Think telecom regulatory reform is a done deal? Think again. Yesterday's Senate Commerce Committee hearing on competition in the telecommunications industry put a damper on speculation that the Federal Communications Commission (FCC) will completely rewrite regulations in the space to favor the regional Bells.

For the past couple weeks, industry observers and news reports have all but concluded that the FCC’s triennial review of the unbundled network elements platform, or UNE-P, will result in widespread deregulation (see Will Powell Pull the Plug?). The FCC faces a February 20 deadline for revising regulations on UNE-P, which require the Bell operating companies to give competitors access to their network elements at low wholesale prices controlled by the government.

Yesterday several members of the senate committee questioned FCC Chairman Michael Powell’s deregulatory agenda and voiced concern that relaxing UNE-P rules could reduce competition, raise rates, and subject regulators to a raft of lawsuits.

"I worry very much that we will have dramatically less competition if the commission moves forward and removes the capability of having companies come in and use those facilities,” said Senator Byron Dorgan (D-ND). "The American consumer, in my judgment is going to suffer grievous injury.”

Some analysts were surprised by the strength of the skepticism on show on the Senate floor.

"The message was that it’s taken us years to get here, and now [Powell’s] going to pull the rug out from under competition,” says Network Conceptions LLC analyst Phil Jacobson.

If the FCC does decide to drastically scale back regulations, it will not only meet resistance from competitive carriers like WorldCom Inc. (OTC: WCOEQ) and AT&T Corp. (NYSE: T), but also from state regulators, who now are responsible for setting the UNE-P rates. Some of their concerns may have been alleviated yesterday, when three of the five FCC commissioners stated that they would not vote for a proposal that greatly reduces the influence of the local regulators.

In his address to the senate, Powell insisted that a full UNE-P offering is not the only way to encourage competition in the telecom space. He added, though, that regulations now in place are a disincentive to both investment and innovation. “I do not accept that the only likely opportunity for meaning full competition in the United States is a full UNE-P offering and nothing else,” he said, pointing out that while 11.9 million access lines are served by CLECs using UNE-P today, 16.7 million consumers are served by full facilities-based competitors.

This is very much in line with the RBOC argument that as long as UNE-P allows competitive carriers to piggyback at deep discounts on the incumbent networks, they’ll feel no urge to invest in network elements of their own. "TIA continues to believe that it is imperative that the FCC act very timely to correct the regulatory disincentives to increased investment in last-mile, broadband communications facilities,” said Telecommunications Industry Association president Matthew J. Flanigan in a statement today (see TIA to FCC: Deregulate Broadband!). TIA represents the interests of telecom equipment and service suppliers.

This lack of investment has had dire consequences for telecom equipment vendors, the RBOCs and Powell insist (see FCC Talk Boosts Lucent, Nortel). “Lucent, which I think is a national jewel, is lying barely breathing on its bed,” Powell said.

But while Powell continued to argue in favor of possibly removing some of the elements currently available under the UNE-P rules, he tried to downplay reports that the Commission plans to dramatically change the access rules: “Nothing being contemplated by the Commission is going to result in absolutely no access to the incumbent’s network. I’ll pledge to that right now."

Several of the senators on the panel weren't convinced that the current rule changes being discussed at the FCC would aid the industry in search of stability. “If we keep having new regulations that invite new litigation over new interpretations, this could go on forever,” said Senator Peter Fitzgerald (R-IL), insisting that the constant uncertainty is bound to result in less investment in the sector. “Nobody’s going to want to have anything to do with this field… I think that you could inhibit capital formation in the telecom [sector] for eons to come.”

For small competitive carriers and large long-distance providers, the political resistance to an FCC scaleback of the regulations, which many have come to view as inevitable, is good news (see CLECs Pressure FCC on UNE-P and CLEC Groups to Congress: Keep UNE-P!). “We’re cautiously optimistic,” says Robert McDowell, the vice president and assistant general counsel of the Competitive Telecommunications Association (CompTel), which represents CLEC interests. “We’re pleasantly surprised [that there seems to be] a real lack of any political will to support the Bells' agenda… There was no support at all to amend the Act.”

Some industry analysts, however, say that it is still way too early to declare a winner in the regulatory game. “The process is just beginning,” says Andrei Jezierski, an analyst with i2 Partners LLC. “Trying to bet on the outcome is really premature… There’s a complex agenda under consideration.”

— Eugénie Larson, Reporter, Light Reading