For the third time since the creation of the 1996 Telecom Act, a court has struck down the FCC’s attempts to write rules to uphold the Act’s mandate that the telecom playing field be made more equitable for competitors.
The D.C. Court of Appeals took a look at the FCC’s latest iteration of rules for competition known as the Triennial Review Order (TRO) and—in a ruling that at once baffled lawyers, lawmakers and activists alike—could pull the rug out from under competition in America. The court, in effect, struck down the UNE-P regime that has kept competitors in business since the passage of the Telecom Act. It also ruled that the FCC erred in handing the states the job of holding impairment hearings, but it upheld the commission’s decision to keep broadband free from unbundling. The FCC found that a requesting carrier is impaired when lack of access to an ILEC’s network element poses a barrier, or barriers to entry into the telecom business. It includes operational and economic barriers that are likely to make entry into a market difficult for a CLEC.
This was just the latest decision in the ongoing judicial, legislative and regulatory battle between ILECs and the CLECs, and it came at a moment in time when the two sides were at a tipping point.
For industry spokesmen and pundits, it felt like ice water had been thrown on a pair of sparring boxers, and while everyone tried to get a grasp of what the court had just done, the telecom debate ground to a halt.
In Washington, the stalwarts on both sides of the telecom debate were for once in the same place: simultaneously confused and awestruck at the implications. If the court’s decision held, what was to happen with the other flashpoints in the war between incumbents and competitors? What of the longstanding TELRIC policy, recently opened up for review by the FCC and facing action on Capitol Hill? No one could say for certain. What about the role of states in determining impairment policy? Illegal, the court said. After eight years of operating under the UNE-P regime, no one was quite sure what to do next (for more on the difficulties the CLECs will face, see “Telecom’s Uncertain Future”).
“There is no end to the surprises, confusion and uncertainty,” says Randall Lowe, a telecom lawyer with Davis Wright Tremaine in Washington, D.C. Lowe gathered with a group of competitors and lawyers in the hours after the ruling came down. “We were all trying to figure out what was going on,” he says. “The court had gone out of its way to undo what the FCC has tried to do.”
The court gave the FCC 60 days to appeal or come up with new rules the court might accept. Rep. Joe Barton, R-Texas, who took over the House Commerce Committee after the recent retirement of Rep. Billy Tauzin, R-La., urged the FCC not to appeal the decision. But if the FCC doesn’t take it to the Supreme Court, other parties certainly will.
Battle Between Competitors
In the weeks before the court rejected the TRO, regulatory decisions were moving along without constraint. The FCC, for instance, ruled favorably in the case of Pulver.com’s dedicated VoIP service, declaring that it wasn’t a telecommunications service and was to be unregulated. The same day, the FCC opened a Notice of Proposed Rulemaking (NPRM) seeking comment on the future of VoIP-based services and keeping VoIP as free as possible from government regulation. Meanwhile, members of Congress have hinted at reforming the Telecom Act of ’96 with a focus on new VoIP realities. And the FCC had previously determined that present TELRIC rules had to be reviewed with an eye toward making them more equitable.
All of these developments will affect how ILECs, and by extension competitors, conduct business. In the weeks before the court knocked down the TRO rules, competitive industry groups, such as the CompTel/Ascent Alliance, hoped the momentum was about to swing to their side.
During the group’s convention in Anaheim in early February, CompTel/Ascent CEO H. Russell Frisby Jr. described what was at stake for competitors. “From broadband deployment to voice over IP, from wholesale pricing to access charges, the rules—or lack thereof—could have a significant impact on the varying business models our members employ and their ability to serve a wide variety of customers,” Frisby told conference attendees. “Combined, these events could swing the pendulum of momentum, which for the last year or so, has been pointing toward a comeback of the telecommunications industry.”
To put some perspective on all the earth-shaking and confusing, fast-paced action in the telecom regulatory space in the past three months, Billing World & OSS Today spoke to attorneys who argued the TRO case before the D.C. Circuit Court of Appeals, state public utility commissioners undertaking the TRO-mandated state impairment proceedings, and members of the CLEC and ILEC community, all of whom did their best to describe what these developments mean to the industry’s future as a competitive marketplace.
One State’s Response
The TRO handed the task of determining impairment to the states; under FCC guidelines, the states were to hold hearings where incumbents and competitors could make their case on where elements should be leased and where CLECs would have to buy their own switches, loops, etc. The courts in the past had ordered the FCC to get more “granular” in its determination of who could enjoy UNE-P access.
“The FCC thought it was what the court wanted them to do,” Lowe says. But [FCC Chairman Michael] Powell dissented vehemently; the LECs don’t have a favorable audience [in the states].”
Once the circuit court told the FCC it was illegal to ask the states to hold the proceedings, it created more confusion. “That’s where we are today, we are in a mess,” he says. “The states were saddled with a huge burden, and they have limited money, limited staff and limited budgets.”
Down in Tallahassee, the Florida Public Service Commission (PSC) was beginning its second week of TRO-mandated impairment hearings when the court issued its ruling. Florida PSC commissioner Charles M. Davidson wasn’t too thrilled about states having to determine impairment. “It’s a difficult task because the FCC didn’t come close to offering sufficient guidance to state commissions on how to handle issues, such as what constitutes a relevant geographic market? There’s a huge difficulty here; they [FCC] haven’t defined it yet.”
If states were to hold hearings that involved dozens of lawyers, dozens of witnesses for the ILECs, CLECs, and other interested parties, then the Florida hearings were working well, Davidson says. The hearings split into two parts. The first week of testimony dealt with impairment issues with mass market residential switching; the second week dealt with loops and transport, including enhanced extended loops, or EELs.
Then, the court nullified the hearings as the two sides began the impairment proceedings for loops, transport and EELs. Davidson and his colleagues on the Florida PSC stopped the hearings and instead admitted the remaining testimony and documents into the PSC’s record should the hearings once again become necessary.
“The parties have done a great job; we have a good record that could be of great value to the FCC in the future,” Davidson says. But he wasn’t too upset that the court halted the hearings. It’s a bad idea, he says, to have each state create individual rules for who can lease a switch. “The view itself is not that UNE-P should stay or go; it’s that we need a single national policy. If the same set of facts is given to five states, you have five different outcomes. Carriers can’t plan for 50 different regulatory outcomes.”
Powell—much to the anger of competitors—suggested that UNE-P agreements be renegotiated immediately. During a March 10 speech at the winter meeting of the National Association of Regulatory Utility Commissioners in Washington, D.C., Powell urged incumbents and competitors to spend the next 30 days negotiating new rates for interconnection agreements. In effect, Frisby says, it gave ILECs permission to raise UNE-P rates or to kick competitors off their networks altogether.
Should those rate negotiations fail, Powell said, the FCC should institute an 18-month moratorium and transition period “to protect existing UNE-P customers from sudden changes in their service.” Powell also proposed that the commission adopt interim rules to protect against “precipitous disruptions” that might result after day 60.”
Competitors reacted with disdain to Powell’s proposals, noting that Powell is in the minority with his fellow commissioners and doesn’t reflect what the commission may or may not do. They suggested that Powell was handing the ILECs a thinly veiled hint that they can begin the process of rejecting UNE-P agreements. “We’ve been trying to negotiate with ILECs for eight years,” Frisby said. “Now he’s asking us to negotiate with them for 30 days.”
“There’s nothing in the [Telecom Act] that approves of an 18-month transition; it’s a bizarre suggestion,” said Rob Curtis, president of Z-Tel.
One CLEC executive says he’d received letters from SBC warning him to accept its rates or they would terminate his contract. Verizon also reportedly has begun to send out termination letters and has been refusing to renew interconnection agreements.
“There is no legal basis for terminating these contracts,” Frisby said. “But the Bells have never [been worried] about legalities.”
But what of the UNE-P regime, which is in jeopardy? “My hope and belief is that existing arrangements with the CLECs will continue,” Davidson says. “Companies have been operating under these existing rules. Florida has an interest in seeing that these companies continue to do business.”
TELRIC Model: Uncertain Future
For years, the states have set discounted rates for the network elements based on an awkward pricing model called the Total Element Long Range Incremental Cost (TELRIC) formula. The ILECs have complained for years that UNE prices based on that formula are too low and don’t reflect the true cost of what it takes to replace or buy those elements. TELRIC also assumes that the prices are based on an ideal, state-of-the-art network. Incumbents argue that’s far from realistic. They couldn’t invest in new networks as much as they’d like, because they’d have to turn around and lease those elements to CLECs at a loss.
The FCC felt that the rules should more closely take into account real-world attributes. [TELRIC] ignores the realities,” says Bob Canavan, a managing consultant with Fujitsu’s telecommunications division. “States come to different conclusions in pricing using TELRIC. It looks too loosey-goosey.” To have that [TELRIC reform] dropped into the market with the potential enormity of the TRO, I wouldn’t want to be on either side.”
In September, the FCC opened a TELRIC proceeding into whether the pricing model should be revamped or not—a debate that became even more complicated once the FCC announced its new unbundling rules in the Triennial Review Order. CompTel/Ascent asked the FCC for clarification on TELRIC pricing, because the new UNE rules in the Triennial Review allowed for partial unbundling. Partial unbundling changed the assumptions upon which TELRIC was based: When one element is unbundled, the unbundling obligation applies to the entire network element, not just a portion of it, CompTel said in comments to the FCC.
Another powerful competitive group, the Association for Local Telecommunications Services (ALTS) urged the FCC not to abandon TELRIC principles. “UNE rates are based on the forward-looking costs replacement, not the historical costs of the ILECs’ current networks,” ALTS argued. “Nor do TELRIC prices mean that ILECs will invest less. ILEC investments actually increased during the first five years following passage of the Act.”
After the TRO was released, states tried to apply the TELRIC formula to the new UNE rules, but now those rules have been struck down by the circuit court. Does that mean states continue to set prices under TELRIC as it was before? And if the circuit court’s ruling stands and the UNE-P prices become moot because the UNE-P regime’s future is a big question mark, what happens then?
CompTel/Ascent’s Frisby believes there’s a big chance that the RBOCs will raise rates if the FCC’s TRO stays struck down after 60 days. “On the 61st day, the Bells are going to raise prices and stick the American people with the bill. We’re not just whistling past the graveyard either; there’s a real danger to the American consumer.”
Verizon, meanwhile, argued that TELRIC pricing is bad for the American consumer, because the formula hampered economic growth—by extension, it created an annual decline in national income of $101 per household. As obtuse as these arguments can get, the reality is that TELRIC is considered by opponents to be the underlying problem with the Telecom Act.
Impairment Hearings Confuse TELRIC Use
Fujitsu’s Canavan says the TELRIC question is hanging in the background of the state impairment proceedings. “Not only are the states being tentatively brought into this idea of impairment,” Canavan says, the FCC dropped another bomb when it made it clear that the TELRIC formula didn’t have its complete blessing. “They in effect, said ‘By the way, we’re not too comfortable with the pricing methodology you’ve been using.’”
In the midst of all this uncertainty surrounding the future of pricing, Canavan says, ILECs and CLECs have to be careful of the economic models upon which they build their impairment and business strategies. “You may get the impairment that you want, but some time later, you may find out you can’t afford to buy that element.”
Though the circuit court put a stop to the FCC-mandated state impairment hearings, Frisby believes the state impairment hearings should continue at least until the 60 days are up. “The ruling doesn’t change anything, as a technical matter the state obligation to conduct the [impairment] hearings is still there. TELRIC will still continue, but they’re still sorting the court decision out. I don’t think this has any effect at all on TELRIC.” But the fact remains: If the Supreme Court doesn’t strike down the Circuit Court’s TRO ruling, the FCC’s reliance on UNE-P could be in great danger. And the TELRIC pricing model—the underpinning of UNE-P, might not be far behind. “It is asking [ILECs] to aggressively build networks so their competitors can rent it at a great price,” Canavan says. “Do I put money in something I’ll use myself or something my competitors will use? The facts speak for themselves.”
The CLECs will fight just as hard to prevent the loss of TELRIC, Canavan says. “The CLEC side of the market would kill themselves on their swords rather than let the ILECs get the pricing opportunity,” he says.
VoIP Decision: Regulatory Hands-Off
While CLECs seem to be losing the fight to lease network elements at the right price, the FCC has more than once hinted that broadband services will be as free as possible from government regulation. It has bent over backwards to put out the message that VoIP and other IP services be free from the bureaucratic morass that the FCC now finds itself in with switched voice. The circuit court—while lambasting everything else the FCC put in its TRO—praised the FCC for not unbundling fiber-optic broadband. On Feb. 12, the commission ruled that Pulver.com’s Free World Dialup (FWD) VoIP service would remain “a minimally regulated competitive option for consumers.” FWD is a peer-to-peer service, meaning that FWD members can call other FWD members without charge and without crossing the public-switched network. The FCC also determined that the service is “an unregulated information service.”
On the same day, the FCC opened an NPRM on the future of VoIP and other IP services. It seeks public comment on a variety of issues based on the “premise that Internet services should remain largely free of regulatory burdens and would apply, only where needed, discrete regulatory requirements.”
The debate over the future of VoIP will take its cue from the Pulver decision and the upcoming rulings on Vonage’s VoIP operation and AT&T’s long-standing petition for the FCC to determine whether long distance voice calls transported over AT&T’s IP backbone are exempt from access charges. “Silence is not acceptable,” is how Tauzin ended a letter to Powell demanding that he answer AT&T’s question. “The [FCC’s] silence on the question has been deafening.”
Access Charge Reform
The FCC also has been looking to reform the access charge regime in which carriers pay other carriers for terminating traffic and create a more uniform scheme. This includes long distance, LEC to LEC, CLEC to CLEC, etc. “In the summer of 2001, the FCC instituted a unified inter-carrier compensation NPRM to figure out some kind of carrier-to-carrier compensation plan that applies to all forms of traffic that uses the network,” says Jonathan Lee, senior vice president of regulatory affairs at CompTel/Ascent. “They’re looking at different forms of bill and keep, which is that each carrier bills its own end user for the costs associated with the end user’s line.” CLECs, used to collecting more for access, could lose valuable income if it reverts to bill and keep. Also, Lee says, CLECs would like to see more opportunities for CLECs to create aggregated traffic on the local level, much like long distance carriers enjoy on long-haul networks.
Will the CLECs Get a Break?
When one puts all these events together—the circuit court seemingly rejecting every FCC attempt to write rules for competition while applauding the decision to keep broadband bundled—it’s not hard to see why the CLECs feel like they’re up against the wall.
“The FCC made a decision … on broadband that it be a monopoly rather than competitive,” says Donald B. Verrilli, the attorney who argued the CLEC case in the D.C. Circuit Court of Appeals. “The theory is that by removing [broadband from unbundling] ILECs would have more incentive to invest in deployment of fiber—that was preferred over competition. We challenged that ruling … the ‘96 Act created a very strong presumption in favor of competition. The FCC was not free to decide to go back to the old days of monopoly.”
CompTel/Ascent’s Frisby doesn’t think the Bells will suddenly cut the lines leased by competitors once the court’s decision takes affect. “There’s a practical aspect, there are 19.1 million lines provided by CLECs. There’s no way the FCC, the states and Congress will let these lines be cut off on the 61st day.”
It didn’t help the ILECs’ image when large incumbents held a dinner where the future of competition was discussed and, where competitors argue, a planning meeting to force competitors out also took place. It also didn’t help much when the incumbents allegedly told equipment manufacturers that competition was hurting the ILECs’ ability to buy their switches, hubs and other products. Competitors cried foul; in their eyes, the dinner and discussion with equipment makers was a breach of antitrust laws. The outcome of that flap is uncertain, but it certainly gives competitors the idea that they’re up against an organized cadre of monopolists who are out to freeze them out of the business.
CLECs have used every legal and administrative avenue to correct what they see as wrongdoing by incumbents: holding up provisioning to woo customers back from competitors by failing to provide dial tone for the customers the CLEC had won over from the ILEC and otherwise refusing to play by the rules. They see incumbents willing to pay fines as a cost of doing business rather than following the law.
And incumbents are tired of giving the CLECs a free ride. Their response to the circuit court decision says it all: Noting that the ruling would take a lot of review before understanding it, the United States Telecom Association said, “All along the USTA has argued that where real competition exists, government-managed competition on such heavily subsidized terms as UNE-P amounts to nothing short of corporate welfare for companies that make little or no investments of their own in the local communities where they turn a profit.”
Competition Pays
The competitive industry released figures they say bear out the financial impact CLECs have had on consumers. According to a CompTel/Ascent and PACE Coalition study, expanded competition and innovations from the competitive industry added up to about $4.4 billion in savings for small businesses. The savings could reach $6 billion in 2004. They say bundled offerings and lower prices for both local and long-distance services reduced small business phone bills by 10 percent. All of these savings will go out the window if the FCC were to lose in the circuit court, the CLECs argue.
Lowe of Davis Wright Tremaine blames the political makeup at the FCC for the present insanity in the telecom industry. Republican commissioner Kevin Martin voted with the two Democrats on the commission—and against Powell—when they left switches and loops unbundled in the TRO and had the states take a granular look at impairment. “We have an awful triumvirate over there pitted against the two Republicans, and it’s crazy,” Lowe says. “For what it’s worth, the commission is in disarray; they have to figure out how to get their act together for the sake of the industry and the sake of the FCC.”
Frisby and others are upbeat about the final outcome of the TRO ruling and CLECs’ appeal to have broadband unbundled. “We feel good because this decision was so outrageous,” Frisby says. “The Supreme Court will overturn it. We’re not going away, not today, tomorrow or the 61st day. I’ve been at this for 25 years; the one thing I know is that competition always wins out in the end.”
|
The chaos in the telecom world makes it extremely difficult for CLECs, and to a lesser extent ILECs, to launch accurate business plans. “Traditionally these carriers used to have high-load OSS systems, one for facilities, one for inventory, one for their UNE-P, one for their interconnection,” says John Konzal, vice president of customer solutions at Telution, who sees carriers changing their OSS strategies to better handle regulatory changes. “We see them now say, ‘If I’m going to have a multi-pronged approach to my business, I can’t economically do that with all these different systems. Carriers have to build a series of flexible product offerings that they can take where the regulatory climate might be different from state to state.” To do this, CLECs have to know clearly what they already lease, what elements they already own, and how the terms of their contracts hold up under the possibility that UNE-P could be struck down. Donald B. Verrilli, the attorney who argued the CLEC case in the D.C. Circuit Court of Appeals, says many UNE-P contracts have protection clauses that prevent them from becoming cancelled when regulatory laws change. CLECs should take a close look at their contracts to determine their rights. Theoretically, CLECs should have had a handle on inventory when they began to go before the state impairment hearings. Moreover, CLECs may have to decide where they may want to stop leasing switches so they can buy switches in better markets in the event UNE-P is phased out. When it comes to the division of a telecom carrier’s business—the leased wholesale side and the unregulated or “purchased” element side of the business, inventory becomes an issue. In some cases, the carrier has kept one side of the house from viewing information pertaining to the other side. “The configuration may take the form of erecting barriers from one side of the house that’s not able to view specific information and other pieces in their organization,” says Julie Wingerter, vice president of strategy at NetCracker. “You have to erect a wall, but at the same time, you’ve got an operations group that’s trying to streamline service delivery and an IT group that wants to minimize the number of systems they’re maintaining.” Instead of installing two systems to keep the two parts separate, Wingerter says CLECs should build one single system with rules that restricts views and privileges. In the most drastic scenario for CLECs, the world of UNE-P may be on the way out, says Ramesh Balakrishan, senior wireless strategist for North America at Amdocs. “Arguments of who gets access to broadband and whether there is a demand for services, that’s going to be the most important thing,” he says. Balakrishnan says that CLECs should continue to consider their future broadband strategies, even though the FCC has frozen them out of leasing broadband circuits at a discount—for now. “There’s no discounted broadband, and that’s a huge problem,” he says. “It doesn’t promote broadband.” He says there’s been a slowing in line losses (ILEC lines to competitors) because the carriers now offer high-speed broadband, wireless and VoIP services—as should a growing number of CLECs. “The competition is going to be about services,” he says. “Two years ago none of the RBOCs were offering video services, now they have partnerships with satellite services,” he says. “ILECs are in a very dominant position.” |
