices below their costs.

For the record:

12:00 a.m. May 24, 2003 For The Record
Los Angeles Times Saturday May 24, 2003 Home Edition Main News Part A Page 2 National Desk 2 inches; 76 words Type of Material: Correction
Telephone study -- A Business article Thursday about a study on wholesale lease rates charged by Baby Bells mistakenly said that a separate study shows that SBC Communications Inc. is losing about $17.50 per leased telephone line each month. An article by the director of technology policy at the Mackinac Center for Public Policy did not independently verify the figure but simply repeated SBC’s own claim that it loses that much money on average in Michigan.

The study maintains that the four Bell companies were earning wholesale profits at the combined rate of $605 million a year on their discount leases by the end of March.

Although selling at those prices provides less revenue than retail sales, the Bells enjoy profit margins of 16% to 33% on their wholesale business, according to CompTel, which represents such competitors as AT&T; Corp. and WorldCom Inc.'s MCI unit.


“Wholesale leasing is a moneymaker for the Bells,” said CompTel’s president, H. Russell Frisby Jr. “On average, the Bells are earning more than 20 cents on the dollar every time a competitor leases a [discount] line. That’s a good business.”

But the Bells say there are no profits, only losses, on the wholesale business.

“When another carrier uses Verizon’s real network to deliver service, the wholesale price it usually pays is based on a dream world where networks are assumed to be almost as efficient as thought,” said Larry Plumb, spokesman for Verizon Communications Inc., the state’s second-largest local carrier.

The rates amount to a “corporate welfare plan primarily benefiting two large companies, AT&T; and MCI,” said SBC spokesman John Britton. The low prices, he said, are “killing investments in telecommunications infrastructure and killing jobs at a time when the economy needs to be supercharged.”

In the last few years, California and a number of states have slashed prices that SBC and the other Bells can charge rivals in an effort to stimulate competition quickly. Higher wholesale prices had been keeping rivals away, long delaying the competition promised by the Telecommunications Act of 1996.

The CompTel study determined that SBC, which has leased nearly 5.8 million lines in 13 states to competitors, was earning wholesale profit at the rate of $275 million a year, giving it a 19.9% profit margin. Verizon, with 3.5 million lines leased to rivals, was earning $149 million on an annual basis with a 16.2% return.

But Britton pointed to a recent study in Michigan, a low-rate state where rivals have gained a quarter of the market, that shows SBC is losing about $17.50 per leased line each month. The study was done by the Mackinac Center for Public Policy.