Posted: 04/1999
The UNE Bomber
Supreme Court Questions Necessity of Unbundled Elements
By Kim Sunderland
Carriers in the telecommunications industry have taken to their respective corners over the U.S. Supreme Court's January decision in AT&T Corp. et al vs. Iowa Utilities Board et al. And in the wake of this ruling, the ripples are becoming waves.
Competitive local exchange carriers (CLECs) have petitioned the Federal Communications Commission (FCC) to ensure the incumbent LECs (ILECs) adhere to the Telecommunications Act of 1996's 14-point checklist. The CLECs are particularly concerned with the unbundled network elements (UNEs) portion of the High Court's ruling.
Specifically, the FCC now is charged with redoing its list of the UNEs that ILECs must offer to competitors. At issue here is Rule 319, the FCC's primary unbundling rule that sets forth a minimum number of network elements that ILECs must make available to requesting carriers. The Supreme Court vacated and remanded Rule 319, calling it inconsistent with the Telecom Act because the FCC didn't fully consider all factors "when it gave requesting carriers blanket access to network elements."
In other words, the High Court wonders if the FCC is giving competitors access to UNEs that go beyond what is "necessary" to provide basic local service, which is what the Telecom Act called for. In its ruling, the Supreme Court said the FCC virtually ignored the Telecom Act's requirement that it consider whether forcing the ILECs to provide access to each network element was "necessary" to promote competition, and whether new entrants would be "impaired" by having to get the network element on their own.
The commission now must develop and apply a new test that's consistent with the Supreme Court's decision, and publish a new rule identifying the network elements that must be made available under the Telecom Act. Several carriers, in fact, already are lobbying the FCC hard on how the "necessary" and "impair" standard should be applied.
At press time in early March, the commission had received UNEs comments from AT&T Corp.; BellSouth Corp., Atlanta; and MCI WorldCom Inc. Meanwhile, the ILECs marked their spot on the existing interconnection deals they have with competitors, as well as access to UNEs.
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"We want the FCC to act expeditiously." -- Cronan O'Connell, vice president of industry affairs, Association for Local Telecommunications Services (ALTS) |
"Industry players are staking out and implementing different strategic public positions based on differing interpretations of the Supreme Court's order," says Eileen Polsky, vice president of Jersey City, N.J.-based Regulatory Research Associates Inc. "This is creating an environment that is becoming riper by the day for regulatory intervention.
"Quite frankly," she adds, "it is difficult to see how the FCC can look away from the need to provide interim guidance."
In fact, FCC Chairman William E. Kennard told the National Association of Regulatory Utility Commissioners (NARUC) in February that he had concerns about the current rules on both intraLATA (local area and transport area) dialing parity and geographic deaveraging of the rates for UNEs. He said the FCC is considering an order on setting a time frame for the ILECs to comply with the rules.
The Supreme Court's decision directs "the FCC to rewrite the [UNEs] rules in a way that encourages competitors to make investments and build network elements, rather than relying entirely on incumbents to invest and build everything for them." -- Kelly Welsh, executive vice president and general counsel, Ameritech Corp. |
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In comments filed with the FCC, AT&T suggests the FCC set rules determining that: A UNE is "necessary" if an ILEC or other carrier hasn't made "a reasonable substitute" available to a requesting carrier; and a requesting carrier's ability to offer telecom services is "impaired" if its inability to obtain a UNE "materially reduces its ability to offer services."
Some of the factors that AT&T says should be considered in determining whether access to a UNE is "necessary," or whether a requesting carrier's ability to offer services is "impaired," include:
- Availability of substitute capabilities from the ILEC or other sources;
- Whether a substitute capability requires requesting carriers to incur higher deployment costs or lower economies of scale compared to those of the requested element; and
- Practical difficulties in obtaining business arrangements necessary to obtain any substitute capability by requesting carriers.
The impact of the Supreme Court's decision is clearly positive for AT&T, according to Anna-Maria Kovacs of Janney Montgomery Scott Inc., a Cambridge, Mass.-based telecom research firm. It "assures AT&T of cheap access to its customers, not only in the form of cheap lines to the customers, but also in the form of pressure on access charges, a major cost factor for AT&T and the other long distance carriers," she says.
In its ex parte filing, BellSouth says the FCC should lay out a series of tests and standards addressing Rule 319 that state commissions also can follow in determining whether a proposed or requested UNE meets the "necessary" and "impair" standard of the Telecom Act.
The "essential first step," BellSouth says, in determining if the necessary and impair standard has been met is to determine the relevant product market in which the UNE will be offered. This would require the FCC to collect and evaluate "credible data" on the availability and cost of various telecom services and facilities, BellSouth adds, including the scope of the networks already constructed by non-ILECs; the costs of expanding these networks; and a competitor's costs to purchase facilities or services from a company other than an ILEC.
MCI WorldCom's ex parte filing with the FCC posed questions for the commission to consider in its expected Notice of Proposed Rulemaking on Rule 319, such as:
- In addition to the "necessary" and "impair" factors, what other factors, if any, should the FCC consider in determining whether to unbundle a particular element?
- Should the FCC consider the extent to which access to an ILEC element will lead to more rapid competition, or the extent to which lack of access to an ILEC element will retard the speed of competition?
- To what extent should the FCC consider whether the definitions it adopts will be easy or difficult to administer?
- If rules weren't made on a nationwide basis, what is the potential for disparate decisions to result across regions?
"The FCC can redefine UNEs without seriously limiting the availability of UNEs and [the] UNE platform to competitors," Kovacs says. "But this will take some time and work."
She suggests possible options for the FCC would be to define the UNE platform itself as an element, or to define elements as necessary when no alternate supply is available.
While the FCC considers its vacated Rule 319, the Bells and GTE Corp., Irving, Texas, have promised to provide competitors with the UNEs outlined in that rule and in their existing interconnection agreements. They also say they'll negotiate new interconnection agreements in "good faith." US WEST Inc., Denver, has even offered to extend the terms of any expiring interconnection contract until the end of 1999 so that the FCC's new UNE rules are concretely in place.
"We are aggressively trying to comply with the Telecom Act," US WEST President and CEO Solomon Trujillo said in February during NARUC's meeting in Washington.
Meanwhile, the Association for Local Telecommunications Services (ALTS), which represents facilities-based CLECs, has called on state and federal regulators to come up with new enforcement procedures to help ensure ILECs don't obstruct competition. The group has petitioned the FCC to impose new rules that would mandate ILECs to negotiate new and updated interconnection deals in "good faith," and to quickly come up with a list of UNEs that incumbents are required to provide competitors.
"We want the FCC to act expeditiously," says Cronan O'Connell, ALTS's vice president of industry affairs. She says ALTS is concerned that some ILECs are falsely interpreting the Supreme Court ruling to mean they no longer are required to provide UNEs to CLECs.
In some cases, that fear seems justified.
For instance, US WEST's Trujillo gave reason for pause during NARUC's meeting when he also said, "we fear that with the same processes, with the same barriers in place, consumers will not be the beneficiaries" of local competition. The money US WEST spends on interconnection-type issues are "dollars ... that are not going to upgrades" on the ILEC's system, he added.
Kelly Welsh, executive vice president and general counsel for Hoffman Estates, Ill.-based Ameritech Corp., went so far as to say the Supreme Court's decision directs "the FCC to rewrite the [UNE] rules in a way that encourages competitors to make investments and build network elements, rather than relying entirely on incumbents to invest and build everything for them."
And in a company statement pledging its continued offering of access to UNEs per interconnection agreements, Ameritech added that if a carrier "seeks to modify the status quo or requests that Ameritech provide, in advance of the commission's determination, access to a [UNE] that Ameritech has previously not provided, Ameritech reserves its right to exercise its legal rights." A letter from San Antonio-based SBC Communications Inc. to the FCC included similar remarks.
William Barfield, BellSouth's associate general counsel, says the Supreme Court has agreed with the ILECs that the FCC was "overly broad in defining which parts of our network we would be required to separate out and sell to our competitors at bargain-basement prices. We should not be required to sell to our competitors network elements that they can easily obtain elsewhere on their own."
So the table of litigation is being set. "This is a very high-stakes poker game," says Atlanta-based telecom analyst Jeffrey Kagan, "and both sides are trying to deal the best hand for their side."
In the end, though, the FCC may not come out with anything new. Jeanne Schaaf, senior analyst with Cambridge, Mass.-based Forrester Research Inc., expects the FCC will rationalize its current UNEs list and Rule 319 and "won't change anything."
"The original list of UNEs will continue to be offered," she predicts.
Reciprocal Compensation:
The Clock Is Ticking
By Kim Sunderland
The Federal Communications Commission (FCC) ruling that a call connecting to the Internet constitutes a long distance call, not a local one, bodes well for competitive local exchange carriers (CLECs) in the short term. It's the long-term situation that looks less rosy.
On the upside for CLECs, the FCC retained reciprocal compensation payments in its existing interconnection agreements with the incumbents. That means CLECs can continue billing incumbent LECs (ILECs) for terminating calls to Internet service providers (ISPs) until those agreements expire. The FCC's Feb. 25 decision also means CLECs can collect past-due reciprocal compensation payments from the ILECs.
On the downside, however, as these interconnection agreements expire over the next few years, the FCC's ruling basically dams a hefty CLEC revenue stream.
"The CLECs ... are unhappy that this purely regulatory arbitrage 'gravy train' eventually will run out of track," says Scott C. Cleland, managing director of the Legg Mason Precursor Group, Washington. "The CLECs had found a broken ATM that dispensed money, and they didn't have to put any in. But that's not sustainable."
In the meantime, the CLECs are "pleased that the FCC has bought them valuable transition time and has bestowed on them the regulatory 'gift' of some free working capital to tide them over," Cleland adds.
This 'free working capital,' as Cleland calls it, temporarily juiced up CLECs' financial performances, he says, to the tune of $600 million to $700 million industry-wide in 1998. That's up from $100 million industry-wide in 1997, a more than 500 percent annual rate hike. Expecting the same increase this year would translate into $3 billion. Now the CLECs must undergo a "painful metamorphosis" as they redo their business plans, Cleland says.
"Depending on how and when this messy proposed transition legally works itself out in practice, this temporary arbitrage looms as a threat to 1999 expected earnings for both the CLECs and the local telcos," Cleland explains.
Also with this ruling, the FCC issued a Notice of Proposed Rulemaking that pretty much leaves it up to state regulators to decide if reciprocal compensation will apply to Internet calls in future interconnection deals. The FCC says the current state decisions--29 commissions have ruled that such calls are local--should remain in place. But when the ILECs head back to the state negotiating tables on renewing interconnection deals, industry experts expect them to use the FCC ruling to support their argument that the states should overturn their decisions on dial-up calls to ISPs.
And if the states don't, "the ILECs will go to court on appeal," says Cindy Schonhaut, executive vice president of government and corporate affairs, ICG Communications Inc., Englewood, Colo. "I don't know if in their hearts the ILECs really believe" that they shouldn't pay reciprocal compensation.
"They have lost these arguments before and no state has supported them," she adds.
In the first of probably many more related appeals, MCI WorldCom Inc. March 8 asked a federal appeals court in Washington to review and vacate the FCC's ruling that dial-up calls to ISPs should be regulated as interstate calls.
| Sen. John McCain, R-Ariz., has warned the Federal Communications Commission
(FCC) against requiring incumbent local exchange carriers (ILECs) to set up separate
subsidiaries to offer advanced data services. As chairman of the Senate Commerce
Committee, McCain told FCC Chairman William E. Kennard that such a requirement would
disable the ILECs' abilities to compete in this market by making it "unworkable"
for them to deploy advanced broadband network services fully. McCain called any FCC action
against the ILECs in this regard "unfathomable." An FCC decision on this Section
706 proceeding was expected at press time. The FCC also is getting flak from two other Republicans. Sen. Conrad Burns, R-Mont., chairman of the Commerce Committee's communications subcommittee, has introduced his "Digital Dozen," an agenda of 12 telecom-related items that he plans to introduce or co-sponsor this year. At the top of the list is restructuring the FCC, a legislative proposal Burns plans to draft with none other than Sen. McCain. FCC reauthorization legislation also can be expected this year from Rep. W.J. Billy Tauzin, R-La. As chairman of the House Commerce Committee's telecom subcommittee, Tauzin's plan goes a little further--he also wants to reopen the Telecommunications Act of 1996. The FCC has released certain staff-level audit reports concerning property records of the regional Bell operating companies (RBOCs). These records are part of the RBOCs' accounting records that provide inventories and costs of the companies' plants, property and equipment used for providing regulated telecom services. The audit reports found that the RBOCs' book costs may be overstated by roughly $5 billion, according to the FCC. That's valuable information for companies such as MCI WorldCom Inc., which believes this finding may reduce the amount it pays to the Bells in access charges. But the FCC hasn't made final conclusions about the validity of the audit findings or whether the audit process is relevant, and now plans to seek pubic comment on these audit reports. MGC Communications Inc., a Las Vegas-based competitive local exchange carrier (CLEC), has filed a complaint in federal district court in Nevada against Sprint Corp. alleging violations of federal antitrust laws. MGC charges that Sprint is using payments from the yellow pages business to subsidize local residential phone rates in the Las Vegas area. This subsidy, says MGC General Counsel Kent Heyman, allows Sprint to charge below-cost rates for residential services while maintaining a chunky profit margin. MGC wants Sprint to be required to apply this subsidy to the entire residential market, not just its customers. On the state level, the board of the National Association of Regulatory Utility Commissioners (NARUC) will file comments with the FCC seeking reform of current collocation practices. State regulators at their February meeting in Washington urged federal/state cooperation in this reform; asked that the FCC review how the states have addressed and implemented collocation reforms; recommended that states continue to have the flexibility to adopt collocation requirements; and asked that ILECs be required to amend their tariff or standard service offerings in an expeditious manner. The FCC was set to issue an order in March on physical and virtual collocation requirements for ILECs as part of the commission's proceeding on the deployment of advanced services (Common Carrier docket 98-147). FCC Common Carrier Bureau Chief Lawrence Strickling says the rules were held up following the U.S. Supreme Court's January decision reinstating the FCC's interconnection order. The FCC is mulling additional national rules for collocation to remove barriers to entry and speed the deployment of advanced services. |
