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The UNE-P Paradox

Stories abound of obituaries accidentally published while the subject is still alive. One of the best known examples is that of Mark Twain, who said, after reading his own obituary, “The rumors of my death have been greatly exaggerated.”

For the past year, telecommunications newspapers have been filled with ‘doom and gloom’ stories about the end of UNE-P. Well, I am here to tell you UNE-P-based competition is not dead and reports of its demise are greatly overstated.

The FCC addressed the state of local competition in its Triennial Review Order issued in August 2003. The findings were relatively simple, instructing the state PUCs to examine the state of local competition for mass market (i.e., residential and small business) customers. If they determined that sufficient competition existed (according to a detailed formula and a nine-month process) to conclude that CLECs no longer required access to ILEC network facilities in order to provide service to mass market consumers, then - and only then - the requirement that ILECs provide CLECs access to certain unbundled network elements (e.g. UNE-P) could be eliminated. But, even in that event, the FCC ordered a three-year transition to alternative service arrangements.

Unfortunately, the circuit court in Washington, D.C., vacated the FCC’s rules and sent them back to the FCC to be reworked - not because it fundamentally disagreed with the FCC’s analysis, but because it rejected the statelevel process necessary for detailed findings. Leaving aside for now our firm belief that the court misinterpreted the 1996 Telecom Act, the fact remains the act itself has not been repealed and it still calls for local competition, including competition relying on network elements leased from the ILEC.

Why is the FCC having such a hard time developing rules that work in the marketplace? They are caught in a dilemma. Everybody agrees we want local competition, but we still have not figured out just how best to achieve that.

The 1996 Telecom Act was based on a simple premise:

By requiring ILECs to share the ratepayer-financed, public telephone network with entrants, retail competition could develop quickly, while the much longer process of building competing local networks proceeded over time. In anticipation of the competition that would come from these changes, the ILECs’ profits have been deregulated in most states and they are beginning to seek even greater freedom to increase rates throughout their operating territories.

Well, after many false starts, only one form of local competition has emerged as a winner in the mass market and it is UNE-P. Today, with more than 17 million local residential and small business lines served using UNE-P, the promise of the 1996 Act is becoming reality.

Here is why UNE-P is not dead:

First, no practical alternative to UNE-P exists to serve mass-market customers.

Regulators are ignoring the message of the marketplace. If there were a practical, economically rational way to serve residences and small businesses using alternative switching facilities, CLECs would be using it now. Entrepreneurs are not waiting for regulators to tell them where to invest or how to provide service. The state TRO proceedings have been proving this. The evidence gathered in most states clearly shows a continued need for UNE-P for the foreseeable future because no cost-effective, operationally viable alternative exists to serve the mass market.

(In some states, the need is so obvious the ILECs did not attempt to press a case.) Secondly, the ILECs still have not figured out how to migrate large numbers of customers without interrupting their services. After all these years, the ILECs are still using manual cutover processes to move customers from one carrier to another. Unlike in long distance, where there is an efficient, mechanized ‘PIC process’ that works for tens of thousands of transactions in a day, the ILECs got away with not having to implement mechanized systems to truly enable switched-based competition. The process today still is manual; technicians climbing on step ladders to wire a port and loop together. This process is not scalable and is prone to errors. As an example, at current productivity levels and processes, it would take Verizon more than a decade to move the 2 million UNEP lines running in New York state.

Thirdly, you can’t have local competition without local competitors.

There is unanimous support for the notion that new technologies hold great promise. But it is fantasy to believe that a competitive marketplace can emerge from a market where entrants have only the choice to introduce new technologies and cannot compete for a customer’s existing service. First, like a parent who would not abandon a child, the FCC and the state regulatory commissions cannot and should not prematurely ‘abandon’ UNE-P.

UNE-P enables entrants to establish a business - not just create a base of customers, but also to create and perfect customer support system, gain customer and investor confidence, and generate the necessary profits to reinvest in new technologies and attract capital. The small CLECs undoubtedly are making technology choices. (By the way, this process did not start with the D.C. Circuit Court decision. It has been going on for years.) Some CLECs are deploying switches, while others are merging with switched-based providers to reduce their dependence on the ILECs’ networks. And some are pursuing more cutting-edge, VoIP and voiceover- Internet strategies.

However, this takes me to my other critical point - not all customers are ready to adapt to new technology. Despite the recent policy decisions in Washington, D.C., phone service is not yet dead. In order to even consider an Internet-based service, however, a residential or small business user must purchase a high-speed connection to the Internet.

According to a study from North Carolina, only 56 percent of the homes with incomes exceeding $75,000 per year and only 13 percent of the homes with annual incomes of $50,000 or less have high-speed Internet access. Similar disparities exist based on age and education. The reality is the majority of users simply are not in a position (nor do they have the desire) to disconnect their phone service and rely exclusively on high-speed data connections for service.

I am confident VoIP will be a force in local competition. However, all these strategies and others based on UNE-Loops, now serve only a fraction of the customers served by UNE-P.

For the majority of users, it is basic POTS competition that matters. And this is how we come full circle. UNE-P will survive because we are here, and because we cannot get there from here without it.

So, you may ask, how do we get out of this mess? It’s simple. Later this year, the FCC will have a chance to issue ‘reasonable rules.’ While there certainly will be legal challenges, the new rules will force the ILECs to negotiate new interconnection agreements (also called commercial agreements). The FCC must recognize that ILECs only will negotiate in good faith if they have to, since they hold most of the cards - the so-called bottleneck facilities.

The FCC must recognize that UNE-P will lead to truly efficient facilities-based competition once sufficient customer concentration and migration/transition systems are in place. This may come at different times for different markets and segments. What works in Manhattan may not work in a small rural town, and what works for a large bank with multiple PBXs may not work for the small business with an analog key system. The timing difference may involve years and we have to account for that.

The only way to have local competition is to have local competitors - and not just for some customers for some services, but for the core of the local phone market - including the analog POTS customer.

Peter Karoczkai is vice president of sales and marketing for InfoHighway Communications Corp. He also is responsible for key regulatory and business development initiatives at InfoHighway.

Karoczkai also serves as the chairman of the PACE Coalition, a Washington, D.C.-based industry organization dedicated to ensuring the continued availability and viability of the UNE-P across the United States.

Links

InfoHighway Communications Corp. www.infohighway.com


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