Cellular phone used wholesale

RESELLERS MAKE FILING AGAINST CPUC CELLULAR TARIFFING PROPOSAL

The California Resellers Association has filed comments in opposition of the May cellular tariffing decision of Administrative Law Judge Michael Galvin on the grounds that it does not believe it will actually spur competition or lower cellular telephone rates. The proposal intends to remove mandatory wholesale margins, which seems to have provoked the most anxiety among resellers (MPN March 15, pp. 4-5).

The California Public Utilities Commission (CPUC) proposal also would limit the cellular carrier price increases to 10% a year and make them effective immediately when filed, with a 20-day protest period.

"Our biggest fear is that [the measure would allow] the carriers to price us out of the market," said David Nelson, president of the California Resellers Association. Generally in California, the margins are around 21%, according to Nelson, but this decision could cause a severe reduction in that spread.

The Reseller Association's filing noted, "To the extent that resellers are offered wholesale rates by the carriers that insure them favorable margins, they can stimulate price competition by adjusting their retail rates within the spread." The association is made up of 16 California resellers. While Nelson agreed that some retail competition was good, he said that tariffing policies were not the reason for the lack of competition.

According to Neil Fitzpatrick, PacTel Cellular director external affairs, putting the squeeze on resellers would be possible with the new proposed rules, but it would be impractical. "Resellers are a good source of business for us. They are the prime reason we have had such good growth in the Los Angeles area," he said. "It is a benefit for us to have them healthy, and it would be foolish for us to damage it. Their fears are not justified."

...Commission Decision Not Based on Fact, According to Resellers

According to Nelson, the conclusions the commission reached were not based on fact. "Their scrutiny of financial data was not complete and there was no cross-examination; the figures they used didn't add up," Nelson said. "There was also not enough depth to the inquiry into cross-subsidization [of the carriers' wholesale and retail sides]."

The Division of Ratepayer Advocates (DRA) also made a filing opposing the commission's proposal, stating that the decision was based on a "narrow range of facts." The DRA also requested a chance to provide input on the issue of competition and profits in the cellular industry. "An opportunity to be heard implies at the least that a party must be permitted to prove the substance of its protest rather [than] merely being allowed to submit written objections to a proposal," said DRA.

According to Fitzpatrick, the CPUC had all of the company's financial data. "They asked for everything but the kitchen sink the first time around and I think they even got that the second time."

"There is discussion in the proposed decision about what would demonstrate a failure to compete, and the policy adopted in the proposed decision is that carriers can keep revenues derived from use of the radio spectrum to encourage investment," said the Ratepayer Advocates. "However, the commission fails to reach the finding that carriers' profits result from capacity constraints and not a failure to compete under the market."

In filing, the reseller association summarized its position like this:

* Wholesale profits should not be allowed to subsidize carrier retail

operations.

* The wholesale tariff should be unbundled to allow reseller switches.

* Carriers must be required to operate their retail operations in a

compensatory manner.

* Retail rate competition will be enhanced if cost-based wholesale rates

deprive the wholesale carriers of supercompetitive profits.

* Temporary tariffs as proposed in the decision should only be allowed for

wholesale decreases or for wholesale/retail decreases or increases that

are directly proportional on a percentage basis.

* Carriers should treat their retail operations in the same manner as

their independent resellers.

...Commenters Accuse Carriers of Excessive Profits

The Ratepayer Advocates firmly believe that the carriers are presently making excessive profits. The group also expressed frustration at the confidentiality of the carriers' financial information.

"If [we] had not been constrained by carriers' claims of confidentiality on specific [financial] information, [we] could have demonstrated that many wholesale carriers in specific markets earn excessive returns while their systems fail to push the technical limits of cell size and while there is excess capacity on the existing cellular system." The Reseller Association also assailed carriers for making as much as 50% profits in some MSAs.

Fitzpatrick didn't think that the claims were fair. "If you want to cherry pick, there are a handful of alrge metro areas that are financially attractive, but we have many other poor markets with negative cash flows," he said. "We have huge capital investment. Even after a property turns into a positive cash flow, that investment must be paid off." PacTel is beginning construction on cells at the rate of one per week at a cost of $750,000 each.

Nelson did agree with what he called the show of support of the commission for reseller switching equipment. But a hearing directly on that topic has yet to occur. In the long run, Nelson would like the resellers to be released from dependency upon the carriers for monthly access and delivery through the public switched telephone network, and only purchase airtime from them. Nelson also agreed with the CPUC proposal that would allow resellers to negotiate their own roaming agreements.

Lawrence Movshin, attorney for a Washington D.C. law firm, touched on the carrier/reseller competition issue recently at the International Mobile Communications Expo in Dallas. "Indeed, most innovation in pricing and service orientation in cellular, at least initially, is going to come from the resellers - the carriers already have their customer base.

"Moreover, the competition in cellular is now something that is of concern to the FCC. We haven't seen any price decreases and very little price competition on the service side," Movshin added. "They have seen it on the equipment side, largely because of the bundling of agents' commissions with the telephones. There is some concern that the duopoly simply doesn't provide adequate competition to create innovative services and cheap services for consumers."