Gartner Dataquest Alert FCC UNE Order Continues Contentious Telecom Environment On 20 February 2003, the Federal Communications Commission (FCC) adopted rules concerning incumbent local exchange carriers' (ILECs') obligations to make elements of their networks available on an unbundled basis to new entrants. 20 February was the last day for the FCC to address issues regarding unbundled network elements (UNEs) and line sharing mandated by a May 2002 decision by the U.S. Court of Appeals for the District of Columbia. That decision overturned the FCC's previous UNE rules and required that the FCC respond by 20 February (see the Gartner Dataquest Alert "Appeals Court Strengthens FCC's Hand in UNE Restructuring" [TELC-WW-DA-0095] and the Gartner document "New FCC Rules Won't Rescue Poor Regulatory Approach" [AC-19-1430]). The FCC chose to address the Court's requirements as part of the Triennial Review of UNEs. Following is a brief summary of the key issues addressed in the decision: Broadband issues The FCC requires no unbundling of fiber-to-the-home (FTTH) loops; the FCC elects not to unbundle bandwidth for the provision of broadband services for loops where ILECs deploy fiber further into the neighborhood but short of the customer's home (hybrid loops), although requesting carriers that provide broadband services over high-capacity facilities will continue to get that same access, even after this relief is granted; and the FCC will no longer require that line sharing be available as an unbundled element. The FCC also provides clarification on its UNE pricing rules that will send appropriate economic signals to carriers. UNE platform (UNE-P) issue The FCC determined that switching a key UNE-P element for business customers served by high-capacity loops such as Digital Signal Level 1 (DS-1) will no longer be unbundled based on a presumptive finding of no impairment. For mass-market customers, the FCC left switching as part of UNE-P and set out specific criteria that states shall apply to determine, on a granular basis, whether economic and operational impairment exists in a particular market. State commissions must complete such proceedings within nine months. Upon a state finding of impairment, the FCC sets forth a three-year period for carriers to transition off of UNE-P. The FCC also redefined its "impairment standard," clarified pieces of its total element long run incremental cost (TELRIC) pricing standard, and adopted rules governing access to enhanced extended links (EELs) and dedicated transport, among other things. Dedicated transport The FCC finds that requesting carriers are not impaired without optical carrier (OC-n)-level transport circuits. However, dark fiber and DS-3 transport also each are subject to a route-specific review by the states to identify where competing carriers are able to provide their own facilities. 21 February 2003 2003 Gartner, Inc. 1
The FCC also opened a Further Notice of Proposed Rulemaking (FNPRM) on whether the FCC should modify the so-called pick-and-choose rule that permits requesting carriers to opt into individual portions of interconnection agreements without accepting all the terms and conditions of such agreements (Source: FCC press release and Commissioners' statements). Gartner Dataquest Perspective This Isn't About Broadband, It's About Local Competition Although the headlines may focus on the broadband aspects of this decision, the real controversy and confusion is in the portions of the ruling that affect UNEs. The FCC squeaked in and met the due date established by the U.S. District Court of Appeals for dealing with the UNE rules that were overturned for a second time in May 2002. The FCC bundled the requirements of that order into this ruling on the FCC's Triennial Review of UNEs. In this decision it would appear that the FCC has elected not only to sustain the UNE construct but to hand it over to the individual state commissions for their "granular" review. The decision also gives states the latitude to add or subtract elements from the UNE construct. Although the FCC decision does provide a list of economic criteria that the states may consider, the states are under no obligation to do so. Gartner Dataquest asserts it is extremely unlikely that the states will conclude that impairment exists for the mass market and the status quo will most definitively be maintained.the bone that was thrown to the incumbent carriers was the elimination of line sharing as an UNE and the phasing out of existing line sharing over three years. Smaller broadband competitors that have focused on DSL and relied on the economic benefits of line sharing were thrown to the wolves in favor of large local competitors such as AT&T and WorldCom. Both have lobbied the state regulators successfully in the past months for lower prices on UNE-P. Gartner Dataquest would assert that the incumbents are not concerned about broadband competitors. The broadband portion of the order is largely about future investment. UNE-P is important to the incumbents because it is about existing revenue. For example, the most critical factor underpinning the acceleration in SBC consumer access line losses has been the migration of retail customers (read "voice") to UNE-P-based competitors, overwhelmingly AT&T and MCI/WorldCom. In fact, with third-quarter financial reporting, SBC stated that the largest factor in its consumer line losses was because of UNE-P-based competition. In the fourth quarter, SBC stated that almost 80 percent of its consumer line losses in the quarter were because of growth of UNE-P (75 percent of which were for AT&T and WorldCom). SBC states that, "Over the last three quarters, UNE-P lines added for AT&T and WorldCom tripled, while UNE-Ps added by others actually declined." This is the battle the incumbents must win if they are to stem these losses. Although there will not be additional investment in this area as a result of this ruling, there will be continued pressure on the incumbents by these large carriers, which may have a positive impact on prices for users in the short term. Investment Barriers to Fiber Removed So What? This decision clearly addresses the complaints raised by the incumbent carriers that the uncertainty of unbundling requirements for fiber and other next-generation equipment forced them to defer investments in new technology. SBC's Project Pronto, which was to place DSL closer to customers and expand coverage, was put on hold in part to make this point with regulators. So it would appear that the FCC's decision to not subject fiber or hybrid-fiber deployments in 21 February 2003 2003 Gartner, Inc. 2
"greenfields" (new) or "brownfields" (overbuilding) to unbundling is a good thing. Now that the regulatory barriers are removed, the real issues will begin to come to light. Gartner Dataquest expects that more remote terminals for DSL will be deployed once proven in by cost and revenue justification. However, don't expect a big rush for FTTH or fiber to the curb by the large incumbent carriers. That will be dependent on a business case that has yet to be made for an investment in that level of risk capital. Does not having to share give incumbents an advantage over new entrants? This is true only to the extent that incumbents by nature of their size may have access to more capital it doesn't guarantee they will invest it. The FCC characterizes this action as promoting investment and helping the telecommunications industry by giving incumbents incentives to move services to fiber. However, they also have a provision in this order that the incumbents must get approval from the state to retire any copper loops or subloops. Will states allow loops that are utilized by competitors under UNE-P to be retired or will incumbents have two infrastructures to maintain? It does mean that for now, barring future regulatory changes, next-generation networks (NGNs) will rely on facilities-based competition from new entrants. The Voluntary Disintegration of U.S. Telecom Policy The FCC has missed an opportunity to establish a regulatory approach appropriate to contemporary technology and service opportunities and has instead chosen to remain part of the problem. The result will surely be continued litigation to the detriment of the consuming public, service providers and equipment suppliers. Putting the states in the position of determining the appropriate costs and UNE components means 50 different agendas and outcomes will determine the future of the U.S. telecom market. In past commentary, Gartner Dataquest has recommended that the FCC take on a strong role as catalyst and facilitator between the key parties (service providers, equipment suppliers, industry think tanks and so on) to define the boundaries, parameters and implementation details of any new regulatory construct. Instead, the FCC has chosen to step aside and expand the contentious environment that is at the root cause of the industry's current problems. Gartner Dataquest does recognize that state commissions are generally more responsive to consumer issues than the FCC structure would allow. However, Gartner Dataquest believes that issues as critical to the telecom industry as UNE policy and pricing are best handled with consistency at the national level. UNE/UNE-P pricing is the critical issue that has really led to the current contention within the industry. The FCC's TELRIC clarifications offered in this instant order would not preclude the agency from pursuing a broader TELRIC review later this year. Expect the agency to open a proceeding, but do not expect any new rules or procedures to be enacted until 2004 UNE/UNE- P pricing will remain status quo in the near term. Incumbent providers remain in the untenable position of being a wholesaler to their competitors and a retailer competing for the same customers. Some high-level direction is expected at the National Association of Regulatory Utility Commissioners (NARUC) Winter Meeting, held 23-26 February in Washington, D.C. Expect Business as Usual While the Courts Take Center Stage The text of the FCC's order is not available and won't be for some time, mainly because the final decision usually departs in so many ways from the draft. After the FCC's order is published in the Federal Register, the legal challenges will begin. This ruling is clearly headed to court. The dissenting opinions by Chairman Powell and Commissioner Kathleen Abernathy are certainly crafted with nuggets of information that will be used in filings by incumbents and competitive entrants. This is undoubtedly a bitter loss for the Chairman, and he deliberately pulls no punches 21 February 2003 2003 Gartner, Inc. 3
in criticizing the "majority" for the flaws in their decision. As Gartner Dataquest predicted in its Perspectives "FCC Tips Its Broadband Regulatory Hand" (TELC-WW-DP-0281) and "Anticipated Rulings Could Spell Major Changes to the U.S. Broadband Market: Update" (TELC-WW-DP-0195), nothing substantial will immediately come out of this ruling. The service provider industry will remain polarized and will continue to use litigation. Consumers may see some expansion of DSL services by incumbents, especially in areas that have heavy cable presence. Fiber placement will be based on business case assessments and largely in greenfields something that is happening today. Vendors should not expect that this would result in any big equipment purchases by incumbents or competitors. Competitive broadband providers that rely on line sharing should see the writing on the wall by now and change their business strategy. This ruling essentially means that the telecom industry will see no significant changes for the time that it takes the courts to sort this out. It is unfortunate that the FCC has chosen a path that will ensure that millions of dollars continue to be invested in legal battles instead of new technology and services for consumers. By Kathie Hackler 21 February 2003 2003 Gartner, Inc. 4
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