As the deciding battle approaches in the war over government regulation in the telecom industry, many companies are carefully watching the U.S. government's next step.

"Regulations is probably my number one concern right now,” says Vern Kennedy, CEO of Broadview Networks Holdings Inc., a CLEC with about 300,000 lines in the Northeast.

Broadview is one of hundreds of CLECs that came onto the scene after the 1996 Telecommunications Act was passed. The Act requires regional Bells to allow competitors access to their networks at a set price determined by each state, and it was meant to boost competition. In exchange, the RBOCs were permitted to apply for long-distance licenses in their territories.

The CLECs are wary of revisions to the Act. With RBOCs stepping up the pressure to roll back some of the pricing regulations, CLECs could be the first to feel further pain.

The RBOCs are complaining that the unbundled network elements platform (UNE-P) is putting them at a competitive disadvantage. Speaking at a Lehman Brothers conference in Arizona yesterday, SBC Communications Inc. (NYSE: SBC) chairman and CEO Edward E. Whitacre blamed regulations for the company’s loss of about 750,000 UNE-P lines to competitors in the third quarter this year alone, indicating that service to the company’s customers could suffer if UNE-P is not discontinued. In a press release late last month, SBC charged that losses due to UNE-P were forcing it to lay off 11,000 employees (see SBC's Fed Up, But So Are Its Critics).

In light of recent comments by Federal Communications Commission (FCC) chairman Michael Powell, it looks as if the RBOCs' campaign just might succeed. "Times have changed and policies must change," he said at a Goldman Sachs & Co. conference on October 2. "[The government] can advance and implement a regulatory structure that more faithfully answers more to capital investment, rather than airy political imperatives."

The FCC has said it could reach a decision on whether or not to dismantle the regulations by the end of the year.

"There is definitely a move afoot to come up with some kind of compromise,” says Network Conceptions LLC analyst Phil Jacobson. “The FCC may well force a two-year phase-out of UNE-P… and we believe that the switching element is what will be targeted.”

Jacobson disagrees with the RBOC claim that UNE-P dissuades them from building out their networks. “What are the RBOCs going to offer... if there’s no one pushing them?”

He says, however, that since a phase-out of UNE-P would have to happen over several years, it would not be catastrophic for CLECs, which could migrate their services to other facilities-based CLECs. “There’s no way it would be a drop-dead thing,” Jacobson says. “The CLECs would have enough time to find a solution.”

In addition, the phase-out of UNE-P will probably only affect the business market where there are CLECs with their own infrastructures, Jacobson says. The residential market he thinks likely to remain untouched. This is because only the RBOCs have infrastructure into this market. If competitors could no longer use their networks, regulators would be virtually condoning a service monopoly.

While Jacobson doubts that the disappearance of UNE-P will hurt CLECs, he says it would probably be very painful for the RBOCs themselves, since they'd lose the wholesale price they now are getting from the CLECs. "They should be careful what they wish for,” he warns. "It might come true."

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com