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Current issue : #4 | Release date : 1986-03-13 | Editor : Taran King
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Title : Centrex Renaissance "The Regulations"
Author : Jester Sluggo
                              ==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
     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
     "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
     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
     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
     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
     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-
     "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
     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
     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
     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,

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.

 / luggo !!

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