The Beginning of the Endfor UNE-P

Telecommunications companies large and small have a greater incentive to offer Internet-based phone service and develop other technologies to provide millions of homes local service after FCC rules were removed from the books last month.

Controversial regulations governing wholesale access to the networks controlled by BellSouth Corp., Qwest Communications International Inc., SBC Communications Inc. and Verizon Communications Inc. are gone, dealing a major blow to AT&T Corp., MCI Inc., Sprint Corp. and numerous other smaller companies that have been leasing the regional Bell networks at discounted, government-mandated rates.

Despite pledges for an appeal before the Supreme Court, people familiar with the process say the high court is unlikely to review the rules after U.S. Solicitor General Theodore Olson and the FCC declined to endorse an appeal.

Paul Polishuk, president of Information Gatekeepers Inc., says the demise of the rules does not mean the end of local phone competition. He predicts the regulatory changes will fuel the growth of Internet-based phone service. “In fact, because of the relative independent way in which VoIP can be implemented by CLECs, cable companies, and others, these rulings may lead to more local exchange competition, rather than less,” he says.

Telecommunications companies like Talk America and Z-Tel Technologies Inc. for years have argued it is too expensive to replicate the incumbent local phone network due to the steep cost of switches and other equipment, particularly if there is not a large base of customers to justify the investment. With the advent of Internet-based phone service and emerging technologies, like WiMAX and broadband over power lines, it is likely fewer companies are interested in purchasing legacy switches to route local phone traffic.

“It’s just impractical in today’s telecom environment to think you are going to have a lot of folks out there deploying a lot of switches,” says Kevin Shady, vice president of the local product division with Lightyear Network Solutions LLC.

Shady says it is more likely companies will deploy Internet-based phone service. Lightyear conducted a trial and is making a decision as to the type of equipment and network provider to use, he says.

Lightyear, of Louisville, Ky., provides local phone service in 31 states by using the resale platform known as UNE-P. In March the U.S. Court of Appeals for the District of Columbia Circuit rejected FCC rules preserving the platform. Shady told PHONE+ during an interview in June Lightyear planned to expand local phone service to all states by the end of the year.

The Supreme Court’s refusal to prevent the federal rules from expiring could foil long-distance phone companies’ plans to expand local service.

The FCC released its first set of network unbundling rules governing wholesale access to the biggest local phone networks in 1996. However, many long-distance phone companies did not enter the local residential phone market until 2002 or later. For example, PowerNet Global Communications, a long-distance reseller based in Cincinnati, did not announce its debut in the local residential phone market until April 29.

“Ensuring the quality of the programs and operationally and tariff wise, it is just not a quick process to enter the local phone market,” says Brian Lammers, marketing manager for PowerNet.

The company offers local phone service in 16 markets and plans to expand to a few more states through the UNE-P within the next few months. “We have no plans to pull back or stop the UNE-P initiative,” Lammers says. “Certainly resource wise, there will be some shift to voice over broadband.”

He says PowerNet plans to offer consumers phone service over a broadband network in early 2005, a move that also would allow the company to provide high-speed Internet service.

As of June 2003, there were 13 million UNE-P lines in service, representing nearly half of the country’s 26.9 million local phone lines provided by competitive phone companies, according to FCC data. In 1999, the year the FCC released the second of three UNE regulations, there were less than 1 million UNE-P lines in service, according to agency data.

In letters to the FCC, the biggest local phone companies have vowed not to seek to unilaterally increase the wholesale phone rates for several months.

BellSouth, Qwest and SBC. have pledged to leave the current rates alone for the remainder of the year. Verizon, the biggest local phone company, made a similar promise, saying it was committed to not increasing the rates for five months and vowing to give wholesale customers at least 90 days notice of a future change.

“We will, of course, continue to pursue efforts to correct the wholesale prices that have been set by the states,” the company added.

Michael Gallagher, acting assistant secretary for communications and information with the National Telecommunications and Information Administration, the principal telecom advisor to President Bush, urged FCC Chairman Michael Powell to write interim rules and maintain the current wholesale phone rates.

“To ensure appropriate competitive access, the Administration believes the interim rules should cover a full year, unless superseded by permanent rules, and include the maximum legally sustainable transition period without wholesale rate increases for those network elements subject to the vacatur of the DC Circuit Court,” Gallagher said.

MCI, the second-largest long-distance phone company selling dial tone to 3.5 million customers, warned it may have to raise its rates or leave some local markets if the rules lapse and wholesale prices increase. AT&T spokeswoman Claudia Jones declined to comment on speculation the company might also raise rates and leave local phone markets, but she said Supreme Court Chief Justice William Rehnquist’s refusal to prevent the rules from expiring “confirms that the Administration has set the industry on a path to higher prices, less competition, fewer jobs and depressed investment.” AT&T provides local residential phone service to 4.3 million customers.

On June 14, FCC chief Powell said the agency would strive to adopt local phone regulations as soon as possible. “Moreover, the commission is prepared to consider interim, transitional protections to bridge the gap that exists in the period preceding adoption of our final rules,” he said.

FCC commissioners also urged telecommunications providers to continue negotiating commercial leasing agreements with the regional Bells.

Collectively, BellSouth, Qwest, SBC and Verizon have struck numerous agreements to lease their networks to competitors. Yet, several companies, including AT&T, had had not entered a pact by the day the federal rules were taken off the books, June 16.

Adam Thierer, director of telecommunications studies with the Cato Institute, contends the demise of the federal rules combined with previous developments, including the sale of its cable and wireless units, has sealed the fate of AT&T.

“A merger of what remains of the company with some other major telecom provider seems inevitable at some point,” Thierer says.