FCC Releases its Long-Awaited Triennial Review Order
The FCC released its long-awaited Triennial Review Order late yesterday, detailing new rules for determining what portions of incumbent local exchange carriers’ (“ILECs”) networks (i.e., unbundled elements or “UNEs”) would be available for lease by competitors. The FCC initially revealed key details of the decision during its Feb. 20, 2003 open meeting as well as in a press release published that same day. See Update of Feb. 21, 2003. The industry is still wading through the details of yesterday’s very lengthy order (which exceeds 500 pages). However, an initial review of the order and press reports on the reactions of industry players reveals few significant surprises from earlier information provided by the FCC. Below, we provide an overview of the order.
INCREASED ROLE FOR STATES FOR MOST UNES AND NEW “IMPAIRMENT” STANDARD
Under the Communications Act, ILECs must provide a UNE at regulated rates, terms and conditions to competing carriers if the competitor would be “impaired” in providing a service without unbundled access to that element. After several FCC attempts at delineating the meaning of “impairment,” the U.S. Court of Appeals for the D.C. Circuit ruled in 2002 that a determination of impairment cannot be made on a nation-wide basis, but rather, must be made on a “granular” market-by-market basis.
In interpreting the court’s mandate, three out of the five commissioners voted to shift to individual state public utility commissions much of the work involved in deciding which UNEs must be provided to competitors. The order provides guidelines for states in their new role in compiling the list of UNEs available in particular markets. Specifically, the order includes a list of barriers to entry, and then requires state regulators to determine whether the sum of any barriers present, as a whole, is likely to make entry uneconomic for competitors—the new standard for applying the statutory “impairment” test. The types of barriers identified are: scale economies, sunk costs, first-mover advantages, absolute cost advantages and barriers solely/primarily within the ILEC’s control. In compiling UNE lists, state regulators must also take into account any countervailing advantages that competitors may have. In conducting the impairment analysis, the FCC noted that it is particularly interested in evidence concerning the use of non-ILEC facilities, and that it would give weight to the deployment of intermodal technologies (such as wireless or cable-provided telephone service).
The increased role for state commissions is seen as a major victory for competitive providers in the current political climate. States are generally considered to be more favorable to competitors than the present majority at the FCC. Despite the highly unusual six-month delay in releasing the text of the FCC’s decision, many states long have begun preparing for their increased role in regulating UNEs. In fact, state commissions in Qwest’s territory have set up a procedural framework for addressing their new responsibilities and issues engendered by the decision.
While the states’ role has increased, the FCC did provide nation-wide rules for certain UNEs, including “line sharing” of the high frequency portion of a loop, switching, and fiber and hybrid fiber-copper loops in the provision of mass market services. An initial review of these rules is provided below.
3-YEAR PHASE-OUT OF “LINE SHARING”
The FCC adopted a national three-year phase out of its rules that required ILECs to make the “high frequency” portion of a loop available to competitors under “line sharing” arrangements. Such arrangements have allowed competitors to provide broadband Internet access services without paying for the entire loop because the ILEC can continue to use the remaining bandwidth to provide voice services. After the phase-out period, ILECs will no longer be required to provide access to the high frequency portion of the loop as a UNE. The Commission grandfathered all existing line sharing arrangements, however, until its next biennial review, which is slated to begin in 2004.
NATIONAL IMPAIRMENT STANDARDS FOR SWITCHING
The last-minute addition of national impairment standards came as a surprise, as such standards were not included in the framework announced by the FCC in February. The FCC created two separate impairment presumptions regarding switching: one for the provision of service to the “mass market” (residential and small businesses), and another for the “enterprise market” (medium to large businesses).
For mass market switching, the FCC presumptively found that CLECs are impaired on a nation-wide basis by the “operational and economic barriers associated with the incumbent LEC hot cut process”—basically, the difficulties encountered in trying to get customers off the ILEC’s switch and onto a competitive switch. In order to mitigate this impairment, state commissions must approve an ILEC “batch hot cut process” (an efficient process for transferring large volumes of customers) or make a finding that such a process is unnecessary. On a going-forward basis, the FCC has provided specific “triggers” and criteria for states to use in evaluating impairment on a market-by-market basis. If the state finds that there is impairment in a particular market for residential/small business customers, the state is required to consider whether temporary, 90-day unbundling of switching for purposes of acquiring new customers would suffice to cure the impairment.
For the enterprise market, the FCC presumptively found, on a nation-wide basis, that CLECs are not impaired in providing service to medium and large businesses without unbundled access to ILEC local switching facilities. This presumption may also be rebutted through a geographically-specific record and certain operational and economic criteria.
ELIMINATION OF ILEC UNBUNDLING OBLIGATION FOR NEW FIBER-TO-THE-HOME
Where loops consist entirely of fiber (fiber-to-the-home or FTTH) the FCC has generally eliminated the requirement for ILECs to unbundle such loops. One narrow exception is where the ILEC retires existing copper loops and replaces the copper with fiber; in that case, the ILEC must unbundle the loop for the provision of narrowband (voice-grade) services only. ILECs will not be required to unbundle FTTH facilities for any type of service, however, where the fiber is deployed in situations involving new construction. As noted in our February Update, this is unlikely to have much impact on the market because regardless of the presence or absence of unbundling requirements, deploying all-fiber loops to each and every home is simply uneconomical. The FCC recognized that FTTH situations are, at least at present, “largely theoretical.”
HYBRID FIBER-COPPER LOOPS
The normal technology used by ILECs in new neighborhoods is not FTTH, but is fiber from the switching office to a location near the neighborhood, then copper to each individual home. This is known as a hybrid fiber-copper loop, and the new rules only require minimal unbundling of specific features associated with such loops.
The new rules require ILECs to unbundle only those features, functions and capabilities of hybrid loops that are not used to transmit packetized information, so that CLECs would only be able to use such loops to provide narrowband services (e.g., voice and dial-up Internet access). CLECs seeking to provide mass market narrowband services over hybrid facilities will continue to have unbundled access to the entire non-packetized transmission path capable of voice-grade service.
The above discussion focuses on residential and small businesses, which the FCC has generally found to be much less economical to serve than the large business market. Even many larger business customers cannot easily served without using ILEC loops. However, the new rules find no impairment—and hence no need for unbundling—of extremely high-capacity ILEC loops for CLECs seeking to serve the enterprise market.
The new rules announced in the Triennial Order will be phased in through the normal commercial process of contract negotiation, unless otherwise specified, although we expect that the order will be subject to multiple appeals and legal challenges. We are continuing to review the details of the order and the new regulatory framework created therein, and would be happy to provide a more detailed analysis of the order and how the new rules will affect your business. loops for CLECs seeking to serve the enterprise market.