Regulatory Watch : Switches May Be Pulled From UNE List

The industry is biting its nails waiting for the release of the FCC’s Triennial Review, the agency’s promised evaluation of its policy on what network elements the incumbents must offer to competitors.

CLECs worry that the FCC will drop circuit switches—one of the most expensive items necessary for linking new customers to the ILECs’ networks—from the list. The FCC will rely on the “necessary and impair” standard when deciding whether incumbents must lease the switches. The standard examines which platform elements are “necessary” to create an even playing field and the lack of which would “impair” a CLEC from competing with that carrier. Two earlier attempts by the FCC to determine what elements have to be unbundled were hurt by the courts. In Iowa Utilities Board v. FCC, the Supreme Court vacated the FCC’s rule because the commission didn’t adequately consider the “necessary and impair” standards when it gave blanket access to its present list of unbundled network elements.

The court also told the FCC that it had failed to consider the availability of elements outside the incumbent’s network, including equipment that could be obtained from third parties. Switches may fall under that category.

Bells Don’t Want to Lease Switches

The Bells believe “circuit switches are freely available and if purchased by a competitor, can be colocated and connected to unbundled copper loops,” SBC said during an investor’s conference in late September. “Allowing competitors to bundle switching loops and transport enables total service resale of the Bell network at substantially lower prices than available under traditional wholesale pricing.”

Will the FCC stop requiring ILECs to provide switch leasing when it releases the Triennial Review in the next few months? Many in the industry believe this will happen. The telecom meltdown, during which many switch-owning telcos went out of business, left the playing field littered with switch equipment—equipment that can be picked up from third parties for a song.

Plethora of Switches

“The RBOCs argue that the circuit-switching portion of the UNE–P, the port and loop function, should not be unbundled,” says Dick Ottalagana, executive vice president and founder of PaeTec of Rochester, N.Y. PaeTec has 300,000 access line equivalents and provides T1 and higher access, Ottalagana says. The company also provides long-distance, data and Internet services, sells hardware and managed services, and provides billing services. There is “a plethora of switches, so they argue that switching is not a real function that should be under the UNE-P,” he says.

CLECs don’t want to believe the FCC might be considering this. “It would put a lot of companies under,” says one telecom industry observer.

“We hear that about switches frequently,” says Robert Curtis, senior vice president of strategic planning at Z-Tel Technologies, which provides services for about 200,000 subscribers in 47 states. It provides local, long-distance and enhanced services to small business and residential accounts, and it depends on UNE-P rules to compete.

“We buy and lease UNE-P from every single one of the RBOCs,” Curtis says. “We lease network interface devices, unbundled switching, transport, signaling, and OSS.” Z-Tel, however, doesn’t depend on the ILEC to bill its customers. For that, the company uses Telution’s billing system. “We track billions of call detail records, including where the call was placed, what time and what carriers it was handed off to. We reconcile that, bill and render access bills to other carriers,” Curtis says.

Switches Cost Long-Term Money

Though competitors may be able to buy a switch at a great price, they will have to take on other costs to get it up and running—costs they don’t have to consider if the incumbent leases them an already installed switch.

“The real expense in these things is in building all the colocation cages,” Curtis says. “In New York City, for instance, there are more than 270 end offices in Manhattan alone. Z-Tel would have to build colocations and put equipment in every one of those end offices—for each switch we bought. If you try to be a nationwide phone company, before you acquire your customers you have to build your network, run the network, put in the switch and wait for customers. It’s a failed business model.

“You also have substantial recurring costs, such as rent and power bills, and if you have only one or two customers in that end office, you can’t make it work economically. It would cost hundreds of millions of dollars to serve our customer base.”

Hot Cuts a Big Problem

CLECs that have to buy their switches also have to pay higher rates to cut over service for customers who switch from the incumbent. As it now stands, the CLEC pays the incumbent as little as $2 a customer for hot cuts. The incumbent’s switch is already up and running; it takes only a software manipulation to move a customer to the CLEC. If the incumbent has to manually move the line to another switch owned by the CLEC, it can charge the CLEC up to $185 per line, as Verizon does.

Not only that, but the hot schedule is already backed up. Hot cuts “are not scalable, they’re manual—they can only do a couple thousand of them a month,” Curtis says. “There are 2 million UNE-P lines in New York. If service quality was perfect and nobody left their phone companies, there would still be 2 million lines a year to move to another carrier. They can’t do the hot cuts quick enough in the competitive arena.”

In its comments filed with the FCC, the New York Department of Public Service said Verizon is sorely behind in hot cuts: “Verizon performed approximately 56,000 hot cut orders in 2001 or 4,700 hot cuts per month,” it said. “Verizon would have to dramatically increase the hot cut orders per month if UNE-P was terminated and CLEC customers were switched. To keep up with the new orders, Verizon would have to improve its hot cut rate by 4,400 percent.” It called such improvements unlikely unless the ILEC streamlined the hot cut system.

What Will the FCC Do?

Whether the FCC will no longer require the unbundling of switches, of course, remains to be seen. That is what many expect, however. “I think people are quite nervous,” Ottalagana says. “If I would guess, switching will be gone.” But he believes the FCC will allow for grandfathering today’s CLECs and a gradual phasing out of the switch element, rather than a sudden cutoff date. PaeTec primarily serves large multi-building institutions, such as college and universities, including numerous Ivy League institutions. It also provides large access pipes to healthcare systems and hospitals, and more than 1,000 hotels across the country.

Though the company doesn’t handle the retail market, it will be affected if switches are pulled off the list or other UNE rules change. “The pressure on the UNE side forces up pricing and provisioning for us,” Ottalagana says. “We don’t have a business plan that depends on the whims of the regulatory agencies, but we know that provisioning does affect other markets.”

Like some telcos, PaeTec doesn’t want to make any decisions about entering the UNE-P market until the FCC publishes its findings. “We have not embarked on UNE-P because of the Triennial Review,” Ottalagana says. “With a sweep of the pen it could be removed.