RESELLER CHANNEL: UNE-P: Are the Bells Subsidizing Their Rivals?

Posted: 10/2002

UNE-P: Are the Bells Subsidizing
Their Rivals?

By Josh Long

Bells are being required to lease portions of their local network at a loss in
18 states stretching from Massachusetts to Washington. Other industry-watchers
pooh-pooh the report’s methodology and claim there is no reason the Bells should
be losing money on leasing unbundled network elements.

UBS Warburg analysts assert the
operating costs required to lease UNEs in those states exceeds the money rivals
pay for the services. The study looked only at the residential market. "We
believe the Bells generate negative EBITDA (earnings before interest, taxes,
depreciation and amortization) from wholesale lines in 18 states," the
report says. "The long-distance market will be only a partial offset as
competitive conditions have dramatically reduced its profitability, making it an
unfair tradeoff under these conditions."

Sue Platner, co-founder of
Illinois-based consultancy, The Northridge Group, says there is no reason the
Bells should be losing money by providing rivals with UNEs. For example, if
their operating support systems were advanced and could, say, eliminate the
number of wholesale accounts the Bells fail to bill, the incumbents could
achieve better margins under the current UNE pricing structures, she says.

The consultant wonders how the Bells
are failing to generate earnings when the UNE prices in many suburban and rural
areas throughout a state often are higher than the retail rates.

But the Bells argue the total
element long-run incremental costs (TELRIC) rules — the formula local
regulators use to set the UNE rates — is flawed and does not take into account
all their costs.

In May the U.S. Supreme Court upheld
the TELRIC standard "… The FCC was reasonable to prefer TELRIC over
alternative fixed-cost schemes that preserve home-field advantages for the
incumbents," the Supreme Court wrote.

Alex Winogradoff, vice president and
chief analyst of Gartner Group, says TELRIC is not indicative of the Bell’s true
costs. While the standard is based on forward-looking costs, it does not
consider expenses related to maintaining infrastructure that is approximately a
century old, he says. "Clearly it is higher than what is being charged …
at the UNE level," he says.

The Gartner analyst agrees the
government essentially is requiring the Bells to subsidize their rivals. He says
competitors tapping UNEs are relying on regulatory policies rather than a sound
business model. "They built their model on regulatory policy, not on
realistic business models," he says. "Even in stimulating
long-distance competition, there was never anything forced below cost,

However, not everyone is certain the
Bells are unable to profit under the current UNE rates.

In calculating whether the
incumbents earn a profit in each state under the current rates, the UBS Warburg
analysts had to make several assumptions. Those assumptions tended to overstate
the incumbent’s retail revenue while understating the revenue they collect from
the UNE-P-based competitive providers, says Carey Roesel, a consultant with
Technologies Management Inc., a Florida-based company advising CLECs.
"Because of the structural mismatch between UNE costs and retail rates,
it’s easy for even small assumption errors or too heavy a reliance on averaging,
to profoundly influence the results," the consultant says.

For example, the UBS Warburg
analysts assumed in the model that Bells bill long-distance companies the same
amount of interstate and intrastate switched-access minutes — the fees they
charge long-distance carriers for linking to the incumbent’s local network,
Roesel says. UBS Warburg valued the interstate fees the incumbents collect at
half a cent a minute, and the intrastate fees at 1.5 cents per minute. Yet FCC
data show in 2000 there were twice as many interstate access minutes than
intrastate minutes across the country for all residential and business lines,
Roesel says. If the interstate/intrastate pattern mirrors the FCC data for
residential lines, the Bells may be making less money on switched access than
the Warburg report calculates. This means the Bells would be losing less revenue
from each local residential line that a competitor takes away than the Warburg
report suggests.

UBS Warburg calculates that in
Kentucky — a state identified as a money-losing venture for BellSouth — the
UNE-P usage revenue the incumbent collects is $1.33 per line, per month.
"When UNE usage elements are properly [accounted for] the result is an
increase in this [revenue component] by a factor of three or four," Roesel

To illustrate his point, the
consultant says most calls are routed through multiple switches, a pattern that
boosts the incumbent’s revenue for usage-based fees. Yet the Warburg report
assumes a call is routed through only one local switch, he says. "If you
properly [account for all of the] UNE usage elements you get a much bigger
number than the Warburg study suggests. They have made assumptions [that]
understate the impact of the UNE usage elements. So instead of receiving $15 per
line in total UNE-P revenue [in Kentucky], the real number is closer to $20 or
more," Roesel says. "I think it’s a big, big difference the way the
UNE usage rates are applied."

The ongoing debate over UNE-P may
have some resolution later this year or early in 2003 when the FCC recommends as
part of its triennial review of the UNE regime whether the Bells should be
exempt from having to provide all elements of the UNE-P, including switching and

In the meantime the Bells’ local
monopoly continues to shrink. UNE-P competitors snagged a total of 5.6 million
lines from the Bells last year, reports UBS Warburg. That figure does not
include losses to alternative technologies such as wireless phones. Verizon
estimates it is losing 1 million fixed lines a year due to alternative

Competitors say it is no wonder the
Bells are lobbying so hard to eviscerate key elements of UNE-P. Says Platner:
"The contention that because the Bells no longer have a monopoly means the
system is incorrect is just false."

At a Loss

A controversial UBS Warburg
report claims the Bells can’t make money on UNE-P in the following states:

  1. Arkansas

  2. California

  3. Colorado

  4. Illinois

  5. Kansas

  6. Kentucky

  7. Maine

  8. Massachusetts

  9. Michigan

  10. Minnesota

  11. New Jersey

  12. New York

  13. Ohio

  14. Pennsylvania

  15. Texas

  16. Vermont

  17. Washington

  18. Wisconsin




Northridge Group

Management Inc.


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