FCC Imposes Wholesale Conditions on Megamergers

The FCC has blessed the merger of Verizon Communications Inc. with MCI Inc. and the takeover of AT&T Corp. by SBC Communications Inc., but not without levying several wholesale conditions to which the companies all must adhere.

Despite their opposition to the mergers, CLECs did win some tradeoffs thanks to Democratic commissioners. FCC Chairman Kevin J. Martin and fellow Republican, commissioner Kathleen Q. Abernathy, hoped to approve the mergers without imposing any riders. Martin, however, could not clinch the consensus of the commissions two Democrats without requiring the RBOCs to freeze special, or open, access rates and unbundled network element pricing for two-and-a-half years. They also were obliged to abide by regulations governing backbone peering and Internet neutrality and to offer naked DSL.

Colleen Boothby

Heather Gold

Earl Comstock

The Dems, Jonathan S. Adelstein and Michael J. Copps, both wanted additional obligations, including more divestiture of overlapping facilities and routes, but said they took what they could get. Competitive carriers will benefit from the reforms we put in place for special access and UNEs, Copps told the commission on Oct. 31, when it voted to approve the mergers. This will provide at least some latitude for competitive players trying to crack open an increasingly concentrated marketplace. We need active and engaged competitive carriers to keep rates low. This is especially important for small business customers.

One of the Bells most vocal critics, competitive industry association COMPTEL, maintains the FCC conditions do not do enough to protect smaller providers. The conditions won by the Democratic commissioners are mere fig leafs designed to give the appearance of consumer protection, says Earl Comstock, president and CEO of COMPTEL.

Attorney Colleen Boothby says the FCC considered some enterprise and CLEC interests, but notes, The special access prices are way too high. Boothby, a partner in the law firm Levine, Blaszak, Block & Boothby LLC, says with IXCs, CLECs and wireless carriers relying heavily on special access, overpricing those services creates price squeeze issue and suppresses demand. It really distorts the whole marketplace, she adds.

As for net neutrality and backbone peering, which are essentially the same, Boothby supports the provisions. Net neutrality is about preventing the BOCs from degrading service or modifying service based on the end-user content and applications, she explains, citing competitive IP telephony services as one such application.

Similarly, Boothby says, requiring the Bells to offer naked DSL (without a local voice contract) is a boon to CLECs with enterprise customers. What they want DSL for is a cheaper alternative to T1s at locations where they need lower volumes than T1. And DSL is a perfect service for a lot of enterprise customers, she explains.

Heather Gold, senior vice president of government relations at XO Communications Inc., says competitive service providers such as her company are pleased with the wire center recalculation rules laid out in the merger approvals. Under the Triennial Review Remand Order, she says, wire centers came off if there were so many fiber-based colocators in the end office. And now, SBC and Verizon have to go back and recalculate those wire centers as if, in SBCs case, AT&T was not a fiber colocator and, in Verizons case, MCI was not a fiber colocator.

Raul Martynek, president and CEO of Eureka/InfoHighway, the Northeasts largest CLEC, says the FCC addressed many of the issues companies such as his were concerned about. He says the conditions also indicate the RBOCs dont see the CLECs as a significant threat, since they agreed to them quite readily. Instead, he says, the incumbent telcos are more worried about their cable TV competitors and possibly newcomers like Google and others in the residential market.

Several industry associations, however, take issue with the requirements. Among them is the Competitive Enterprise Institute (CEI), a libertarian think tank. The groups technology counsel, Braden Cox, says the FCC micromanaged the mergers unnecessarily. In particular, he says, net neutrality an FCC policy promoting consumer access to the lawful Internet content, applications, devices and service providers of their choice should not have been a requirement because it should be decided on a caseby- case basis in court. [T]he commissions conditions forcing unbundled DSL, regulating wholesale rates and freezing current arrangements for exchanging traffic still reflect a narrow perspective of competition, Cox says. Rapid developments in technology along with an environment where cable, telephone and wireless companies all compete against each other, will help ensure competition in the industry.

AT&T Corp.
Competitive Enterprise Institute
Levine, Blaszak, Block & Boothby LLP
MCI Inc.
SBC Communications Inc.
Verizon Communications Inc.
XO Communications

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