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Longtime Feuds Boil Over With MCI Probe

July 29, 2003

NEW YORK (AP) _ The federal probe into allegations that WorldCom avoided millions of dollars in fees normally paid to local phone companies for connecting long-distance calls cuts to the heart of one of the most bitter, long-running feuds in the telecommunications industry.

The fees, set by regulators, have represented a huge source of revenue for local carriers, a huge cost of doing business for long-distance providers and a huge thorn in the industry’s side for nearly 20 years _ ever since the government broke up AT&T’s national telephone monopoly into seven regional Baby Bells and one long-distance company.

While the long-distance business was tremendously profitable in the early days, the sniping over access fees quickly took hold as the Bells complained they were forced to provide access to their networks below cost and long-distance players complained they were being overcharged.

It’s easy to see why.

Although local access charges have been cut sharply since the early days, ``the fees are still the single greatest expense that any long-distance carrier incurs,″ said Lisa Pierce, an industry analyst for Giga Information Group.

``These charges represent about 40 percent of the long distance cost structure,″ said Rex Mitchell, an independent industry analyst, estimating that long distance companies pay an access fee of about half a cent per minute on both ends of every interstate call.

The stakes are just as large on the flip side.

Verizon Communications, the nation’s largest local phone company, reported Tuesday in its quarterly update that revenue from network access services totaled $3.2 billion, or nearly a fifth of the company’s sales for the period.

Meanwhile, the bickering has only intensified as price wars have left long-distance companies desperate to cut costs.

It was that sort of desperation that helped drive WorldCom down a path of deception:

First came an $11 billion accounting fraud that painted a picture of profitability by masking daily operating expenses like the local access fees.

Now, federal prosecutors are investigating whether the bankrupt company has tried to revive its fortunes by masking long-distance calls as local calls, which require only a minimal access charge to connect. Officials are also investigating a complaint by AT&T that WorldCom, which is seeking to rename itself MCI, also tried to mask long-distance calls by routing them through Canada and back into the United States on AT&T’s network.

SBC Communications, the local phone company for most of the West and Southwest, said it grew suspicious in the spring when customers began complaining that their caller ID displays were flashing local numbers for incoming long-distance calls by MCI subscribers. Further investigation revealed an increase in such incidents in the year since WorldCom’s bankruptcy filing.

``As a long-distance company, anything I can do to originate that call and have it look like a local call to a local network will save me that half a cent a minute on each end,″ said Mitchell.

With the new controversy threatening to complicate its bid to emerge from bankruptcy, WorldCom announced Tuesday that it has hired the Washington law firm Gibson, Dunn & Crutcher to lead a review of the company’s handling of call routing and access fees.

But rivals have seized on the investigation in their campaign to persuade federal authorities that WorldCom does not deserve to compete with a slate freshly cleaned of debt and scandal. In particular, they have bristled at a series of government contracts recently awarded to the company by federal agencies.

``We believe that MCI should not be able to enjoy the fruits of fraud that was perpetrated on the industry and the nation, and there must be some penalties paid for their actions,″ Ivan Seidenberg, chief executive of Verizon Communications, the nation’s largest local phone company, said Tuesday in a conference call about second-quarter earnings.

``We’re very disappointed in the precipitous actions of the SEC and the non-action by the FCC and all the other federal agencies that have just allowed this thing to sort of meander around while there continues to be misbehavior on the part of MCI,″ said Seidenberg.

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