Upcoming FCC review has big implications

Within weeks the Federal Communications Commission is expected to change regulations on which competitive telecom providers rely to offer local phone services to business customers, but it’s still unclear whether the changes will favor those providers or their incumbent phone company rivals.

There’s a lot at stake for both sides.

Competitive local exchange carriers (CLEC) say that if the FCC changes the rules in the incumbent local exchange carriers’ (ILEC) favor, there will be less telecom competition, which could mean fewer choices and higher prices for users.

ILECs say that if the FCC doesn’t rule their way in its so-called triennial review the ILECs will lose money on their network investments and be less inclined to upgrade or expand operations. This could mean that users looking for new ILEC services, such as broadband, would have to wait longer.

The FCC is examining its rules regarding unbundled network elements (UNE) – the pieces of a network that incumbent carriers such as Verizon, SBC Communications, BellSouth and Qwest must make available to local competitors such as AT&T and WorldCom and a host of smaller regional CLECs.

UNEs include elements such as local loops, switching and transport between central offices. What bothers the ILECs is they must sell UNEs to competitors at discounted prices. A typical UNE platform includes at least a local loop and switching.

“The FCC is going to take a serious look at UNE [platforms],” says J.P. Gownder, an analyst with The Yankee Group.

It’s extremely unlikely the FCC would put an end to UNEs, Gownder adds, because the U.S. Supreme Court has upheld the FCC’s UNE pricing model. What could happen though, is that the FCC could look at how it draws up the UNE lists region by region, rather than continue using one list for the whole country, Gownder says.

Scott Randolph, director of federal regulatory for Verizon, says the discounts on UNE platforms range from 40% to 60% – much higher than the approximately 20% discount the ILECs offer to CLECs on a resale basis for switched access lines.

Verizon and other ILECs say they would like to see at least the switching portion of UNE platforms removed from the list of platforms the ILECs must offer.

The thinking behind UNE platforms was that CLECs could use them to build market share until they acquired enough customers to install their own switches. The problem, Randolph says, is that UNE platform pricing is so low there’s no incentive for the CLECs to invest in their own network equipment.

SBC Communications has issued a recommendation to the FCC seeking to immediately end UNE platform sales to business customers and to phase out sales to residential customers over one year.

The problem with that plan, says Russell Frisby, president of CLEC association CompTel, is that ILECs lack the operations support systems and personnel to switch UNE platform customers to CLEC switches.

“If you look at SBC, they say they can do 500,000 hot cuts per year, which seems great except there are 4 million UNE [platform] customers in SBC territory,” he says.

CLECs say they would like the UNE platform rules to stay essentially unchanged.

“What we want is maintenance of the status quo with clearer FCC guidelines attached to pass judicial muster,” Frisby says.

The FCC rules have been challenged in court, most recently by the U.S. Court of Appeals for the District of Columbia, which ruled the FCC’s approach to deciding what network elements should be unbundled was flawed.

Deciding what elements, if any, should come off the UNE list will require intensive economic study, and state regulators can handle that better than the FCC, Frisby says. State regulators have written to the FCC opposing any move to restrict their powers over the UNE platform lists.

Gownder says consumer UNEs might be more at risk than UNEs sold to businesses, because the ILECs already have competition in the consumer high-speed data market from cable companies. Cable companies also are beginning to offer telephony services, meaning there would be competition even if the CLECs were forced out of the consumer market, he notes.