Spring 2003

Ed. Note: The February 20^th press release by the Federal Communication Commission, "FCC Adopts New Rules for Network Unbundling Obligations of Incumbent Local Phone Carriers," has many technical dimensions, but, as a major competition policy proceeding, it's been greeted by widespread comment among community communication specialists as well as the corporate community. As with a previous Point/Counterpoint exchange involving different points of view on the Tauzen-Dingell bill, we present here two differing perspectives on this recent decision. For a counterpoint to Bruce Kusknick's perspective here, see Debbie Goldman's commentary and analysis.

The goal of the FCC's rule making was supposed to fulfill the Telecom Act's primary goals: to bring in competition that would lower prices and to bring America broadband. The FCC's incoherence in this proposed plan is exposed by the fact that almost every commissioner is dissenting on some part of it, except for Kevin Martin (whose proposal won the day).

For a longer discussion of what's wrong with Martin's Plan, see the critique of his speech last December.

What we got was essentially a Rube-Goldberg contraption that makes reading a phone bill look simple.

The primary winners of this entire process are the lawyers, who will now have a field day in all of the ill-conceived rulings and next steps. The winners are definitely not most competitors, and definitely not the customers and consumers of broadband or competitive local phone services.

When a competitor wants to use the network it has been able to purchase specific parts of the phone network, commonly known as unbundled network elements (UNE), or purchase a combination of UNEs that allow end to end service delivery. This is known as UNE-Platform (or, more commonly, UNE-P).

And the only competitors that won at some of this decision are those that sell local phone UNE-P services in specific states – states that like competition. Instead of a coherent national policy, the FCC dumped these issues in the laps of the under-funded, politically attached state public service commissions, and this means 51 state commissions now have to have separate proceedings to determine the rates for companies – and this will mean law suits in every state. And, of course, each state has its own opinions of competition, or the lack thereof.

At this point, prior to the final order being issued, to assess what all the details are likely to be, one needs to consult the press release's fine print. For example, if the state decides to not act and does not do a proceeding on UNEs, then the Bells will no longer be obligated to resell their services to competitors in that state... And caveats abound. For example, the Bell companies do not have to sell services that use packet switching. "Incumbent LECs are not required to unbundle packet switching, including routers and DSLAMs, as a stand-alone network element."

"The order eliminates the current limited requirement for unbundling of packet switching." Packet switching, the sending of small digitized packets of information that make up, say, a web site or a phone call, is the primary way the Internet, Voice over IP, DSL and most other services work these days.

For a commission interested in stimulating broadband deployment, the stupidest thing to do is to get rid of services competitors are already using. For example, today, an Incumbent Local Exchange Carrier (i.e., Verizon, SBC, BellSouth, Quest) can be required to share its phone line for a reasonable fee with a company offering DSL on the same line using a frequency higher than what is used for voice traffic.

This new FCC decision says that line-sharing is no longer going to be available under regulated rates, and within three years the ILEC will have the right to terminate their competitors' DSL service that is being used by many residential customers.

Talk about a chilling effect on every company that offers services using line-sharing, or everyone who owns stock in companies that have based their business plans on line-sharing. According to Powell, "40% of DSL providers use line shared inputs. The decision to kill-off this element and replace it with a transition of higher and higher wholesale prices will lead quite quickly to higher retail prices for broadband consumers."

We expect that this activity alone could destroy the entire Internet Service Provider market and the Competitive Local phone companies (CLECs) that depend on line-sharing – who's going to invest in a company whose major business dies in three years?

But what truly separates the simply bad ideas from the truly bad ideas is the fact that the FCC's decision essentially turns over the entire future of wireline broadband to a group of four companies whose broadband track record has been abysmal. The FCC plans states that if Bells upgrades their current networks with fiber, they have exclusive rights to the networks and do not have to resell it to any other company.

This week we filed a complaint with the FCC pointing out that their broadband data was seriously flawed. It neglected the facts. In most states, the Bell companies promised to deploy fiber-optic based broadband services in exchange for financial incentives in the form of higher phone rates. And the facts show that NO Bell company built any of the promised networks, even though customers paid for it.

For example, in Pennsylvania, Verizon PA is being held accountable for its promises to have half of the state wired with a fiber-optic 45 mps two-directional service, including all rural, urban and suburban areas, by 2004. In our complaint with the Pennsylvania Public Utilities Commission, we estimate that the Bell collected $785 per household – $2.1 billion dollars, in excess fees to date and there's no network in sight.

But the FCC is betting that giving the Bells exclusive access to any new fiber-based networks will make these companies actually build something.

More to the point, all customers reading this should realize that they already paid for the development and implementation of fiber networks that, if ever actually built, will now be solely owned, without any obligation to allow competitors to use these networks, as noted in our recent Complaint with the FCC.

These entire proceedings have been stacked against the small businesses, not only small business Internet and broadband competitors, but also small businesses that depend on these services. In fact, the Small Business Administration's Office of Advocacy stated that the FCC should have revised its entire process because it did not take into account its obligations under the Regulatory Flexibility Act, which requires the FCC to examine the impacts its laws will have on small businesses.

Second, on the issue of pricing of UNE-P, the Bell companies continually complain that they lose money from selling below cost to the competitors.

The FCC has never bothered to just take out an annual report or 10Q and examine the profits of these companies. It shows that the Bells' profits have continually increased and they are still some of the most profitable companies in America – all from local phone services. Also, the FCC has never bothered to complete the audits it started which showed that the current network expenses have been inflated by the inclusion of over $20 billion dollars of missing equipment.

How much do the networks really cost? See our report on the Bells' profits and about the FCC audits .

Let the lawsuits begin.