AOH :: P04-07.TXT

Centrex Renaissance


                              ==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.

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