Verizon's Rickety 'Framework'

Verizon (VZ Quote) hopes a big deal with a small rival can carry a lot of weight.

Sterling Telecom, a unit of closely held BAS Communications of New Hyde Park, N.Y. has agreed to a wholesale pricing arrangement with Verizon. No terms were disclosed in the announcement late Friday, but Verizon called it a "framework" for future contracts with competitors that rent its local phone network to resell calling services.

The proposed deal is one of the first that the New York phone giant has been able to reach as national pricing rules continue to flip-flop . And while Verizon holds up the deal as proof that it can strike reasonable agreements with rivals, observers say these arrangements will be rare and inconsequential as the industry waits for more definitive pricing rules to be handed down.

The Federal Communications Commission is working on a new set of rules in the wake of a major setback earlier this month, when it failed to get a U.S. Supreme Court appeal approved by the Bush administration.

Though Verizon's new pricing framework will be important to show to regulators in coming months, it may not hold much promise as a model on which competitors can base their own deals. One hint that the pact may be noncompetitive is that Sterling says the new higher prices may cause it to drop out of the residential phone business.

Sterling resells Verizon service to fewer than 1,000 customers in the New York area. About 80% of its sales are to small businesses. The company books about $2 million a year in annual phone service sales, according to company executive Paul Contino.

Contino said that under the original unbundled network elements platform or UNE-P rules, his company rented lines from Verizon for $20 a month. Without the discount, Contino says the price would be more like $30 per month. Though he would not offer specifics, he says the new deal puts his price somewhere in between $20 and $30 per line a month.

"They got what they wanted, and we got what we wanted," says Contino. Though Contino says Sterling is profitable, he adds it will be less so with the new prices. Sterling charges businesses $58 a month for local and long-distance service, and offers residential service for $50 a month.

"The $50 product will have to be re-evaluated due to the rate increase," says Contino. "We may have to shy away from the residential because of the rate increase."

Despite the urgings of regulators who would like to see market forces determine pricing, the Bells have struck very few UNE-P agreements with their rivals. The most notable deal was reached earlier this month after an intensive weekend-long bargaining session. Those discussions resulted in Denver Bell Qwest (Q Quote) entering a tentative pact with MCI.

Contino says his negotiations with Verizon took about 10 minutes.