By Mike Mills
Washington Post Staff Writer
Wednesday, July 31, 1996; Page C01

There will be something for all sides on Thursday when federal regulators establish the official rules for bringing competition to a now largely monopolized industry, the United States' $100 billion-a-year local telephone market, according to government and industry sources.

The Federal Communications Commission plans to detail how local phone companies will be compensated for allowing future competitors to lease circuits on existing telephone networks. The rules are a crucial step to enabling new companies to compete in local phone service, which in the Washington area is dominated by Bell Atlantic Corp.

The new competitors will get comparatively low rates for leasing phone circuits on the existing phone networks, the sources said. The Bells, in turn, will win a one-year postponement of consideration of lowering the subsidies that long-distance companies pay them for handling the local legs of long-distance calls.

The action comes after weeks of high-decibel lobbying among the giants of the industry, with key members of Congress writing the FCC on behalf of the seven regional Bell companies, which dominate local service, and the Clinton administration weighing in on the side of would-be local competitors -- including AT&T Corp., MCI Communications Corp., Sprint Corp., the cable television industry and others.

"This will set the ground rules to tell us how fast, and in what form, competition will arrive," said Jonathan Sallet, chief policy counsel for MCI, which is based in the District.

The vote is the latest step in a process begun with the Feb. 8 enactment of a new federal telecommunications law, which requires states to open local phone markets to competition. The Bell telephone companies have an incentive to cooperate: They will be allowed to offer long-distance services once they demonstrate they face local competition.

Regulators in the District, Maryland and Virginia already have begun allowing local competition, but await these guidelines from the FCC.

Because of the huge cost of building phone networks, many newcomers plan to compete, at least initially, by leasing services on the existing networks and selling them under their own brand names.

The Bells' would-be competitors scored a victory by persuading the FCC to make local carriers offer as many as eight separate network components for lease to competitors, such as copper phone lines and central switches. Those components would be priced based on their individual costs.

The Bells had urged the FCC to make as few as three network elements available, and at higher prices.

Competitors also could lease end-to-end service at rates roughly 22 percent below what carriers charge customers, sources said. The Bells had pushed for only a 10 percent discount.

But the package also has a big present for the Bell companies: The FCC has decided not to wade into the morass of changing the access charge system of subsidies to the local carriers. Bells collect roughly $22 billion a year in these subsidies.

In a meeting with Wall Street analysts last week, FCC Chairman Reed E. Hundt's "key point . . . was that Wall Street ought to calm down, the FCC is not going to reallocate fortunes," said Merrill Lynch & Co. analyst Daniel Reingold, in a memo to investors on Monday.

The Bells have argued that the subsidies are used to maintain low-cost telephone service to poor and rural areas. Removing them, they say, would wreak havoc on their earnings and force states to raise local telephone rates by an average of $10 a month. The FCC agreed to their demand not to tamper with access charges until the agency addresses universal service questions next year.

AT&T and other carriers say much of the access charges they pay -- amounting to 40 cents of every dollar in long-distance revenue -- does not contribute to universal service and instead amount to excess earnings for local carriers.

During the lobbying fray, AT&T and MCI made promises to the commission that consumer groups are applauding: Once the FCC and states reduce access charges, both companies vow to build their own local telephone facilities rather than lease rivals' networks, to offer local telephone service at or below current rates and to lower long-distance rates to reflect the decrease in access charges.

Gene Kimmelman, Washington co-director of the Consumers Union, said the offer from AT&T, in particular, was significant. "This promise commits the marketplace to keeping pressure on holding local rates at current levels as long-distance access prices come down," Kimmelman said.

But Bell company officials were skeptical that their opponents would follow through. "We've heard bogus offers like that before" from long-distance carriers, said Robert Blau, BellSouth vice president for regulatory affairs.