Editor’s Note: The “dot com bomb” got more attention in many quarters, but another big business story in 2001 was the telecom meltdown. Is more grim news coming? This is the second of a two-part series examining the tortured state of telecommunications companies. The Telecommunications Act of 1996 forced the Baby Bells to open their lines to competitors, and observers correctly predicted that the new laws would result in a booming industry.

As loud as that boom was, the ensuing crash was even louder.

By late 2000 competitive local exchange carriers, also known as CLECs, were becoming more cash strapped with each passing minute. By November, Carolina telecom workers were beginning to lose their jobs and industry analysts were predicting a shakeout similar to what was seen in the dot-com world would level 50 percent or more of all existing CLECs.

Cary-based Access Point filed for Chapter 11 bankruptcy protection in late 2000 a few days following the announcement that it had laid off 71 workers. The company has since pulled itself out of bankruptcy. About the same time Greenville, S.C.-based New South Communications trimmed 27 people from its Raleigh offices in an attempt to trim payroll by $10 million.

And Raleigh-based BTI Telecom, a privately held company, nearly slipped into the telecom abyss last year. BTI was choking on $400 million in debt and was forced to lay off 270 employees in early 2001 before New York-based investment firm Welsh, Carson, Anderson & Stowe wiped out half of its debt by buying back all of BTI’s public notes.

By mid-December the stock prices of most CLECs were caught in a nosedive, and 27 of the 35 public companies watched their share prices plummet to less than $10. Charlotte-based US LEC managed to sail through the storm without laying off a single employee, says company president Aaron Cowell, but its share price bottomed out near $2 after reaching a high of close to $48 in January 2000.

“I think what happened in our industry was an overall magnification of what happened in the technology sector,” Cowell says. “We had businesses that were viewed and valued on the belief that there were riches to be obtained very quickly. People’s eyes were just too big for their plates.”

Tight purse strings were just enough rope

Blame for the crash can be placed on many factors, observers agree. The CLECs were able to raise billions for working capital to help build out their networks, which would enable them to rival the Baby Bells in terms of capacity. But banks, venture capital firms and the big equipment manufacturers, which were lending money to CLECs, began to tighten their purses after experiencing setbacks of their own, and many of the CLECs were unable to continue with expansion plans.

Some networks were abandoned altogether, such as the fiber-optic loops planned in Raleigh and Charlotte by Carolina Broadband. That company burned through a North Carolina-record $402 million in venture capital without laying down a single inch of fiber, and later laid off nearly all of its staff after failing to raise another $400 million in debt financing.

Most telecom executives said that by making it difficult for competitors to access their lines the Baby Bells were not complying with the Telecom Act of 1996. Now, as BellSouth makes its push to begin offering long-distance services throughout the Southeast, a new argument is sprouting on the industry’s landscape and its backed, at least in Georgia, by a concerted effort led by a former U.S. long-distance heavyweight.

Wholesale rates Bell’s Achilles heel?

Miss.-based MCI WorldCom, ITC DeltaCom and Access Integrated Networks, two Georgia-based CLECs, have filed a joint petition with Georgia’s Public Service Commission requesting that it force BellSouth to submit cost studies for commission review detailing what it charges wholesale customers to access its lines.

The petition contends that current Federal Communications Commission regulations require the Bells to provide CLECs purchasing wholesale services access to four or more business lines for about $3 per month. But only if the business is located in one of the nation’s top 50 metropolitan areas, as determined by the FCC. If the business is not in that city, the Bells are only required to provide three lines, and rates for any lines above that are determined by the local Bell company.

Rodney Page, vice president of strategic development for AIN, says that in smaller cities throughout the Southeast, BellSouth says it charges wholesale customers the “market rate.” Page says that rate is about $14 per month, per line.

“The BellSouth network, which was built over the last 100 years and largely by federal funds, is a national resource that should be opened so that customers can have a choice of local service provider and that smaller companies can compete and thrive,” Page says.

Fight isn’t over – yet

MCI WorldCom has also filed similar petitions in Louisiana and North Carolina, asking state regulators to review BellSouth’s wholesale rates. MCY contends that the company simply wants to enter the local service provider market as CLECs were provisioned through the Telecom Act.

BellSouth spokesman Clifton Metcalf responded to MCI WorldCom’s petitions, telling LocalTechWire that “this is really nothing more than an attempt to distract the utilities commission and deny our efforts to bring long-distance services to North Carolina.”

The Bell’s have been prohibited by federal law from offering long distance service to retail customers until they can prove beyond a reasonable doubt that they are complying with the Telecom Act, and allowing competitors to access their lines. The BellSouth recently filed a petition with the FCC, asking that it be allowed to sell long distance services in Georgia and Louisiana. The North Carolina Public Staff has already recommended letting them enter the market in the Tar Heel State. The commission has about 80 days to rule on the filing.

Many of observers agree that BellSouth’s entrance into the long-distance market was inevitable, but they say allowing the Bells to enter the market now may be a mistake.

“I don’t oppose their entry, but I do oppose their premature entry,” says Russell Frisby, president of the Competitive Telecommunications Association in Washington D.C. “If they are allowed to enter the market before they have shown that they are complying with the law it will strain competition. There will be no checklist in place to ensure the local markets stay open, and it will reinforce their monopoly. I think many of the smaller CLECs will be forced to close up shop.”

US LEC’s Cowell has a different perspective on the BellSouth argument. “I think there will always be some level of conflict, some level of questioning, because at one time we are both customer, vendor and competitor (with BellSouth),” Cowell says. “That’s an unusual circumstance.”

The telecom bust is clearing

Observers agree that the prospects for 2002 again look bright for those CLECs that have completed the build out of their networks, mainly because the industry has returned to a world where the real competitors remain the Baby Bells. But the carriers that don’t own their own facilities and still need to access the lines of their competitors in order to offer services, such as Access Point, may have a harder time than companies with established networks.

“We’re ready to compete with the Bells on a services basis,” Access Point’s Brown says. “I’m not going to run and hide from them.”

But observers and common sense agree that the remaining CLECs need to focus their business strategy around landing customers rather than searching for available capital.

“As long as you’re building your business around individual sales that make money, and its core is customer revenue, as long as you mind your headquarters expenses and how much you’re paying for facilities and other network usage, it’s a plan that not only makes sense, it’s the only plan that makes sense,” Cowell says.

Executives at BTI seem to agree. Since Joe Cece assumed the role of CEO last summer he has publicly declared that the company will not spend any more cash on expansion. And just last week US LEC executives told Local tech Wire they would not be investing in new, untried equipment.