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Fortnightly Magazine - July 15 1998

true market value, rather than simply given away.

Sold to the Highest Bidder

The business strategies of CLECs vary. It is by no means the intention of each registered CLEC to offer service in every locality in the states in which it operates. However, plain arithmetic illustrates that to do so could require scores of additional area codes. This calculation is based on some plain realities: the number of exchanges available in an area code (about 800); the number of local calling areas in a state; and the number of registered CLECs. If, hypothetically, 40 CLECs were to seek to provide statewide service in a state that is divided into 100 local calling areas, it would require 4,000 exchanges -- the capacity of five area codes -- just to serve the needs of new CLECs. In fact, many states have well more than 40 registered CLECs. Some states have many more than 100 local calling areas. Historically, these calling areas were tied to neighborhoods served by mechanical switches. Often, these exchanges have not been consolidated, even as switching technology has been updated.

Under a market approach, state regulators need not become directly involved in setting the value of exchange codes. Instead, they would only set the schedule by which new exchange codes are to be released, keeping in mind the likely period of time within which new solutions -- e.g., number portability and number pooling, which are expected to alleviate much of the pressure on this situation -- will become available. The Number Administrator for the state would assign newly released exchange codes on the basis of an auction that would be strictly impartial and non-discriminatory, in compliance with the key requirements set forth in Section 251.e.2 of the federal Telecommunications Act of 1996.

Central to this approach is the notion that the winning bidder would gain, not only the use of the exchange code, but a transferrable property right to it. Because customers will gain rights to their 10-digit numbers under the number portability provisions of the Telecom Act, these exchange code rights necessarily would expire upon implementation. Moreover, holders of existing, previously assigned exchange codes also must be vested with similar, transferrable, and eventually expiring, rights to them.

By determining and clearly signaling only the time frame by which new codes will be released, state utility commissions could stimulate an orderly market among all LECs in a given area for both new and existing exchange codes, and ensure that the lives of the existing area codes are extended for a considerable period -- if not, in theory, indefinitely.

This auction approach would work by encouraging efficient market exits, providing attractive compensation for less viable competitors who make a well-timed decision to yield up their exchange codes. Whenever an exchange code "jeopardy" situation looms, bids will rise. Competitors with few customers will exit or combine with others and sell rights to exchange codes to those who have a greater need for them. This system would re-establish equilibrium, relax the "jeopardy" situation, extend the life of existing area codes, and reduce the