Off to the Races

By Tara Seals

Posted: 3/2003

Off to the Races:
Telecom Reacts to FCC Ruling

By Tara Seals

There was no dancing in the streets
for competitive telecom providers when the FCC handed down the results of its
Triennial Review in late February, but the mood was generally upbeat thanks to
the upholding of UNE-P regulations. The incumbents, meanwhile, who have fought
tooth and nail for looser rules to stem what they say is a regulation-triggered
flow of revenue from its coffers, lost the UNE-P battle but won a few important
concessions in the area of line sharing and some broadband regulations. It looks
like competitors are still in the races, but the FCC’s decisions are, by all
accounts, a mixed bag of feed.

"There was a good deal of horse
trading," says Russell Frisby, president of the Competitive
Telecommunications Association (CompTel). "Some of it benefited
competitors; some of benefited the RBOCs."

One of the finest thoroughbreds
competitors received was the decision to guarantee UNE-P for the next three
years.

"[The FCC] acknowledge[s] that
competitors are impaired in the mass market for switching, and have given a
strong state role for the rest of the year to further clarify the FCC rules at
that level," says Peter Karoczkai, senior vice president of sales and
marketing for InfoHighway Communications Corp., who was on hand in the meeting
in Washington, D.C. We will be visiting a lot of state capitals in the coming
year, and we will be very active there."

Sarah Bialk, a spokeswoman for UNE-P
based CLEC Z-Tel Technologies Inc., says Z-Tel is "cautiously
optimistic," since they won’t see the actual order for several weeks.
However, the decision, she says, partially "lifts the dark cloud that has
been hanging over the competitive industry for months now."

Preserving UNE-P predictably set off
a flurry of statements from RBOCs and their sympathizers. The decision to
continue to mandate the controversial resale model causes the Bells to lose
money on the wholesale side while competitors steadily eat away at market share,
they say. That impedes the Bells’ long-term viability and will lead to further
rocky times for the telecom industry, they say.

"Congress, the Administration
and the American people were looking to the FCC to follow the dictates of the
courts and the mandate of the statute to revise a deflationary policy and
restore economic growth, capital investment and jobs to the telecommunications
sector of the economy," reads the statement from Walter B. McCormick, Jr.,
president and CEO of the United States Telecom Association. "But as
Chairman Powell said, a majority of the Commission abdicated their
responsibility in important areas. Had they been as forward looking with regard
to switching and UNE-P as they were with line-sharing and broadband, all of
America would have benefited, but instead, the regulatory landscape is left
uncertain and the economy is left to stagnate."

The Bells agree. "We are
certainly disappointed in the decision," says Steve Davis, senior vice
president of public policy and law, Qwest Communications International Inc.
"We think the majority [of FCC commissioners] missed a golden opportunity
to jumpstart investment and confidence in this industry."

Bill Blau, vice president of federal
regulatory affairs for BellSouth Corp., says the problems of the ruling extend
far beyond the Bells’ margin issues with UNE-P. "At the end of the day the
only competition that will be lasting is facilities-based," he says.
"More and more CLECS and ILECs will suffer as a result of more and more of
these types of regulations.

"This ruling has added a lot of
uncertainty to the industry, and investors can’t quantify or manage the risks
associated with it," he adds. "So rather than take it they will take
their money and walk," he says. "This is not a healthy investment
environment."

As McCormick notes however,
incumbents can look to a bright spot in the FCC’s decision to not require RBOCs
open its fiber-optic broadband networks to competitive Internet service
providers.

"The FCC’s broadband decision
shows that the Commission understands the need for a national policy that
preserves the economic rationale for companies making big investments in
technology," says William Daley, president of SBC Communications Inc.

Contrary to industry groups’ claims,
"This culture of dependency and avoiding capex for CLECs is not a
prescription for new service applications and innovation; it’s a big downward
spiral, not just for us, but for CLECs," says Blau. "The key to
innovation in this business emanates from switching technology, and if
everyone’s using the same switch and the same network there won’t be any
diversity to speak of. You’ve got to have people investing in their own
switching, because for now it’s a pricing game, which drives the returns down
below the cost of capital."

Horse hooey, says the competitive
side of the industry. Some say the decision will kill choice for America’s
consumers and businesses.

"A competitive ISP market has
helped transform the Internet into a powerful communications and technology tool
for both individuals and organizations, stimulating small business development
and benefiting the entire economy," explains Information Technology
Association of America President Harris Miller. "Today’s FCC decision for
broadband is likely to reduce the number of ISPs consumers can choose from by
about 99 percent."

In fact, the decision to give the
Bells concessions in the area could lead to steps backwards in innovation, says
Jim Cicconi, AT&T Corp.’s general counsel. "Policymakers should monitor
closely the level of the Bells’ future investments to see if this radical
deregulation fosters the extravagant investment in next generation high-speed
fiber networks the Bells have promised, or whether the Bells’ assurances
represent simply another empty promise designed to kill competition rather than
foster innovation," he says.

The fiber-optic connectivity that
ruling applies to is largely a future technology, says Royce Holland, chairman
of the board and CEO for CLEC Allegiance Telecom Inc. While Allegiance is
unaffected by the FCC’s ruling for now, "There is a potential problem when
three or four years from now packet-based technologies are introduced to the
small and midsized business market and we won’t have access to that," he
explains. "Trying to take future technology and only letting the ILECs use
it is bad policy."

Placing that responsibility in the
hands of the incumbents will adversely affect the consumer, says Wayne E. Huyard,
president of MCI mass markets for WorldCom Inc., a major player in the CLEC
space and one of the Bells’ most formidable opponents.

"As Commissioner Copps stated,
this will perpetuate the ultimate bottleneck in consumer access to competitive
broadband services," he says.

Verizon Communications Inc.’s Tom
Tauke, senior vice president public policy and external affairs, says the
broadband regulations do have a down side for the ILECs.

"Of particular concern is the
requirement … that companies like Verizon cannot retire copper loops or
subloops without going to the state and getting approval from the state,"
he explains. "Today … we are able to replace copper with fiber without
going to the state for permission. It appears to be an attempt to have us
maintain two networks — a copper network which competitors could use to offer
services and a fiber network, which we could use to offer services. That
obviously is a major deterrent to investment.

"It appears that the FCC on one
hand is trying to provide incentives to deploy broadband and on the other it is
taking those incentives away," he adds.

"This is a difficult
compromise," says Mike Pruyn, a spokesman for AT&T, which offers UNE-P
based residential service to 2.5 million people in nine states. "Certainly
the decision relevant to UNE-P is a win for American consumers and small
businesses and will nurture the competition there that’s just in the early
stages. But on broadband, it remains to be seen."

While confusion remains regarding
the broadband ruling, the decision to sunset line sharing during the next three
years, in favor of forcing competitors to lease whole loops, is certainly a blow
to those looking to expand their DSL business in major markets, say industry
players.

"We will continue to lease
copper in underserved and rural areas, because this decision did not address the
UNE elements important to us, for which we are relieved," says Dan Moffat,
CEO for broadband provider New Edge Networks Inc. "But those focused on
line sharing for consumers are going to have a hard time."

Covad Communications Co., one of the
last remaining DLECs, has been embarking on an aggressive campaign to extend DSL
service, signing a number of high-profile agreements with companies like AOL and
AT&T. With line sharing gone, those plans may be cut off at the knees.

However, Covad CEO Charlie Hoffman
says it will continue to focus on its strategic marketing relationships,
"bundling our data products with voice services, and continuing to expand
our presence in the business markets." Its success, he explains, rests on
Covad’s ability to negotiate wholesale pricing on whole loops that will allow it
to stay profitable.

Industry groups are expected to
fight the decisions in this area.

"We are deeply concerned how
other key aspects of the order — the restrictions on broadband unbundling and
the termination of line sharing –will impact consumers and competitive
carriers," says Walt Blackwell, president of the Association of
Communications Enterprises.

Another issue bedeviling competitors
is FCC Chairman Michael Powell’s perceived lack of support for the spirit of the
1996 Telecom Act.

"We are also very concerned
that the chairman dissented and that he has not realized the value of
competition to businesses and consumers," says Karoczkai. "But at the
end he threw down a challenge to continue to provide service, and absolutely we
will live up to that challenge."

UNE-P Safe for Now

By Josh Long

In a victory for the competitive
telecommunications industry, the Federal Communications Comm-ission has left in
place telephone regulations that have emboldened companies to invade the
once-indomitable turf of the four Bells.

The FCC voted to preserve local
phone regulations that allow competitors to lease the Bell networks at heavily
discounted rates, granting state regulators the authority to determine whether
competitors are impaired without access to the incumbent networks based on
economic and operational criteria.

Under the FCC’s ruling, regulators
have nine months to analyze whether impairment exists or not in a particular
market. If a state regulator finds no impairment exists, the commission must
establish a three-year period for carriers to migrate off a local resale
platform that has been the center of so much controversy and rhetoric over the
last several months: the unbundled network element-platform.

"I don’t think the intent is to
measure where individual companies are in the marketplace but to actually
measure the dynamics of the marketplace," said Rebecca Klein, chairman of
the Texas Public Utility Commission, in an interview the day of the vote.
"Once that is measured, let the chips measure where they may. You are not
going to do any kind of analysis based on from company to company to
company."

As pundits anticipated, the FCC
found that the Bells are not required to lease rivals their switches in the
business market where customers are served by high-capacity loops, such as a
DS-1. State regulators have three months to rebut the finding.

The top regulator also found that
carriers are not impaired without optical carrier level transport circuits.
However, the FCC ruled that carriers are impaired without access to dark fiber,
DS3 and DS1 capacity transport. The regulations are subject to a route-specific
review by the states.

Not all the components of the FCC’s
ruling represented a setback for the Bells. The FCC eliminated line-sharing
requirements that allow broadband service providers such as Covad Communications
Co. to lease the high-frequency portion of the copper loop. Broadband providers
have a three-year period to transition customers, and the price for the
high-frequency portion of the loop will increase incrementally each year of the
transition.

In a triumph for the Bells, the FCC
also ruled that incumbent phone companies building fiber loops to the home are
not subject to unbundling requirements. However, the incumbent phone companies
must make available to competitors a line for voice service if it removes the
copper loop.

The Bells also are not required to
unbundle hybrid loops for packet-switching features, but they still must provide
unbundled access to a voice-grade channel and high-speed loops using TDM
technology.

Ruling Bound for Appeals Court

By Josh Long

Now that the FCC has adopted rules
governing local telephone and broadband regulations, it will be up to the
judicial system to determine whether components of the official order can stand.

"I don’t know how long [a
ruling on an appeal will take] but it would be less than a year," said Mike
Glaser, a partner with Shughart, Thomson and Kilroy PC. Even that ruling could
be appealed before the Supreme Court, delaying a final decision on the
regulations for another year or more if the justices decided to take the case,
lawyers say.

The FCC had not disseminated the
official order the day of the Triennial Review meeting Feb. 20, but FCC
officials said they were making it a top priority to complete the voluminous
document.

Fuming over rules that uphold local
telephone regulations, the Bells made it clear they planned to challenge the
order before the U.S. Court of Appeals.

"Another round of litigation is
in no one’s interest, but if we cannot get the FCC to follow the dictates of the
statute then we will have to turn to the courts to overturn the FCC rules,"
Tom Tauke, senior vice president for public policy and external affairs at
Verizon Communications Inc., told reporters the day of the ruling. "I
expect we will challenge this in court."

Steve Davis, senior vice president
of policy and law, Qwest Communications International Inc., said it is likely
the Bell operator would challenge the part of the ruling which preserved
switching as an unbundled network element incumbent phone companies must lease
to rivals.

"I would say it’s highly likely
we would challenge that portion of the decision," he said.

However, the Bells are likely to
challenge more than the local phone regulations. Verizon, for example, took
issue with certain aspects of the new broadband rules, including a mandate that
the Bells must go to the state regulators for approval before retiring copper
loops.

"It appears to be an attempt to
have us maintain two networks: a copper network which competitors could use to
offer services and a fiber network which we could use to offer services,"
Tauke said. "It is a major deterrent to investment if we have to go to the
states to replace copper with fiber."

While the Bells are certain to
oppose aspects of the regulations, their rivals also are likely to challenge
other components of the ruling in court.

Royce Holland, chairman and CEO of
Allegiance Telecom Inc., said that the company is likely to challenge the rules
that absolve the Bells from having to unbundle hybrid loops for packet-switching
features.

"Trying to take future
technology and only letting the ILECs use it is bad policy," he said.

Jason Oxman, assistant general
counsel with Covad Communications Co., said in an interview the day of the
ruling it was "hard to say" whether the company would challenge the
FCC’s line-sharing rules until the regulator issued its order.

"This was an 11th hour backroom
deal that was struck last night," he said. "We don’t know if the three
commissioners [commissioners Kevin J. Martin, Michael J. Copps and Jonathan S.
Adelstein] … will be able to come up with a sustainable cogent legal theory to
support this irrational decision they have reached on broadband
competition."

Sherman Henderson, president and CEO
of Lightyear Communications Inc. and a board member with the Association for
Communications Enterprises (ASCENT), said he did not know what the association
would challenge in court until the FCC issues its order.

"This order was bound to go to
court one way or another," says H. Russell Frisby Jr., president of the
Competitive Telecommunications Association (CompTel). "We’ll have to see
what it says. But like I said, I am pretty sure that both sides will end up
taking this to court."