STATE REGULATORS COURTED BY ILECs AND IXCs ON UNE-P ROLE

Final language on the Triennial Review is expected from the FCC next month. Much speculation remains on its details as the order by a closely divided Commission was based on several last-min. compromises. The FCC representative on the panel, senior counsel Cathy Carpino, who is involved with writing the broadband section of the draft, limited her discussion to publicly known information from the original Feb. Commission news release. She did say with some pride that the impairment tests the FCC would send to state regulators were “by far the most comprehensive and rigorous” that the Commission had devised.

“State PUCs inherit a very large role in UNE-P cases,” AT&T senior counsel Richard Rubin said. He saw little debate with UNEs intended for large businesses that used high- capacity loops -- DS-1 and above. Under the new rules the FCC presumptively will conclude there’s no impairment to competitors, meaning ILECs won’t be required to unbundled those elements, he said. A state PUC will have 90 days to make a contrary finding. “The big fight will be for the UNE- P for the mass market,” Rubin said. The Commission will presumptively find CLECs are impaired if they're unable use a UNE-P to serve mass-market locations such as residential and small business customers. PUCs will have 9 months to determine whether market facts in their jurisdiction don’t support that presumption using impairment criteria the FCC will identify, he said: “We don’t know what this criteria is. Hopefully, it will leave room for PUCs to exercise their judgment” and rely on their local experience.

Finding impairment for the mass market should be “a no- brainer” to state regulators, Rubin said. Unlike ILECs, competitive carriers always must incur significant extra costs to extend their customer loops to their own switches, he said, alluding to a complex diagram that showed digital cross-connects, optical switches, DS-3 transport and other equipment a CLEC needed to colocate if the UNE-P weren’t available. “These are things the incumbent doesn’t have to do,” he said: “The ability of competitors of provide a service without the UNE-P is extremely impaired.”

Asking state regulators to make “pro-investment” policy, Verizon Asst. Vp-Internet Link Hoewing offered the familiar argument that the UNE-P regime served as a disincentive to ILEC investment in new networks that it knew it must share with competitors. “The more that is shared in the network -- at below cost -- the less incentive competitors have to invest,” he said. Recounting the decline of telecom in the last 3 years, Hoewing warned that “the economy may not recover without telecom, which represents 4% of GDP.” His warning was an argument designed to play in Mass., a state that recently has lost 160,000 jobs, primarily in telecom and Internet firms. “PUCs can make a major dent in getting investments started in your state,” he said.

Less convincing were Hoewing’s arguments that without the UNE-P CLECs still had access to Bell networks through resale or colocation, adding that he had seen telephone switches on E-bay for “$100,000 or so.” “CLECs can buy equipment,” he said. Rubin retorted that “on resale, the RBOC earns the entire profit it would have received if the line were sold to a customer under the peculiar structure of the Telecom Act.” Colocation also isn’t inexpensive, he said -- AT&T has spent up to $10 billion “and has only part of the network necessary to compete on a facility basis.” Facility- based competition to ILEC voice does exist, Hoewing countered, pointing out that Verizon was losing business to wireless services, voice-over-cable and even e-mail on the Internet -- all facilities-based competitors.

Odd man out on the panel was Rick Cimerman, senior dir.- state telecom policy of NCTA, which represents cable operators. He said the broadband portion of the FCC’s Triennial Review would “be most important in the long run.” The UNE-P is tied to competitive voice, a service that remains “a cash cow but with declining revenues.” In the future, “voice will be an adjunct to other services” such as cable modem or DSL broadband “and will be thrown in for free,” Cimerman said. The “general framework where new fiber investments will have different regulatory treatment” than existing networks “is a sensible decision,” he said.

The FCC order will give ILECs significant UNE relief for broadband service capabilities and “the FCC got it wrong on broadband issues,” MCI Vp-Public Policy Joan Campion said. Aside from a 3-year phase-out of copper line-sharing, she said access to hybrid fiber/copper loops would be limited, which “limits competitors’ ability to provide broadband services” such as DSL. Campion and Rubin agreed that the FCC decision would have a significant effect on broadband competition “eventually.” If Verizon can supply DSL, but AT&T and MCI can’t economically, they effectively are locked out of the local voice market, Campion said: “DSL must be part of the bundle.”

Campion worried that a duopoly for broadband -- DSL provided by only the ILECs vs. cable modem service -- would be the result of the new FCC rules. Cimerman disagreed, saying an FCC inquiry opened last week on providing broadband services over power lines, a service that FCC Chmn. Powell has called a potential 3rd network into the home. “If anyone has more money than the phone company, it is the electric utilities,” he said. Cimerman also cited the expanding market for Wi-Fi hot spots, “and with [News Corp. CEO Rupert] Murdoch buying DirecTV, satellite broadband should be making a comeback.”