Regulatory News – School of Hard Rocks

Posted: 08/2001

Regulatory News

School of Hard Rocks
States Stuck Between Competitors, Incumbents in Coast-to-Coast Onslaught
By Kim Sunderland

State regulators find themselves wedged between a rock and hard place as the furor over this year’s Section 271 activity blazes like the roaring August sun.

On one side of the regulators are IXCs and other competitive carriers, who are steadfastly lobbying the states against the BOCs’ Section 271 applications to provide in-region long-distance services.

“Having seen the fallout of RBOC in-region interLATA entry in New York and Texas, competitors are increasingly concerned that the inevitable RBOC long-distance entry in the remainder of the nation could spell the end of any hope of true local competition,” said Dena Alo-Colbeck, director of public policy for regulatory consultants Miller Isar Inc. ( “To that end, companies are producing specific, documented evidence of RBOC anticompetitive abuses to ensure that the return of incumbents to the long-distance arena is sufficiently regulated, [which in turn will] ensure that the provision of competitive telecommunications services remains viable.”

On the other side of the regulators are the BOCs, which maintain pressure to move forward on their interLATA market entry proceedings.

In essence, state regulators are surrounded.

The marked increase in state 271 activity has continued unabated this summer, according to Association of
Communications Enterprises (ASCENT,, as new applications were filed in several states and no relief for the rest of the year appears in sight.

“I’m holding up okay, although the process is a long and complicated one; one in which no one seems to be telling the truth, but, rather, they all seem to be looking out for their vested interests which, of course, one would expect,” said Richard A. Bilas, a commissioner with the California PUC (

And Bilas admitted that because local phone competition is virtually nonexistent in California, “Competitors are definitely becoming more aggressive” as they attempt to force the issue to the forefront.

While his state also slowly and meticulously works to implement Sec. 271 in the Qwest Communications International Inc. ( states, Bob Rowe, a commissioner with the Montana PSC (, nonetheless said that the process has been very productive.

“Yes, it does take a commitment of resources by all parties, especially state commissions,” Rowe said. “However, the outcomes are significant changes in the systems and practices that are necessary to support competition in the networked world. It’s almost impossible to imagine these results being achieved through a series of contested cases.”

Rowe said he also recognizes that both the incumbents and competitors have their traditional positions to defend. But most of what he sees is parties actually focused on making the Sec. 271 process work.

“Competitors know that Qwest will eventually be granted in-region entry, and that this is the competitors’ best chance to lay a solid foundation for local competition,” Rowe explained. “Qwest wants in quickly, but recognizes a rigorous Sec. 271 process is ultimately the fastest way to get there.”

Rowe also thinks that there has been a positive relationship between the nuts-and-bolts work on the Sec. 271 collaboratives and the wholesale commercial relationships that are beginning to grow, such as that between Qwest and McLeodUSA Inc. (

“We still have a way to go, but look where we’re coming from,” he said.

Generally, Rowe said, highly concentrated markets change very slowly, the exceptions usually being in a state where a new technology is commercially deployed. In this market, the problems are more complex than was appreciated, he said, and of course, access to capital has been an issue for more than a few.

“I don’t think anyone has got it right on all points,” Rowe added. “We are all benchmarking against one another and improving as we go. However, if you take a look at the numbers for Texas, there are some signs that all the effort is starting to pay off.”

Hot Fun in the Summer

Indeed, PUC of Texas ( commissioner Brett Perlman said the 271 process has succeeded in opening up the local market in his state. While Texas completed the 271 process in July 2000, Southwestern Bell
(, operating company of SBC Communications Inc., has “generally met the performance standards established by the commission,” he said. The Texas PUC also continues to monitor the incumbent on a monthly basis, using what Perlman calls a “rocket docket” dispute resolution process to quickly resolved disputes between Southwestern Bell and CLECs.

But problems persist and some competitors, in fact, say that there may be no chance for full local competition with such “failed 271 approvals” that continue to monopolize the resources of various state utility commissions who are forced to “baby-sit” the incumbents. In Texas, many competitors still aren’t satisfied with SBC’s QoS, and continue to struggle with the local phone giant regarding issues such as UNEs, timely customer switchovers and the availability of performance information.

In fact, the four major local telephone companies in Texas continue to miss retail customer service quality standards for certain areas of the state, which recently prompted the PUC to begin the administrative process to penalize repeat violators. The PUC now requires the four companies, Southwestern Bell/SBC, Verizon
Communications Inc. (, Valor Telecom of Texas ( and Sprint Corp./United-Sprint-Centel (, to comply with QoS rules and to provide quarterly reports on key performance measurements.

“I’m looking forward to noticeable service improvements,” Perlman said. “However, we will not hesitate to begin enforcement action if service quality continues to lag.”

Despite such lingering problems, Perlman doesn’t think that the 271 process has failed, and he believes local competition in the state will continue to improve. “Clearly, sentiment on Wall Street has changed with the financial markets unwilling to continue to finance some CLECs, resulting in the current retrenchment,” he said. “Our statistics show that CLECs have continued to penetrate markets where there are favorable economics–primarily business customers
(see chart, below). Competition for residential customers will continue to be difficult as long as subsidies continue.”

Image: The Most Recent Data From Texas

Florida PSC (
Chairman E. Leon Jacobs Jr. said that, in his state, many competitors have expressed reservations about the incumbent getting into the long-distance business and are pushing the commission to develop a mediation process.

The idea, Jacobs said, involves getting the lawyers out of the room so that the technical people working for the competitors and for the incumbent can discuss and attempt to resolve any problems.

“We’re in the infant stage of organizing this now,” Jacobs said. “We want to try to make it voluntary, because the companies have to want to work through the issues.”

Those issues include: OSS testing, DSL provisioning and loop conditioning, customer switchovers, access to MDUs, and prices for UNEs.

While working to balance these issues for the competitors and incumbents, the commission also is trying to investigate QoS issues for GTE Corp. ( Communications Inc. (, BellSouth Corp. ( and Sprint Corp. ( QoS has become time-consuming and drains the state’s telecom resources, Jacobs said. And all the while, local phone competition continues to struggle.

“There are pockets of business customers seeing some competitive alternatives in Florida, but it’s nascent statewide,” Jacobs said. “And given the economic health of some of the competitive companies out there, I don’t know that we’ll see much growth.”

Reinventing the Industry

In Pennsylvania, Verizon says competition is changing the state’s telecom landscape and raising customer expectations, a theory that essentially sums up how the incumbents collectively view their current regulatory role on the state level.

Daniel J. Whelan, president and CEO of Verizon in Pennsylvania, said competition–not regulation–has brought down prices, stimulated innovation and enhanced consumer choice in the telecommunications industry.

“The telecommunications industry needs less–not more–regulation,” Whelan said. “We should be moving aggressively to change the regulatory paradigm at the state and federal level to make competition more open and even-handed.”

Whelan said ongoing advances in telecom are challenging Verizon to reinvent itself around the realities of these new technologies and new customer expectations.

“Technology is transforming Verizon’s network into a platform for a whole host of new applications,” he said. “It is challenging Verizon to move beyond just doing things better or faster. We need to invent the next generation of services made possible only by the web itself.”

Contrary to what some competitors have claimed, Whelan said Verizon’s network has the potential for bringing the latest technology and innovation to customers.

“The real opportunities are the ones we don’t even know about yet, but will be created by the next wave of technological innovations, products and capabilities that Verizon can deliver over its network,” he said.

Whelan said that old regulatory models don’t apply to new technology and innovation and that outmoded policies have inhibited competition and slowed investment in new service deployment.

“We need policies that encourage investment,” Whelan said. “And we need policies that promote service development and deployment.”

Competitive carriers, though, see regulation as the means to the end goal of full local competition. They don’t feel that they can get there without regulation.

“The incumbents are telling these newer competitive companies that they’re suffering [financially] because they’re not competing the right way,” Jacobs said. “The competitors are saying, ‘Yes, we are, but you’re putting up expensive regulatory barriers to keep us from competing.'”

And somewhere in the middle, state telecom lawmakers have to figure out what’s going to work for both of them. Hopefully, say state regulators, the kinks can get worked out through the 271 process.

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