FCC review is a split decision

Industry observers are split over whether the unbundling rules the Federal Communications Commission issued Thursday favor incumbent local exchange carriers or their competitors.

While early interpretation viewed the decision as a blow to the ILECs, driving stock prices down, some see it as a win.

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“The [regional Bell operating companies] will say they’re not happy because the state regulators will have a role” determining how some of the rules are applied, says Tom Nolle, president of telecom consultancy CIMI. “But realistically they come out of this with the key issue, which is basically universal exemption of new broadband infrastructure from unbundling.”

The momentous decision, one of the most heavily lobbied telecom issues in recent memory, deals with what network elements — broadband facilities, lines and switches — the ILECs have to make available to competitors on a so-called unbundled basis. It further spells out what role states will play in dictating what will be unbundled.

On the national broadband front, the FCC ruled that the ILECs will not have to share new fiber facilities to residential areas or businesses. The ILECs have long complained that the requirement to share new facilities served as a disincentive to build out new plant.

Observers believe this ruling could encourage the ILECs to start investing. But others say there’s no guarantee that will happen, in part because the ILECs might have to get state approval before moving broadband customers from copper networks to fiber.

“The bottom line is this day was supposed to be a day of clarity, with the gun for investment in the broadband market finally going off,” says Matthew Davis, an analyst with The Yankee Group. “But with this decision, the gun’s still pointing up in the air unfired.”

Also on the broadband front, the commission elected to phase out line-sharing over the next three years, a blow to competitive DSL providers such as Covad Communications.

Line-sharing lowers costs for DSL carriers by enabling them to provide service over the same copper loops the ILECs use to provide voice service, rather than having to lease separate loops from the LECs at higher prices.

The ILECs had argued that in the residential broadband market they have to compete with cable companies that don’t have to share lines, so the ruling should be removed to level the playing field. Business DSL lines from Covad and other providers won’t be affected because these lines already rely on loops dedicated exclusively to DSL service and don’t rely on line-sharing.

The switching rub

In terms of switching, FCC Chairman Michael Powell had pushed for lifting the requirement for ILECs to make switch facilities available to competitors as an unbundled element (UNE). But the FCC majority overruled him, retaining the status quo, at least for the near term.

While competitive LECs (CLEC) that rely on UNE switching to deliver service won’t lose that capabilities immediately, the FCC decision contains a sunset clause that would see it phased out over three years if a state finds that competition won’t be hurt by doing so. The FCC will set the standards for determining whether competition will be hurt or not by phasing out UNE switching.

Coleen Boothby, a partner at law firm Levine, Blaszak, Block & Boothby, which specializes in negotiating telecom contracts for corporate clients, described the FCC decision as a “dark day for CLECs.”

But Drew Walker, president and COO of ITC DeltaCom, a CLEC in Georgia, says the FCC decision is neither a total victory nor a total defeat for companies like his. One issue he says he’s still not clear on is how the FCC will deal with new packetized services, such as voice over IP.

AT&T, one of the largest CLECs in the country, issued a statement calling the decision a “difficult compromise.” AT&T, which resells UNE switching, says the decision will help preserve the existing UNE structure. But the carrier also says the FCC granted the ILECs too much leeway in the broadband market.

WorldCom, another large UNE switching seller, expressed similar views. “We are confident the state commissions will continue to make the responsible decisions necessary to keep their local markets open,” said Wayne Huyard, president of MCI Mass Market for WorldCom in a statement. WorldCom also expressed reservations about the FCC’s decision to deregulate the broadband market.

Powell, who had sought a more ILEC-friendly ruling overall and dissented on a number of core issues, was outgunned in the final vote 3-2. While Republican commissioner Kathleen Abernathy joined Powell, Republican Kevin Martin joined with the two Democrat commissioners to form the majority.

The rule change that the majority pushed through that seemed to upset Powell the most was the decision to turn over to the states the power to determine what ILEC elements should be unbundled.

“The nation will now embark on 51 major state proceedings to evaluate what elements will be unbundled and made available to CLECs,” Powell wrote in his dissenting position. “These decisions will be litigated through 51 different federal district courts. These 51 cases will be decided in multiple ways — some upholding the state, some overturning the state and little chance of regulatory and legal harmony at the end of the day. These 51 district court cases are likely to be heard by 12 Federal Courts of Appeals — do we expect they will all rule similarly? If not, we will eventually be back in the Supreme Court.”

While he decries what he foresees as a long litigation process, if the decision ends up back in court, there’s a chance Powell will see some of his ILEC-friendly vision become reality.

“The D.C. Court of Appeals could very well overturn the parts of this that Powell gave away,” Nolle says. “So you could end up with a sweeping victory for the LECs and a disaster for the interexchange carriers.”