Forbearance Frenzy June 2007

When the FCC early last year relieved Verizon Communications Inc. of broadband services regulations, the agency essentially invited a crush of me too forbearance petitions from the LECs. Many of those pleas come up for a vote or time extension this summer. The additional three months is more than likely to be imposed. That would mean the FCC would address the matters at around the same time a federal appeals court should hear the case for overturning the March 20, 2006, default approval of Verizons request.

The Bells long have used the forbearance process to shed what they consider to be onerous and outdated requirements. Indeed, Congress, in crafting the 1996 Telecom Act, did give the FCC authority to lift some (although not all) Title II regulations. To grant forbearance, the agency must find that a carrier is too squeezed by other providers to compete effectively. Commissioners determined just that in 2005 when they agreed with Qwest Communications International Inc. that cable was hampering the BOCs ability to operate in Omaha, Neb. The FCC freed Qwest from UNE and wholesale rules, and the ripple effects of that decision just now are coming to light. For one, other LECs have since flooded the dockets, wanting the same leniency (see sidebar below). That, combined with petitions modeled after Verizons broadband services coup, is creating a conundrum for competitive carriers across the country: whether to expand in, or even enter, areas where the Bells are getting regulatory relief.

Nowhere is that dilemma more evident right now than in the Omaha metropolitan statistical area (MSA). McLeodUSA Inc. says its likely to sell or stop operating in Omaha, despite its own network investments. Rival Integra Telecom has decided it wont enter that same region after all, because of Qwest. And companies such as Time Warner Telecom are tracking BOC petitions that could evolve from minor annoyances into big problems.

All of this comes as Qwest, pleased with Omaha as its test case, recently asked the FCC to ease up on regulations in Denver, Minneapolis, Phoenix and Seattle. Verizon also has similar requests pending in six of its northeast territories (see sidebar below).

Petitions for Relief

From Forbearance From Title II and Computer Inquiry Regulations Regarding Broadband Services Petitions for Relief

From Dominant Carrier Regulations, and UNE Loop and Transport Unbundling Obligations in Various MSAs

From Operating Long-Distance Services Under Separate Affiliate

Sources: COMPTEL and FCC
*likely to be extended by three months

Loosening up on the Bells in these markets would cause fallout that will hurt a lot more than the broadband petitions because they take away UNEs, says Mary Albert, assistant general counsel for COMPTEL. Thats going to materially impact cost.

McLeodUSA says thats exactly what has happened in Omaha Qwest has raised access prices so much that McLeodUSA is having trouble serving its business customers. The company detailed its woes in a Dec. 15, 2006, letter to the FCC, and has repeated them in SEC filings this year as it prepared to go public for the second time. Because McLeodUSA remained in its government-imposed quiet period at press time, representatives werent able to say much beyond the scope of their public documents. But they do intend to strenuously argue against Qwests latest forbearance petitions. Pointing to other, different competitors out in the market doesnt mean that taking UNEs away is going to further competition whatsoever, says Bill Haas, vice president-deputy general counsel for McLeodUSA. It just means that, yeah, there [are] other forms of competitors in the market, which is what the 96 Act was all about.

Qwest dismisses such arguments. The carrier isnt out to demolish other providers; it just wants to be on the same footing as everyone else, says Wendy Moser, vice president of public policy. Now, in Omaha, it is. Were not at a cost disadvantage in terms of giving away our network. This has leveled the playing field, she says, and given Qwest the foundation it needs to seek the same relief in its four largest markets.

Those petitions probably wont be the last, either. We have to start somewhere, Moser says.

That worries CLECs.

What we are concerned about is that the last-mile facilities have been built, says Integra Telecom CEO Dudley Slater. Once Integra Telecom completes its merger with Eschelon Telecom Inc., it will operate in 11 states, most dominated by Qwest. If forbearance is granted, the cost of those facilities would go up dramatically and, in our view, would be very close to the retail pricing we charge. Therefore, it threatens our ability to make the necessary margins.

For its part, Time Warner Telecom remains relatively untouched by Qwests regulatory activities the Colorado-based provider uses few UNEs. If the FCC were to reduce special-access regulations, however, the situation would be different. At the moment, the biggest concern we have is theyre basically dismantling the act on a step-by-step basis, says Kelsi Reeves, vice president of federal regulatory affairs.

As competitive carriers weigh the effects of Bell forbearance, many arent taking FCC decisions lying down. A federal appeals court this fall is slated to hear the Sprint Nextel et al v. FCC case. The plaintiffs are challenging the FCCs March 2006 default approval of Verizons request. A court date has not been set, as final briefs were due July 5.

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