When the Math Just Doesn’t Add Up

Incumbents Continue to Tell Wall Street One Thing and Washington Another

It isn’t unusual for incumbents suffering from broadband access control issues to misinform and mislead the public in the hopes that people won’t notice they are sick. But that does not make it right. We are looking at you CenturyLink.

In a Communications Daily article posted this morning Steve Berry, President and CEO of the Competitive Carriers Association called into question remarks CenturyLink has provided in FCC filings that directly contradict public comments from the company’s CFO during their Q1 earnings call in May of this year.

Below is the full article from Communications Daily posted with permission by Warren Communications News at www.warren-news.com.

CenturyLink Hits Incompas/Verizon Plan to Cut Special Access Rates as Unjustified

by David Kaut

CenturyLink knocked an Incompas/Verizon proposal to reduce ILEC rates for DS1 and DS3 special access services in areas deemed noncompetitive “to account for supposed growth” in ILEC productivity since 2005. CenturyLink said the proposal would cut ILEC DS1 and DS3 rates by 10 percent in year one and another 5 percent in year two, on top of productivity-driven “X-factor” cuts of 4.4 percent for both years, producing a total reduction of more than 20 percent in the first two years. The cuts could potentially affect Ethernet rates as well, if a “benchmarking” plan is adopted, the telco said.

“These proposed rate ‘adjustments’ could only be justifiable if ILECs’ average cost of providing service had declined steeply since 2005,” said a CenturyLink filing Monday in 05–25. “In fact, just the opposite has occurred. CenturyLink’s ILEC operating expenses have fallen at a much slower rate than the demand for its services — and its costs to provide legacy TDM services such as DS1s and DS3 have actually increased — causing CenturyLink’s average cost of providing service to steadily climb.”

CenturyLink said its ILEC operating expense per access line rose by more than 50 percent from 2007 to 2015, from about $650 to nearly $1,000. It said its ILEC operating expense per business data service (BDS) circuit also increased, from $18,831 in 2011 to $20,832 in 2015. “These rising average costs directly contradict the implicit assumption in INCOMPAS-Verizon’s radical proposal that productivity for ILEC services has substantially increased over the past decade. Given this hard evidence, a Commission decision imposing a significant reduction in BDS rates would be patently unlawful.”

Competitive Carriers Association President Steven Berry said he understood CenturyLink had made a confidential submission claiming rising expenses. “We only have access to their public comments where they state that ‘there aren’t a lot of continuing incremental expenses associated with providing’ this ‘high margin’ service,” emailed Berry. “As an essential input to wireless service today and 5G leadership tomorrow, the time has come for the FCC to act and ensure this critical connectivity is provided to protect consumers, not continued overinflated charges.

Berry recently disputed ILEC arguments that proposed special-access rate cuts would discourage investment. On a Competify conference call Aug. 8 to advocate for BDS regulation, Berry pointed to comments by CenturyLink executives on the company’s Q1 earnings call in May as revealing it didn’t have many incremental costs in providing special access service once networks were deployed.

A Competify representative highlighted the specific CenturyLink comments, which came from the transcript of the May call. An analyst, Frank Louthan of Raymond James, asked about the potential fallout of FCC special-access regulation, and specifically about CenturyLink’s “net exposure” from revenue and certain network costs. “I mean, it’s the wholesale revenue basically, and it’s high margin, Frank,” said Stewart Ewing, CenturyLink chief financial officer. “So there aren’t a lot of continuing incremental expenses associated with providing that service. It’s mostly in the investment that was required to build a service out. There’s some maintenance costs, but it’s probably pretty minimal.”

Louthan said he was referring to the costs CenturyLink incurs when it buys special access outside its region, where the company would benefit from rate cuts. “That would be a benefit on the cost side as well, Frank,” said CenturyLink CEO Glen Post in response to Louthan on that call. “And we haven’t really been able to quantify that either, and frankly, I’m not sure exactly of the relationship now between what we spent with our third parties versus our revenue. I think, when we look at this in years past, it basically — there was some benefit, but the benefit wasn’t enough to offset the potential reduction. And especially this time when they may bifurcate the special access between urban areas and rural areas, so you really just don’t know what they’ll end up doing there and what the implications would be to us until we really get a better understanding and get more detail and have the notice for both rule-making and reply comments made and all. I think, then, we’ll have a better feel, maybe towards the end of the third quarter or so.” CenturyLink had no comment Monday.

This article was posted with permission by Warren Communications News at www.warren-news.com.