The FCC’s UNE Triennial Review Order – A Mixed Bag For Competitors
Yesterday, the FCC adopted its UNE Triennial Review decision, the most sweeping ruling affecting the telecommunications industry since 1996, and one that is certain to have far-reaching effects in the telecommunications industry for years to come. The decision, which is the result of much debate and compromise, is essentially a “mixed bag” for the competitive industry, with some “wins” and some “losses.” The following is a high-level summary of some of the FCC’s more significant determinations and an initial analysis of how those determinations are likely to affect competing firms. Because this summary is based on press releases and the oral presentations made at the FCC public meeting, and not the actual written decision which is still to be released, there may be changes in the final text that affect this analysis.
The Battle Goes to the States
The “states' rights” approach advocated by Commissioners Martin, Adelstein and Copps carried the day, giving the state commissions the right and obligation to review whether competition would be impaired without a requirement that ILECs provide UNE-P and unbundled dedicated transport and high-capacity loops to competitors at cost-based (“TELRIC”) rates. Although the FCC will provide the states with some specific unbundling guidelines, the state commissions are entrusted with tailoring those guidelines to the unique needs and facts in their states, thereby becoming the battleground for establishing the rules of the game for these facilities.
- This is considered a victory for the competitive firms, which were otherwise likely faced with total elimination of local switching and thus UNE-P on a nationwide basis.
- Unfortunately for some competing firms, UNEs—upon which they have relied in fashioning market entry strategies (such as line sharing—see below)—will no longer be available.
- Moreover, competing firms will now be faced with the need to protect their rights before state regulatory commissions throughout the country. The ILECs are sure to attempt to use these proceedings to obtain relief they failed to achieve before the FCC. To avoid expending prohibitive resources doing so, competitors will likely need to pool resources to present their cases for preservation of these rights.
Residential UNE-P Preserved, Business UNE-P Phased-Out Pending State Proceedings
The FCC decided that switching for business customers served by high-capacity loops (e.g., DS1 and higher) will no longer be unbundled, based on a presumptive finding of no “impairment” to competitors’ ability to provide service via alternative facilities, although state commissions will have 90 days to rebut the FCC’s finding with state-specific evidence. For “mass market” (residential and small business) customers, the state commissions will have nine months to determine, based on the criteria to be provided by the FCC, whether economic or operational impairment exists in a particular market such that unbundled switching should be retained.
- UNE-P may be maintained in a particular state for mass market customers either on a permanent basis (assuming a finding of economic impairment), for three years (assuming a finding of no impairment), or for 90 days on a rolling “customer acquisition” basis (assuming a finding of only “operational” impairment, to allow time for the new customer to be “hot-cut” to non-ILEC switching). The outcome of these state determinations during this compressed timeframe will give rise to a slew of concurrent proceedings taxing competing firms’ resources. This will create the imperative to deploy such resources wisely and efficiently.
- Given that carriers apparently are not using UNE-P to serve their large business customers, the finding of no impairment for the business segment may be less significant.
The Deregulation of Next Generation Broadband
The FCC adopted a policy of preserving access to the “legacy” network, while deregulating new, “next-generation” networks utilizing fiber facilities. Thus, any fiber-to-the-home loops are not required to be unbundled, but if an ILEC retires a copper loop in favor of a fiber or hybrid fiber loop, it must continue to provide unbundled access to a transmission path suitable for providing narrowband service. In addition, ILECs will no longer have to provide unbundled access over hybrid fiber/copper loops which utilize packet-switching capabilities. However, they will be required to provide unbundled access to a voice-grade equivalent channel and high-capacity loops utilizing TDM technology (such as DS1s and DS3s).
- This particular aspect of the decision is almost certain to invite foul play by the ILECs in their deployment decisions, enabling them to manipulate what is made available through such decisions. It will be of paramount importance that competing firms be prepared to defend their rights to access.
Line Sharing: Eliminated Over a Three-Year Period
The FCC eliminated line sharing as a UNE, to be phased out over a three-year period. Competing firms will only be entitled to acquire new customers during the first year and, during the three-year period, the price for the high frequency portion of the loop will increase incrementally towards the market cost of a full loop.
- Competitive DSL services will be hit hard by this finding. The Commission apparently is betting on “intermodal” competition to prevent rate increases caused by its decision to eliminate DSL competition. For these competitors, a close reading of the language of the final order will be imperative to ascertain whether there is any basis for overturning this aspect of the decision.
Dedicated Transport and High-Capacity Loops: Retained Subject to State Analysis
The FCC determined that unbundled access to dedicated transport and high-capacity loops should be preserved to encourage facilities-based competition. Thus, competing firms retained the right to unbundled access to dark fiber, DS1 and DS3 loops and transport, except that states, using FCC-prescribed guidelines, can remove such UNEs from unbundling requirements. The FCC did not extend the unbundling requirements to OC-n loops or transport.
- Just as with UNE-P, this part of the decision creates a battleground in the states for protecting the competing firms’ unbundled access rights to high-capacity transport and loop UNEs. The ILECs will use state proceedings to attempt to chip away at these rights, on the basis that these services are sufficiently competitive to warrant deregulation or reduced regulation. New entrants must be vigilant to protect these critical rights.
- Retained the right to EELs and permitted “commingling”, but imposed “service eligibility” criteria to all requests for newly-provisioned high-capacity EELs and EEL conversions.
- Issued a Further Notice of Proposed Rulemaking on whether to modify the “pick and choose” rule.
- Limited access to unbundled signaling and call-related databases to instances where the competitor also purchases unbundled switching.
- Clarified the TELRIC pricing rules related to cost of capital and depreciation. The press release was not explicit on these changes and therefore scrutiny of the language in the final order is required.
Much Dissent Among the Ranks
With the exception of Commissioner Martin, each of the Commissioners disagreed with certain aspects of the order. Chairman Powell and Commissioner Abernathy insist that the Commission’s UNE-P decision “will engender litigation in each of the 50 states” and create a “Picasso-esque regulatory backdrop” as carriers are “mired in a regulatory wasteland.” Commissioners Copps and Adelstein disagreed with the FCC’s deregulatory treatment of broadband services, finding that the FCC is “playing fast and loose with the country’s broadband future” at the peril of consumers and the Internet and questioning the “potential” existence of intermodal competition to offset this regulatory construct. The very fragmented compromise that was fashioned requires careful review of the final order and its implications on individual firms’ operations and needs.
Where Can You Find More Information On How This Will Affect Your Business and How You Can Respond?
Although the written order is not expected to be released for several weeks, the FCC has provided some detail in its news release and the separate statements by the Commissioners.
Our attorneys are closely monitoring this proceeding and can provide insight into how particular decisions in the order affect your business. We will be issuing similar summaries as developments warrant both at the FCC and in the states.
In addition, since the emphasis of the FCC's order is clearly on the states, Davis Wright Tremaine is organizing a coalition—Save American Free Enterprise in Telecommunications (SAFE-T)—to represent competitors’ common interests in a pooled, effective and cost-efficient manner in these upcoming state proceedings, as well as other state regulatory and legislative battles where competitors would otherwise be underrepresented and therefore vulnerable to ILEC onslaughts. SAFE-T will monitor and identify those state matters and bring them to the attention of members, who can then decide whether to participate. Based upon those decisions, SAFE-T will then propose a strategy and tactic for each issue as well as a budget. Interested members will contribute to each individual effort pro rata. SAFE-T will not compete with strong state or regional associations where they exist, but rather will assist their efforts and will take the lead in states where a strong, unified competitive voice is wanting.