Sound Policy or Bellfare?

Posted: 10/2003

Sound Policy or Bellfare?
Regulatory Uncertainties Could Impact Positive Momentum
By H. Russell Frisby Jr.

The sparks needed to re-ignite the
telecommunications industrys flame are being seen as competitive services
providers continue to increase their customer bases, improve their balance
sheets and begin to seek out ways to expand their market shares and product
offerings. However, will the distractions of possible significant policy
changes and legal challenges to recent Federal Communications Commission actions
put a damper on the advances in competition?

After about three years in a slump, the telecommunications
industry is starting to perk up. Competitors that hunkered down and survived the
downturn are showing signs of renewed life, achieving positive financial results
and growing their customer bases quarter after quarter. At the end of the 2002,
CLECs provided 24.8 million or 13 percent of the nations access

Many members of the Competitive Telecommunications Association
are achieving their financial milestones, reducing quarterly losses, reaching
the points of free cash flow and becoming EBITDA positive. Consider New Edge Networks Inc., which reached positive EBITDA
during the second quarter of 2003 and forecast it would be free cash flow
positive during the summer.

Moreover, competitive service providers now are beginning to
attract capital from investors and to discuss expansion through either network
buildouts or mergers and acquisitions. A prime example is ITC^DeltaCom Inc.,
which announced in early July it would merge with BTI Telecom Corp. Not only
will the combined company be one of the strongest competitors to BellSouth Corp.
in the southeastern United States, the new entity also has a commitment for a
$35 million equity infusion once the merger is closed.

Competitive service providers are not the only ones seeing an
up tick. The Bell monopolies continue to post strong quarterly results, in
obvious contradiction to their appeals for regulatory relief that would allow
them to quash competition and retain their market power. BellSouth, SBC Communications Inc. and Verizon Communications
Inc. generated combined operating income of more than $5.9 billion in the second
quarter of 2003 almost $66 million per day. Moreover, SBC and Verizon
both consistently rank in the Top 15 of BusinessWeeks most profitable

Granted, the Bells are losing local access lines to wireline
and wireless competitors, but they are more than making up the difference with
significant growth in their long-distance, DSL and bundled service offerings. At
the end of the second quarter 2003, these three Bells boasted about 27 million
long-distance subscribers and almost 6 million DSL customers.

Even equipment vendors have expressed cautious optimism about
the future, despite continuing financial struggles and limited capital
expenditures by their customers.

Despite these positive signals, there is a lot of work still
to be done to ensure that the engines driving the market to true competition do
not stall. Competitors are concerned that recent FCC actions could hamper
development of competitive markets and the nations overall economic recovery.

First, consider the historic six-month delay from the time the FCC announced its
Triennial Review order until it released the massive text. Because of this gap,
the entire industry has been in a holding pattern, unable to evaluate current
business plans, chart future strategies or make purchasing decisions. Consumers,
meanwhile, have been living with the day-to-day concern that the FCCs actions
could drastically increase the cost of their telephone and data services and
affect their ability to choose their preferred providers.

The scope of activity that follows in the wake of the
Triennial Review is enormous. The industry must focus on the 90-day and
nine-month proceedings in all the states. Time and resources will be dedicated
to legal activities, rather than on using capital to improve networks or develop
innovative services and packages that bring value to current customers and
attract new ones.

Also, consider the inevitable legal challenges to various
parts of the order. Using history as the guide, these details could be tied up
in the courts for many years to come. Unfortunately, the Triennial Review is not the
only regulatory issue that is weighing on the telecommunications industry now.
More highly politicized, FCC-induced distractions are on the horizon.

Consider the wireline broadband notice of proposed rulemaking
(NPRM), in which the FCC proposes seemingly benign definitional changes that
could fundamentally alter the competitive landscape and impact the business
plans of almost every established service provider. The suggested changes would
effectively eliminate many of the unbundling requirements and other
pro-competitive provisions of the 1996 Telecommunications Act, and in the
process destroy the facilities-based competition that FCC Chairman Michael
Powell so vehemently claims to promote. Moreover, the change would eliminate the
principles of common carriage that have always been applied to critical,
high-fixed cost services on which the public depends.

Moreover, this NPRM would tentatively exempt any packet
switching service from the obligations of the 1996 act and the jurisdiction
of state regulators. Given that packet switching is likely to be the technology
over which most traditional and advanced telecom services will be provided in
the future, the change would result in giving the Bell companies carte blanche
to remonopolize.

The FCC also is expected to soon open a rulemaking on total
element long run increment cost (TELRIC) the formula used to determine the
wholesale price of unbundled network elements (UNEs).

In agreement with the Bells and their supporters in Congress,
CompTel says it is time for the FCC to take a hard look at TELRIC. However,
CompTel and the Bells diverge on the reasons why. The Bells sole goal is to seek revisions that enable them
to charge competitors more to access the public switched network. In forbearance
petitions filed at the FCC over the summer, Verizon, BellSouth, SBC and Qwest
Communications International Inc. all wrongly claimed that TELRIC prevents them
from being adequately compensated for the use of their networks.

CompTel, however, says TELRIC must be revisited because
regulatory changes have altered some of the premises on which the pricing
methodology is based. For instance, the Triennial Review order indicated that
the FCC has decided to limit competitive access to ILEC fiber plant and
fiber-fed loops. CompTel noted in an Aug. 8, 2003, letter to Chairman Powell
that the commission must therefore consider whether the UNE rate for the loop
should be reduced by the costs associated with the parts of the loop plant that
CLECs have no federal legal authority to access or use.

In short, CompTels letter noted, since competitors
no longer have full access to and use of the incumbents facilities, it is
imperative that the Commission revise its current TELRIC rules to ensure that
they are not charged as if they do.

Many of these unnecessary distractions are part of Chairman
Powells deregulatory agenda, which he claims will fan the flames of
competition. However, CompTel says giving the Bell monopolies premature
liberties will extinguish all progress made to date.

Chairman Powell promotes the incorrect idea that lifting many
restrictions on the Bells means the monopolies will invest significantly in new
technologies to deliver more services more efficiently to end users. The
deregulatory abdication that Chairman Powell espouses will not cause competitors
to invest in their own facilities. Although some initial investment is
theoretically possible, over the long-term premature deregulation will lead to
the concentration of potentially billions of dollars of purchasing power in the
hands of a few heavily influential buyers the Bell companies.

It is important to keep in mind the Bells have a long history
of backing out of similar promises to increase their spending and deploy new
services in exchange for regulatory liberty. Significant evidence exists about
Bells back-pedaling on merger-related agreements to invest in advanced networks
and deliver services outside of their historical territories.

CompTel says the economy would be better served by putting the
spending power in the hands of hundreds of millions of consumers, rather than a
few large monopolies. A CompTel study estimates full telecom competition could
save consumers at least $9 billion annually. Small businesses could save an
additional $6 billion each year on their bills, according to another economic

These savings could then be used to purchase other goods and
services the formula necessary for a thriving national economy. For example,
CompTel member nii Communications Ltd. tells of one customer a home health care provider who
saved enough money by switching from SBC to nii that she was able to buy health
insurance for her employees. Another nii customer a plumbing contractor
saved about $80 a month by moving to nii, which allowed him to purchase needed
equipment that he otherwise could not afford.

Consumer and business savings will result in far greater
economic development than giving incentives to the Bells to make investments in
their network. Competition-related savings will trickle down to create demand
for new products and services in many industries and will result in increased
salaries and better benefits, which more widely benefit the economy and society
as a whole.

CompTel hopes that policymakers will keep in mind these basic
principles of Economics 101 as they move forward with their regulatory agenda. One misstep could have long-lasting impacts on the health of
our nations economy and the well being of millions of consumers.

H. Russell Frisby Jr. is president of the Competitive
Telecommunications Association (CompTel). Based in Washington, D.C., CompTel
represents companies building and deploying next-generation, packet and IP-based
networks to provide voice, data and video services around the world.

CORRECTION An incorrect price for postage was listed How to Optimize Your
Postal Program which appeared in PHONE+ in September. The correct price for
an additional ounce of postage is $.225.

PHONE+ invites you to air your views.

Call us at +1 480 990 1101 or e-mail

New Edge Networks Inc.
Competitive Telecommunications Association
ITC^DeltaCom Inc.
BTI Telecom Corp.
BellSouth Corp.
SBC Communications Inc.
Verizon Communications Inc.
Qwest Communications International Inc.
nii Communications Ltd.

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