Posted: 12/2000
Goodbye 2000
Competitors Wake Up to 2001's Regulatory Nightmare
By Kim Sunderland
It's time to wake up and smell the coffee: 2001 will be the year of relentless regulatory hell for LECs as they face myriad contentious issues.
The prevailing thought this time last year was that 2000 would be a banner year for competitors who were poised to reap the benefits of the Telecommunications Act of 1996. But the tide is turning: Competitors realize the expected benefits windfall was only a dream.
The reality, which unfolded during the past year, is that LECs awoke to some of their worst nightmares.
First and foremost was the FCC's (www.fcc.gov) approval of BOC's Section 271 applications, which allows them to provide in-region long-distance services.
The Section 271 approvals in New York and Texas, for example, proved the FCC can and will grant the BOCs' in-region interLATA requests, says Washington telecom attorney John Nakahata. The commission's action is a testament "that the market opening criteria are real," he adds.
"This was a win for the RBOCs, but also a win for competitive carriers, who have a much easier time defending the FCC's 271 policies now that some carriers have jumped the bar," Nakahata says.
Not everyone buys that argument, however.
"With ILECs gaining further traction in their long-distance entry strategies, it's going to be more and more difficult for CLECs to convince regulators in other states that incumbents should be prohibited from offering long-distance service," says industry analyst Terry Banks. "Once the gates have been opened in one place, it's harder to justify keeping them shut in another."
In fact, the past year can be referred to as "the year of the incumbent LEC, as far as the FCC is concerned," says Jason Oxman, senior government affairs counsel for Covad Communications Co. (www.covad.com).
The FCC's decision to grant the BOCs' Section 271 applications proves the commission "has done everything the incumbent LECs have asked," Oxman says.
Approving SBC Communications Inc.'s (www.sbc.com) Project Pronto waiver request and granting the Bell Atlantic Corp./GTE Corp. merger to form Verizon Communications (www.verizon.com) are other examples of how "the commission simply isn't saying no to the ILECs this year," Oxman adds.
One ILEC lobbyist says, "It's true that the regulatory curve is now going in the opposite direction. When the Telecom Act was signed into law, subsequent years were largely anti-ILEC. That's changing now as the ILECs win in court and at the FCC."
Rules Aren't Always the Rules
In the 2000 rule-making arena, the competitors won sometimes, but also lost a lot.
Oxman says the FCC failed, for example, to adopt concrete loop provisioning rules to assist market entrants in securing a realistic opportunity to compete.
"Competitive LECs are dying at a rapid pace--GST, ICG, Intermedia, NorthPoint, to name a few," he says. "And the commission has amazingly failed to inquire as to what it needs to do--not just speak about--to promote the competition that it purports to be interested in promoting."
A few other issues concerning the competitors were to urge Congress to retain reciprocal compensation for ISP-bound traffic, to fight against proposed broadband legislation that would give the ILECs a break on getting into the long-distance market, and to oppose mandatory detariffing of CLEC interstate access services.
Another setback for competitors came when the 8th U.S. Circuit Court of Appeals (www.ca8.uscourts.gov) dumped the FCC's pricing methodology for determining how monopoly local carriers should charge new local competitors for using their public telephone networks, or the total element long run incremental cost (TELRIC) pricing methodology.
AT&T Corp. (www.att.com), the Competitive Telecommunications Association (CompTel, www.comptel.org), Sprint Corp. (www.sprint.com) and WorldCom Inc. (www.wcom.com) supported the FCC's request for a stay of the federal ruling, which was made in July. The carriers said the ruling could slow competition and be an open invitation for the ILECs to use "worthless litigation" or delay interconnection with new local competitors.
A WorldCom spokewoman says the company is focused on ensuring that the FCC's forward-looking pricing methodology will withstand court challenges.
TELRIC pricing for elements of the local phone network is essential if CLECs are going to enter local residential markets and provide consumers with choices in local phone service, the spokeswoman says, adding that without fair pricing and based on forward-looking costs, it is difficult for CLECs to serve local residential markets.
The Supreme Court of the United States (www.supremecourtus.gov) is reviewing a challenge to a 5th U.S. Circuit Court of Appeals (www.ca5.uscourts.gov) decision on forward-looking pricing as it relates to universal service, and is also expected to review the 8th Circuit decision.
CompTel also sent a letter to the National Association of Regulatory Utility Commissioners (NARUC, www.naruc.org) urging state regulators to hold off on wholesale pricing changes until the FCC could issue a replacement cost rule or appeal the court's decision.
You Make the CALLS
Then the FCC adopted and began implementing the Coalition for Affordable Local and Long-Distance Service (CALLS, www.phonepolicy.com) access charge and universal service reform plan.
The competitors are all over it.
Citing significant legal deficiencies in the FCC's order approving the CALLS plan, the ALTS, (www.alts.org) and Focal Commu-nications Corp. (www.focal.com) were among the few who asked the commission to rescind the controversial decision.
"The FCC erred in its rush to approve the CALLS plan, which was nothing more than an insider deal brokered by a few large ILECs and long-distance carriers at the expense of consumers, competition and the law," said John D. Windhausen Jr., ALTS president.
Ernest B. Kelly III, president of the Association of Communications Enterprises (ASCENT, www.ascent.org), was disappointed that the commission's order didn't address key issues facing resale carriers and their customers.
"In particular, we are disappointed the order did not treat the multiline business presubscribed interexchange carrier charge [PICC] in the same manner as the residential PICC by rolling it into the subscriber line charge [SLC]," Kelly explains. "While we are pleased the multiline business PICC was capped at a lower cost than originally proposed, retaining it as a separate billing item places a heavy and unfair burden on resale carriers to collect these charges.
"Keep in mind that resale carriers constitute nearly 20 percent of the U.S. long- distance market. To the extent they can reduce their wholesale costs and lower retail prices to customers, it puts that much more pressure on the big carriers to lower their retail prices."
Nakahata, who is a spokesman for CALLS, says the plan takes subsidies that were implicit and not clearly identifiable and makes them explicit, while it takes steps to target subsidies to rural and low-income customers.
"Looking at implementation of the summer and fall, the myth of the untouchable SLC has been broken, and per-line access USF [universal service fund] support is about to be distributed, he says. "This was a win for IXCs in the near term, and ILECs and consumers over the longer term."
Chart: Snapshot of Regulatory Issues
He adds that all tariffs implementing the CALLS plan have been filed, and traffic sensitive access charges have dropped dramatically since July 1. The PICC was eliminated from all residential and single line business bills, and the residential and single line business SLC is now $4.35, Nakahata says.
Consumer bills also now reflect all CALLS-related changes in most areas, and CALLS has begun a consumer education effort with the United States Telecom Association (USTA, www.usta.org).
Reconsideration petitions on the CALLS order are pending at the FCC, however, and an appeal is proceeding in the 5th Circuit. The commission must file its response to the appeal, possibly this month.
Meanwhile, ASCENT will lobby to ensure that IXCs pass through access charge reductions to resellers in much the same way they have agreed to pass along access charge savings to consumers.
State Regs
The competitive industry does relatively well during 2000 at the state level, although a few of the recent state Section 271 decisions bode poorly for competitors, says Andrew Isar, of regulatory consultancy Miller Isar Inc. (www.millerisar.com).
"The 271 decisions in Kansas, Oklahoma and Massachusetts are entirely premature," Isar says. "There is growing concern that the 271 process in the states is becoming one of ostensibly approving applications that rely on the similarity in operations between states where 271 authority has been granted and those where the RBOC's 271 applications are pending."
Other disturbing trends are appearing as well, he adds.
"In an understandable zeal to protect consumers, many [state] regulators have actually increased the level of regulation, particularly in the areas of consumer protection, slamming/cramming and service quality," Isar says.
He cites amendments to Ohio's service quality rules that would increase the level of service quality performance obligations, tracking and reporting for competitive companies.
California and other states have also become more rigorous in their requirements to confirm new subscriptions and resolve slamming complaints, particularly in light of the FCC's recent slamming rules, Isar adds.
Another disturbing trend is an RBOC effort to pursue relaxed regulation through state legislation before demonstrating that their local markets are open to competition, Isar says.
The New Jersey legislature, for example, may consider a bill that would prevent Verizon from seeking relaxed regulation until it meets its Section 271 obligations.
Elsewhere, Isar says competitors can expect an onslaught of legislation intended to reduce regulatory oversight of the incumbents before Section 271 authority is granted. An example is a bill SBC has initiated before the Illinois legislature.
Of like concern are the incessant court appeals of state rulings unfavorable to the RBOCs, such as SBC's appeal of the Michigan Telecommunications Act.
In that case, SBC/Ameritech complains that its due process right to earn a reasonable return has been violated as a result of the law's elimination of a 1995 provision that allowed Ameritech to mirror interstate access charge rates without state commission approval, Isar says.
It was this 1995 provision that led to Ameritech's intrastate primary interexchange charge and some of the highest rates in the entire Ameritech region, let alone the country, he adds.
Isar also points to the SBC Section 271 approval in Texas as a state decision that has had a major impact on the industry.
"We believe that this decision, more so than the New York 271 decision last December, has truly opened the door to numerous 271 applications that may end in a fairly perfunctory process for RBOCs to receive 271 authority throughout the U.S.," he says.
The list goes on. In summation, it's interesting to note that many of these issues are expected to resurface in 2001, which only emphasizes along the regulatory front that the battle doesn't get any easier.
And the Winner Is
The competitors did have some regulatory wins this year.
Several states streamlined regulation because state regulators realize that competitive market forces don't require a conventional regulatory approach, Isar says.
"Regulators, for the most part, realize that incumbents and competitors are not similarly situated," Isar says. "Regulators are generally more inclined to differentiate between incumbents and competitors in terms of levels of regulation when promulgating new rules."
State decisions supporting reciprocal compensation agreements--such as Tennessee's ruling that Internet traffic is local for purposes of reciprocal compensation--and collocation have been bright spots, particularly for facilities-based carriers, Isar says.
He adds that favorable rulings that compel RBOC delivery of the UNE platform (UNE-P) were also a plus for competitors.
Many competitors, in fact, praised the FCC for clarifying and strengthening the collocation rules, specifically its efforts to ensure that collocation is provided in a reasonable and timely manner.
H. Russell Frisby Jr., president of CompTel, says the FCC's ruling will help competitors obtain more timely access to ILEC networks.
Frisby, however, has urged the FCC to keep moving forward in its examination of how ILECs' new network architectures--such as SBC's Project Pronto--could stifle competitive providers' entry into the local marketplace. This could happen unless the commission ensures that competitors receive nondiscriminatory access to these newer networks, Frisby says.
The FCC's UNE remand significantly clarified the competitive framework, according to Jonathan Atkin, senior analyst of broadband services for Dain Rauscher Wessels (www.dainrauscherwessels.com).
The UNE remand specifically provides clarity on the large number of network elements to which competitors have access--copper loops, collocation, OSS, even dark fiber--and reduces but doesn't eliminate the murkiness and potential for footdragging and appeals by the incumbents, Atkin says.
Share and Share Alike
Line sharing was also a notable win for the DSL-based carriers, Atkin says. Line sharing considerably improves gross margins for DSL-based CLECs through the reduction in monthly recurring expenses to less than half the rate for a full loop, and through the elimination of a truck roll, he says.
Atkin expects implementation and enforcement to be the major drivers of competition in moving the market forward.
"There will be occasional federal-level debate with respect to the details of interconnection, collocation, intercarrier compensation payments and so forth, but the real action we expect will be taking place within state commissions and in the marketplace," Atkin says. "This includes, for instance, implementing UNE-P and implementing EELs" [enhanced extended links].
Call the Cops
Regarding enforcement, the FCC has consistently refused to step up to the plate in the past year, Oxman says.
During 2000, he says, the commission took only one enforcement action against an ILEC pursuant to the market-opening provisions of the Telecom Act. That was the fine levied on Verizon in New York.
"That is hardly the swift and effective enforcement that the commission has promised that the new Enforcement Bureau would undertake," says Oxman, a former FCC staff attorney. "The commission needs to seriously evaluate whether it is saying one thing publicly about its interest in enforcement and doing something entirely different."
FCC Chairman William E. Kennard must recognize that some of his colleagues are hesitant to assist him in implementing his enforcement mandate, Oxman says.
As a result, this year's newly developed Enforcement Bureau hesitates to present enforcement cases because it is concerned the commission lacks the votes to release the cases, he says.
"In sum, the bureaucracy of the FCC is stifling enforcement," Oxman says. "The chairman should direct the Enforcement Bureau to find ways to simply do more without getting caught up in the bureaucracy--for example, more bureau-level, rather than commission-level, items. Having enforced the local competition provisions of the act only once in the last year, the FCC should be embarrassed."
WorldCom, among others, plans to lobby the FCC to strictly enforce all provisions of Section 271 when considering RBOC applications in different states, a spokeswoman says.
"In particular, we'll be looking for pricing in the states that will allow CLECs to effectively compete in the local market," she says. "Additionally, we want to ensure that the FCC, when faced with multiple 271 applications, will not lower the bar with respect to forcing the Bells to open their local markets."
Awake now, the competitive U.S. carriers see their regulatory blanket stretched out before them.
Kim Sunderland is Washington bureau chief for PHONE+ magazine.
