Regulatory Watch : Winners, Losers and Complete Confusion: The FCC’s UNE-P Decision

As a room full of lobbyists and journalists waited for the FCC commissioners to emerge from bitter last-minute deliberations, few could predict with any certainty what the future held for the heart of the Telecom Act. The commission—deeply divided—could have either tossed out the switch portion of the UNE-P regime or trashed the entire model for competition in place since 1996.

Simply put, the FCC kept UNE-P intact, and told ILECs they didn’t have to lease broadband elements to competitors. The commission killed line sharing, which means that if the ruling stands, ISPs aren’t going to be able to lease the portion of the last mile to provide Internet service to residential customers.

Since the ruling, many in the industry are still confused as to what the decision actually means. Though the FCC kept Section 251 unbundling requirements, it gave states the right to determine whether CLECs could lease switches from ILECs or be forced to buy them outright. (For details of the FCC’s decision, go to www.fcc.gov. Under “Headlines,” decisions are listed by date. The headline is dated Feb. 20, 2003.) One important consideration: The details and fine points of the order won’t be known until the final order is written and entered into the Federal Register, sometime in March.

Nearly all industry experts say it is important to wait for that final document before making any plans.

Traditional voice competitors are relieved that UNE-P remains intact, although switching for business customers served by high-capacity loops such as DS-1 will no longer be unbundled. But the ruling could catch present billing and OSS systems off-guard. CLECs had better have a good handle on their inventory and how much they pay each interconnect partner for lines, switches and other elements. Otherwise, they will lose track of the business plan, because prices and availability of switches could change. With 50 states and the District of Columbia determining different switching rules, carriers will end up with 51 sets of regulated approaches.

How the States Will Decide

The man to talk to about the upcoming process is Robert Nelson, a commissioner on the Michigan PSC and chairman of the Telecommunications Committee of the National Association of Regulatory Utility Commissioners (NARUC). He is spearheading state efforts to review the switching requirements of the UNE-P regime. As are others in the industry, Nelson is waiting for the final order before moving ahead. In the meantime, NARUC has created a task force to get states to look at the switching issue uniformly.

The chief goal is to determine whether an ILEC will have to lease a switch to a competitor at traditional TELRIC prices, or whether the CLEC will have to buy a switch on the open market. If CLECs are forced to buy switches, they will also have to pay the steep costs of populating and maintaining those switches, an expensive proposition. The FCC requires each state to perform a “market by market” analysis of switching areas using “economic and operational impairment” as a metric. In other words, can the ILEC perform enough “hotcuts to handle a high-volume market?” (Hotcut is an industry term for moving a customer’s line from one switch to another so the customer can receive dial tone from another phone company.) If the ILEC’s hotcut operation is sufficient to handle large volumes of changeovers, “you have a presumption that there is no impairment,” Nelson says. “Then you wouldn’t have the state setting the pricing at that point.”

TELRIC or Market Pricing?

“We’ll see how the hotcut process works in each market, whether it works well enough for ILECs to do it in a mass market environment,” Nelson says. “We then look at the economic level—the price charged for the switch. We look at whether or not the CLEC needs to have TELRIC pricing applied, or whether they could compete using market-based pricing.”

One holdup is how the FCC will define the word “market,” he says. “It may be by central office location or by LATA; we won’t know until the final order.” The states are to have their decisions nine months after the ruling is printed in the Federal Register. They then send their decisions and analysis to the FCC so it can check compliance with its rules.

“It will be very chaotic for software vendors that have to comply with different regulations from state to state,” says Linda Lancaster, Intec’s vice president of operations and marketing for North America. “CLECs should understand what things are costing them—not just the line cost, but the cost that supports those operations.” For instance, if a CLEC is leasing a switch in a rural area at a discount under the present pricing rules, it may not matter that the switch isn’t at capacity for subscribers. Should a state then determine that the CLEC has to buy that switch, the sparsely populated switch doesn’t make business sense.

‘It Won’t Be Uniform’

Nelson agrees that chaos will reign for a while. “One state might determine there’s impairment, while another state may not determine impairment,” he says. “It won’t be uniform. That brings up the issue of all these appeals. We’re going to have 51 different appeals; it will be tied up in the District Courts, then to the Circuit Court of Appeals. But a lot of these cases may be clear-cut.”

Pricing is already difficult enough for multistate CLECs, Lancaster says. “One state allows some elements allowed in TELRIC, some states don’t. They’re already seeing different kinds of rules. For instance, there are two kinds of carrier access billing: interstate CABS and intrastate CABS. Each state determines how each flavor of CABS applies. Some states allow CABS elements, some states don’t.”

Other states may let CLECs recover costs associated with CABS, while others won’t let carriers recoup costs. “You have to determine what elements are involved and what you’re going to charge,” she says. “People generally leave it alone, because they don’t know very much about it.”

With the UNE-P power moving to the states, telecom politics may find a new battleground on the statehouse steps. “It was one thing to have one place—such as the FCC—to get a ruling,” Lancaster says. “Now the ILECs can go to the states and get some relief. They’re just as political at the state level as they are at the FCC—sometimes more so.”

Broadband Blues

When it comes to line sharing and leasing fiber installed by ILECs, data competitors are out of luck—or maybe not, says Jason Oxman, vice president and assistant general counsel for Covad. The company depends on access to RBOC phone lines for providing DSL service to residential customers.

“On the residential side, it appears the commissioners are forcing us to negotiate for line sharing,” he says. “We will attempt to do so. Obviously, no guarantee we will be able to do that or stay in the broadband market.

“I don’t think they know what they did. People will be outraged that the FCC took this step. The FCC will be rewarded with slower broadband deployment, and higher broadband prices.”

Like most of the others, Covad is waiting for the fine print. In the meantime, it’s talking to its ILEC partners to keep access to the phone lines. But there is no imminent earthquake that will remove access lines this year. The order includes a three-year phase-out of any such agreements. And Covad is optimistic: “The order is an unsustainable theory; it won’t withstand appeal,” Oxman says. That was the refrain from both the ILECs and competitors. Most predicted that the U.S. Circuit Court of Appeals for Washington, D.C., would strike down the ruling.

Here’s how other industry players viewed

the decision:

• John Konczal, vice president of product marketing and management at Telution: “On the line sharing side, it’s a whole different ballgame now. Is this going to increase investment by RBOCs in DSL? If so, there are a lot of opportunities for OSS vendors. We hope there is going to be a lot of opportunity in smaller ILECs investing in DSL and high-speed infrastructure. All the RBOCs have been suffering from delays in provisioning and suspect service to subscribers. With their ability to expand their markets without having to expand their networks, will there be investment in their expansion? Will vendors get a piece of that OSS investment?”

He also believes cable Internet providers are “Cheshire Cats sitting in the background. Maybe it’s going to be easier for them to go head to head with RBOCs. The cable providers will be looking at high speed over cable modem, investing in that technology; they have a better penetration than DSL. From an OSS buying pattern, significant opportunities for cable companies may come from this ruling.”

• Bruce Bennett, ATX Communications: “We think it will help stop some of the excuses ILECs hand us regarding facilities availability. When we ask Verizon or Ameritech, for instance, … to convert a customer over, they say there is no facility available—the old ‘no facility’ issue. RBOCs have refused to make basic moves, like plug in a card at the central office. The switch is there, the line is there, and they tell us that they don’t have the right equipment. “The FCC says all routine modifications must be made by the RBOCs to permit us to use their facilities. They can no longer use the excuse that they can’t do this. It’s as if you go to a car dealer and he says he can’t sell you a car because the battery is dead. “The other issue the FCC apparently resolved is the co-mingling of access and local traffic. What the RBOCs have been saying to CLECs is, ‘We aren’t allowed to put local and long distance on one line,’ as opposed to buying two lines. Otherwise we had to carry long-distance traffic on another line than the local line. The FCC decision allows us to put both long distance and local on the same lines. It means better efficiency and more customers served.”

The irony of all this was the response from ILECs, who have spent millions on Capitol Hill to get the Internet Freedom and Broadband Deployment Act of 1999 and other legislation passed that would free up broadband. The FCC decision exceeds the requirements of the Act by halting line sharing. But Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, was still outraged. He questioned the leadership at the FCC and practically called Commissioner Kevin C. Martin a traitor. Meanwhile, the first reaction from the RBOCs was a threat that they would not spend a dime in broadband investment until the FCC dropped UNE-P altogether.

One DSL competitor suggested that ILECs should stop whining.

“Competitors were the first to launch DSL in the country, long before ILECs, and they had the technology since the 1980s. If there was no DSL, their Internet prices would be through the roof as the result of the FCC’s misguided policy direction.”