Qwest & CLECs Negotiate UNE-P
Qwest on Thursday will meet in Denver with as many as 50 CLECs for mediated talks in which it will lobby for a UNE-P replacement plan that would raise prices next year for wholesale services it provides to the carriers. Also on the table will be a plan submitted to Qwest by MCI Inc. (Nasdaq: WCOEQ, MCWEQ) and 30 other CLECs, which, in exchange for UNE-P price hikes, calls for Qwest to cut prices for unbundled network element loop (UNE-L) service, in which a CLEC connects an unbundled loop to its switch. The meeting will be the second Qwest has held with CLECs in as many weeks.
Qwest’s proposal was triggered by a recent court ruling that overturned unbundling rules issued last year by the Federal Communications Commission (FCC). The Commission last August ordered incumbent local exchange carriers (ILECs) like Qwest to make unbundled elements of their networks such as local voice service and DSL available for leasing by competitors (see Qwest Comments on FCC Review). But on March 2, a U.S. Appeals Court in the District of Columbia struck down the FCC’s ruling, taking exception to the Commission’s decision to let states determine when Baby Bells must open their networks (see Courts Overrule FCC Again ).
The court has given ILECs and CLECs until June 15 to reach commercial line-sharing agreements on their own or through mediated talks. So far, few deals have been struck. One notable exception was a DSL agreement reached last month between Qwest and Covad Communications Inc. (OTC: COVD) (see FCC Hails Covad, Qwest Deal).
On March 29, Qwest petitioned the FCC to set up interim unbundling rules that would maintain existing UNE-P prices through December 31, after which prices would rise through 2006 (see Qwest Petitions FCC on Unbundling). In accord with the plan, Qwest has proposed to CLECs a UNE-P replacement service called Qwest Platform Plus, which would raise UNE-P prices by $3.00 on January 1, 2005, $5.00 on July 1, 2005, and $8.00 on January 1, 2006. The plan would offer lower prices for certain residential services than for business services and would include services not currently available to UNE-P customers.
In a separate proposal, a group of 31 CLECs led by MCI say that Qwest’s UNE-P price increases must be accompanied by price cuts for UNE-L service. In particular, the CLECs want Qwest to reduce hot-cut rates, which ILECs charge when CLECs switch unbundled loops to their own facilities. “Right now, in some Qwest states, the rate for hot cuts is in the neighborhood of $40 to $50, and that’s well above what their costs are and would make serving the residential market using a CLEC’s own facilities uneconomical,” says Joan Campion, VP of state policy at MCI.
For new UNE-P lines, the CLEC group proposes a total increase of $2.25 in $0.75 increments over a three-year period, with the second and third increases hinging on a decrease in UNE-L rates. “We’re not in a position of just accepting the increases that Qwest put on the table,” Campion says. “Rather, we’re looking for a proposal that gives Qwest some increase over what it’s currently charging competitors but allows competitors to continue to serve both the residential and business markets.”
Qwest’s proposed price hikes come at a time when its UNE-P business has been slowing. The company said last week that UNE-P line additions dropped 30 percent to 95,000 additions in this year’s first quarter, down from 135,000 additions in the previous quarter. Bill Myers, a Qwest spokesman, attributes the decline to the success of the Qwest Choice Package, a residential service that competes with similar offerings from CLECs, many of which include Qwest’s UNE-P services in their residential bundles.
Qwest must handle the negotiations carefully since it depends on CLECs for a portion of its local phone business. “Most of the long-distance service companies have acquired or have stakes in CLECs, but Qwest does not,” says Jay Somaney, a partner and fund manager at TSG Capital Partners, a hedge fund without a position in Qwest. “So they curry favor with these guys, try to play nice with them, because it allows them to participate in the local market as well.”
Qwest views the CLEC industry as an important distribution channel in its war against cable companies, which are increasingly offering telephony services that strike at the heart of the Baby Bells’ business. “If a customer goes to a cable company for telephony, we’ve lost them forever,” says Bill Myers, a Qwest spokesperson. “If they go to a CLEC, there’s still some financial connection to Qwest.” Though CLECs compete with Qwest for local business, their services often include network elements purchased from Qwest.
About 50 CLECs -- including AT&T Corp. (NYSE: T), Sprint Corp. (NYSE: FON), McLeodUSA Inc. (Nasdaq: MCLD), and MCI -- attended an April 28 meeting with Qwest, which was mediated by Cheryl Parrino, former chair of the Wisconsin Public Service Commission. The meeting did not produce any commercial agreements, and the CLECs said they were not interested in further talks devoted solely to Qwest Platform Plus. In response, Qwest agreed to address UNE-L pricing in negotiations on Thursday.
— Justin Hibbard, Senior Editor, Light Reading