The Final Rung

Posted: 05/1999

The Final Rung
Rethinking UNEs in the Wake of Iowa Utilities Ruling
By Michael Katzenstein and Ken Ferree

In 1996, the Federal Communications Commission (FCC) missed an opportunity to encourage facilities-based competition in the local loop by declining to make available as an unbundled network element (UNE) the subloop distribution facilities on multiple dwelling unit (MDU) properties. The Supreme Court's decision in Iowa Utilities Board v. FCC 119 S. Ct. 721 1999 will allow the FCC to re-examine that decision. The court directed the FCC to revisit its rules to determine whether its UNEs actually are "necessary" and whether their absence would "impair" a competitive local exchange carrier's (CLEC's) ability to compete.

The court illustrated this standard by analogizing telephone competition to competitive "light-bulb changing." The FCC's unbundling rules, according to the court, must provide CLECs with a ladder tall enough to reach the light fixture, but they need not provide a ladder "one-half inch taller."

CLECs that are willing to invest in their own facilities, however, but that cannot access incumbent LEC (ILEC) distribution facilities should not be required to collocate at the ILEC end office and purchase entire loops to serve customers. They should, instead, be able to purchase as a UNE the final rung of the ladder which, a fortiori, is necessary if the entire ladder is necessary. If the FCC makes available subloop distribution on MDU properties as a UNE, facilities-based competitors quickly will be positioned to provide competitive service to business and residential consumers alike.

In 1996, Congress directed the FCC to identify network elements to be made available as UNEs. In making this determination, the FCC was to consider whether the element is "necessary" and whether failure to provide it would "impair" a CLEC's ability to compete. In its first implementing order, the FCC identified as UNEs most network functionalities for which access is technically feasible, including local loops, local switching, network interface devices, signaling databases and operator systems.

Ken Ferree

The FCC declined, however, to define any subloop elements as UNEs. Although the FCC recognized that CLECs could minimize their reliance on ILECs by constructing networks and connecting them to ILEC feeder plant at remote points, it decided not to require subloop unbundling and promised to revisit the issue in the future. The Iowa Utilities decision has given the FCC an opportunity to fulfill that promise.

This decision has changed the UNE landscape. Rather than merely determining whether the failure to provide an element would raise a CLEC's costs, the FCC must "apply some limiting standard ... related to the goals of the Act" in identifying UNEs. Although not specifically adopting the "essential facilities" doctrine from antitrust law, the court suggested that the UNE limiting principle is analogous. The court noted that although it is "necessary" to have a ladder tall enough to reach a light fixture to change a light bulb, it is not "necessary" to have a ladder "one-half inch" taller, nor does the lack of a taller ladder "impair" one's ability to change the bulb.

In his concurrence, Justice Breyer, too, found the FCC's UNE definitions lacking. As Justice Breyer explained, sharing network elements entails costs and the "more complex the facilities, the more central their relation to the firm's managerial responsibilities, [and] the more extensive the sharing demanded, the more likely these costs will become severe." Thus, Justice Breyer's opinion suggests that the benefits of increased "competition" using shared facilities are only worth the costs when the sharing involves "readily separable and administrable physical facilities." Indeed, both Justice Breyer and the court would seem to agree that the one incontestable UNE is the local loop.

In the residential market in MDU properties, facilities-based CLECs are poised to provide service. The only barrier is access to the "last 100 feet" of on-property distribution facilities. ILECs generally will not allow CLECs to cross-connect at a single point on or near an MDU property.

Thus, CLECs that bring facilities to an MDU often find no way to access on-property distribution facilities necessary to reach a subscriber. To continue the court's analogy, a CLEC may bring to the market its own ladder, its own technician and its own light bulb. The competitive ladder, though, is not tall enough to reach the light fixture; it is one rung too short.

The CLEC is left with two options, neither of which is competitively viable. It can lease an entire loop from an ILEC or it can install duplicative facilities on the MDU property (assuming the property owner permits an overbuild). Both approaches are cost prohibitive and inefficient, and the delays associated with the second approach undermine the CLEC's credibility in the market.

It is time for a third option: ILECs should, consistent with the Iowa Utilities opinion, provide MDU subloop distribution facilities (the last rung of the ladder) as a UNE. Subloop unbundling would provide a competitive choice to millions of subscribers who live and work in multiunit complexes.

There can be no doubt that the loop itself is a "necessary" UNE, the failure to provide access to which would "impair" a CLEC's ability to provide service. It follows, therefore, that a small part of that UNE--a single rung on the ladder--also is "necessary" and that the failure to provide it will no less "impair" the ability of a competitor to provide service.

That it is less expensive to add a single rung to an existing ladder than to build a new ladder is not the answer. That answer, if accepted, would discourage any duplication of facilities by CLECs and lead to the kind of reseller-only competition dismissed by Justice Breyer as inconsequential.

Making the subloop "rung" available to CLECs would, by contrast, promote facilities-based competition. CLECs could bring their networks close to the subscriber, provide their own services and network intelligence, and compete not only on price, but also on quality, reliability and service. Further, subloop unbundling would ease collocation congestion by allowing CLECs to move their point of interconnection away from the ILEC end office.

To make subloop unbundling work, ILECs should establish a single point of demarcation at an MDU property line or a nearby street cabinet at which competing networks could cross-connect. Any carriers involved could share the costs of any network reconfiguration. The on-property distribution facilities then should be made available as a UNE.

There may be many reasons that local residential telephone competition has not developed as rapidly as the Congress, consumers and the FCC would have liked. One of those reasons, however, certainly is a lack of access to consumers on multiunit properties. Subloop unbundling would remedy that access problem and allow facilities-based CLECs that have constructed networks all the way to the property line to reach the end users seeking a competitive choice. To the extent that a quick fix is sought for the failure of the Telecom Act to promote facilities-based residential telephone competition, subloop unbundling is the answer.

Michael Katzenstein is vice president and general counsel for WinStar Communications Inc., New York. He can be reached at (202) 429-4900. Ken Ferree is partner for the law firm of Goldberg, Godless, Wiener and Wright, Washington. He can be reached at (214) 634-3824.