While regulators lower the fees RBOCs can charge competitors to lease their network elements, the Bells seem to be generating support for their arguments that UNE-P is an unnecessary drain on their businesses.
UBS Warburg analysts in August issued a research report supporting the argument that the wholesale pricing model is flawed. The report says BellSouth Corp., Qwest Communications Inter-national Inc., SBC Communications Inc. and Verizon Communications Inc. are bleeding losses in 18 states where they are required to lease their network to rivals under the Unbundled Network Element - Platform (UNE-P) model. The study looked only at the residential market.
"We believe the Bells generate negative EBITDA from wholesale lines in 18 states," UBS Warburg analysts reported. "The long distance market will only be a partial offset as competitive conditions have dramatically reduced its profitability, making it an unfair tradeoff under these conditions."
Martin F. McDermott, a former CLEC executive, author of the book "CLEC: An Insider's Look at the Rise and Fall of Local Exchange Competition" and now head of consulting firm Management Profiles, agrees, calling UNE-P "an arbitrage game created by the Telecom Act."
"RBOCs are being forced to do UNE-P and will fight to the death to get competitors off their switches," he says. Further weakening the Bell system is not in anybody's favor, continues McDermott. He says forcing RBOCs to support UNE-P on their switches would do just that. UNE-P is currently 60 percent off tariff rates, but McDermott says it ultimately will be lowered to 40 percent off tariff rates "so the Bell system will not go broke offering it."
However, so far, that's not the direction it's been heading. For example, public utility commissions from Maine to California have slashed the wholesale rates the Bells can charge competitors over the last 18 months, enticing more competitors including long-distance giant AT&T Corp. to compete with the incumbents.
In addition, the U.S. Supreme Court in May upheld the pricing rules that require the Bells to lease rivals elements of the public switched telephone network. " ... The FCC was reasonable to prefer TELRIC over alternative fixed-cost schemes that preserve home-field advantages for the incumbents," the Supreme Court said in an excerpt of the ruling AT&T provided.
Sue Platner, co-founder of consulting firm The Northridge Group, says there is no reason the Bells should be losing money in the wholesale market. For starters, if their operating support systems were more advanced, they could realize more efficiencies, she says. Platner adds UNE prices often are higher than the retail rates.
However, Don Evans, vice president, federal regulatory advocacy, Verizon Communications Inc., says the Federal Communications Com-mission could recommend late this year or early in 2003 whether the Bells should be exempt from having to provide all the elements of UNE-P, including switching and transport. "There is no reason for a switching UNE to be there any longer," says Evans. "The CLECs with the good business plans are still putting out more switches and still taking lines away from us and that is just looking at the wireline piece of the market."
The Bells lost 5.6 million lines last year as a result of UNE-P, according to UBS Warburg and, they add, that figure is just part of a bigger trend. Alternative technologies such as wireless phones are replacing the legacy telephone network. Verizon reports it is losing 1 million fixed lines a year to alternative technology.
