By John Kern
President, Kern & Associates

Since the passage of the Telecommunications Act of 1996, mergers in the telecommunications industry have occurred with ever-greater frequency.  What is surprising is that incumbent local exchange carriers have been participants in this merger mania -- Bell Atlantic/NYNEX, SBC/Ameritech, QWEST/US West, and Bell Atlantic/GTE. 

The basic question facing CLECs is, “How will these mergers affect my business relationship with ILECs.”

In order to provide services to their customers, CLECs must have established business relationships with ILECs, especially in the area of Operational Support Systems (OSS).  OSS are the processes by which CLECs and ILECs jointly provision services to CLEC customers. 

By way of example, if a customer of an ILEC desires to become a customer of a CLEC, processes must be in place to: 

• Notify the ILEC that a customer will be transferring service to the CLEC
• Transfer the customer to the CLEC
• Transfer the customers telephone number to the CLEC
• Transfer the customers billing to the CLEC
• Coordinate the activation of the CLEC customer. 

These business relationships are outlined in an interconnection contract, which creates a contractual obligation between the parties.  The effective and timely implementation of these contracts is essential to the ability of a CLEC to provide services.  Hence, CLECs are concerned about the impact a proposed merger will have on the on-going implementation of its interconnection contract.

This concern is compounded by the fact that while the ILEC is a vendor to CLECs for interconnection services and plays an integral role in transferring lost customers to CLECs, they also compete with CLECs or the same customers.  As a result, ILEC behavior and conduct is not always supportive of CLEC business needs.

It's clear that ILEC mergers will greatly affect the business relationship with CLECs, but the extent and magnitude may not be fully known or understood until after the merger is approved and implementation begins.  For example, a CLEC may not know if the merging ILECs will maintain separate systems or develop a common platform, change one or go to a third system.

Even though specific information is usually not provided by the ILEC, it is safe to assume that changes will occur.  ILECs will centralize and consolidate business practices in order to achieve the “synergies” that they anticipate deriving from the merger.  ILECs use these synergies as proof that a merger is in the public interest by arguing that a more efficient ILEC will provide better and cheaper services to customers. 

However, these synergies usually occur at the expense of CLECs.  If new or different OSS are developed because of the merger, CLECs will be forced to re-engineer their operations to these new specifications.  This not only adds cost to CLEC operations, it may also seriously disrupt their business.

The greatest opportunity for CLECs to protect their business interests is during the period that regulators are reviewing the merger.  Approval for ILEC mergers must be obtained from the FCC and certain state regulatory agencies.  Regulatory agencies are most concerned with how a pending merger will affect the public interest.  During their review, they are faced with what appears to be competing goals:  approving a merger so that the ILECs have sufficient scale and scope to compete in a global economy vs. creating a larger monopoly that will prevent CLECs from entering the market.

During the merger review process, ILECs tend to be more cooperative with both CLECs and regulatory agencies as they attempt to obtain merger approval.   This is self evident in that after the merger is closed, CLECs have little opportunity and no leverage to obtain changes to ILEC business practices and ILECs have little incentive to cooperate with CLECs.

In an attempt to satisfy both goals, regulators generally imposed “merger conditions” as a prerequisite for merger approval.  These merger conditions are designed to protect the public interest by forcing the merged entity to support local exchange competition initiatives in exchange of obtaining merger approval.  The goal for CLECs is to attract enough attention to the OSS issues and other business practices that the ILEC or the regulator will make them a merger condition.

Several potential merger conditions could be presented.  First, CLECs could recommend that any existing OSS platform remain for a certain period after the merger closes.  This would ensure that OSS used by CLECs would not be modified for a set period. 

Second, CLECs could recommend that any changes to the OSS be reviewed and approved by a regulatory agency but not before CLEC input on the affect of any proposed change. 

Third, CLECs should make sure that sufficient notice is provided to any changes in the OSS so CLECs have time to make the required changes. 

Fourth, CLECs could recommend that ILECs hold collaborative processes with regulatory agencies and affect CLECs so that all issues, concerns and proposed changes to the OSS are fully understood. 

Finally, CLECs should recommend performance reports to measure specific performance and monitor the ILEC’s on-going compliance with any merger condition.  Steep financial penalties for non-compliance should also be included as a merger condition.  To the extent that failure to implement a merger condition harms a CLEC, these financial penalties could be paid directly to CLECs.

Once a merger closes, CLECs must to work with ILECs to incorporate these new business processes into existing interconnection contracts.  CLECs must also be prepared to file complaints or other legal action to the extent that an ILEC backs off a commitment or is interpreting the commitment in such a way as to harm a CLEC.  In any event, a CLEC’s vigilance must not stop.

There is a long-term benefit for CLECs resulting from a merger.  Those CLECs that operate in both regions of an ILEC merger will benefit from operating with one, instead of two, business processes.  The synergies experienced by ILECs should also benefit CLECs as their internal costs should decline as well.  However, before CLECs experience these long-term benefits, they will have to endure the pain and expense associated with modifying their business process with the ILECs.

CLECs that  choose to become active in ILEC merger activities, must be prepared to devote time, money and staff in order to protect their business interest.   These merger conditions can be both a blessing and a curse for CLECs.

On the other hand, what choice do they have?