Quantifying the Impact of UNE-P Deregulation

For the first time, the impact of UNE-P deregulation is becoming quantifiable. New data are showing what we all now know — that few CLECs operate on a resale ba-sis, choosing either commercial agreements or their own facilities to replace the preferred competitive model of the late 90s.

A December 2007 FCC report on local phone competition shows the migration of CLEC lines from resold, UNE-P and facilities-based models, between 1999 and 2006. The FCC report compiled data through December of 2006, nearly nine months after government-mandated UNE-P pricing ended March 11, 2006. Competitive providers had seen that decision coming, though, and most had spent the previous year-and-a-half securing confidential commercial agreements with the ILECs. Those deals provided lower margins than did UNE-P, but kept business models intact.

In December 1999, 81 CLECs claimed 8.1 million switched access lines. Seven years later, those numbers had jumped to 396 CLECs and 28.6 million lines. More interest-ingly, the percentage of providers using resold and UNE lines switched places between the end of 1999 and 2006. In other words, by December 1999, 42.9 percent of competi-tive lines were provisioned on a resale basis. At the same time, 23.9 percent of competi-tive lines were UNEs.

Those numbers flip-flopped by the fourth quarter of 2006 as it became clear that reselling lines for minimal margins was less favorable than operating on commercial agreements or owning networks, says Craig Clausen, senior vice president and COO for New Para-digm Resources Group (NPRG). To wit, CLECs reported providing 39 percent of their end-user switched access lines over their own local-loop facilities, 41 percent by using UNEs leased from other carriers, and 20 percent through resale arrangements with unaf-filiated carriers.

Were seeing stabilization now as a result of regulation, Clausen says, referring to the year-old numbers.

CLEC Metropolitan Telecommunications (MetTel), for example, has transitioned to commercial agreements with the ILECs since the phase-out of UNE-P. It also buys ILEC DS0s and, for higher-bandwidth services, uses UNE-L services. If the ILECs priced their services so high that we couldnt make money, obviously we wouldnt be here, says Sam Vogel, chief marketing officer and senior vice president-interconnection. What we see in 2008 is really a continuation of the business model that weve fol-lowed.

That former UNE-P resellers are using commercial agreements instead of building networks might seem surprising. But customer demand, combined with some financial reward makes the decision worthwhile. Admittedly, service provided under commercial agreements aren’t “as profitable as many of the other services; however, there is still demand,” says Brian Twomey, president of TNCI. “And you still get to make good margin on the long-distance associated with it. To the extent customers need and want it, they will need to migrate to the next generation of technology and if they do that, they will need help through that migration.”

Michael McLelan, vice president of sales for PowerNet Global Communications, agrees. “Its good to keep the access to the customer open,” he says.

Proportionately, Twomey says a large percentage of his smaller customers use local service provided via commercial agreements. Frank Ahearn, CEO of McGraw Communications, says the CLEC has “most of our customers on it because we use it as backups for PRIs.”

On the other hand, McLelan and Ron Ireland, president and CFO of TMC Commu-nications, say their companies have “very few” users on services provided under commercial agreements.

Other notable findings in the FCC report include:

Of the 28.7 million CLEC end-user switched access lines, 6.8 million lines were provided over coaxial cable connections. The 6.8 million lines represent about 61 percent of the 11.2 million end-user switched access lines that CLECs reported providing over their own local loop facilities.

There was at least one CLEC serving customers in 82 percent of the nations zip codes at the end of December 2006. About 98 percent of United States households lived in those zip codes.

The 28.7 million lines reported by CLECs is about 17 percent of the 167.5 million total end-user switched access lines reported for the end of December 2006.

McGraw Communications
Metropolitan Telecommunications
New Paradigm Resources Group
PowerNet Global Communications
TMC Communications

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