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Senators Skeptical of Deregulation

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
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lastmile 12/5/2012 | 12:51:55 AM
re: Senators Skeptical of Deregulation 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.
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This was just a debate. Not one Senator took the initiative to change the rules. The FCC is on the right track. As usual the senators will pass the buck to the FCC and find fault later.
This is what I think will happen.
1. The FCC will not allow a free ride on the network infrastructure that they have taken the trouble to build. The telecom act of 1996 concerns POTS and not broadband.
2. The FCC will not alter the act but they will insist that that act was based on voice and not information.
3. All the CLECs will be allowed to piggyback for voice but broadband charity will come to an end over a period of 2 to 3 years. This means that all the free riders would need to install their own equipment but the copper loops would be available as per law.
4. If the RBOCs decide to install FTTH (to compete with cable) then that new infrastructure would be completely deregulated.
JMHO
whyiswhy 12/5/2012 | 12:51:54 AM
re: Senators Skeptical of Deregulation My shot:

1) The consumer groups are slow to rally, but will be very effective, this will force a compromise.
2) The compromise will be that on a drop by drop basis, UNE-P will be re-defined or not depending on the actual competitive environment, and broadband data (above 56Kbps) is the ONLY issue.
3) In other words, there WILL be a free ride for the CLECs unless and until there is facitities based competition.
4) Heritage voice is irrelevant to the UNE debate: nobody is going to invest new infrastructure in it anyway.

This covers SBCs and the RBOCs blackmail wrt capital expenditures: invest or lose even more. BTW, SBC, the most vocal of the RBOCs, is the tenth highest profit company in America. So much for Tiger tears.

-Why
strands555 12/5/2012 | 12:51:52 AM
re: Senators Skeptical of Deregulation re: BTW, SBC, the most vocal of the RBOCs, is the tenth highest profit company in America.

Our boy "lastmile" the RBOC shill will conveniently ignore this and continue to parrot the RBOC claims of poverty and losing money on UNE. He apparently doesn't believe in the US legal system and the Supreme Court upholding the pricing scheme as fair, and their tossing out all the RBOC arguments as bogus and unsupportable.

He thinks the rates that the RBOCs should be able to charge should include an additional $5 per line to cover lobbying expenses, $3 per line to cover extortion of politicians, and $18 per line to cover their highly inefficient operating costs, and $3 per line to cover all the restructuring charges they incur from all the layoffs of the poor souls they axed so they could keep their lobby efforts going, and another $4 per line to cover their losses on bad foreign investments (which they didn't need any regulatory incentive to piss away that $31 billion of value since 1999), and $7 per line to cover the excessive executive perks.

Consultant 12/5/2012 | 12:51:52 AM
re: Senators Skeptical of Deregulation To the contrary, the hearing clearly showed that Powell is in the minority (no pun intended) and doesn't control the Commission.

Powell is unlikely to get what he wants regarding UNE-P and UNE-P scares the hell out of the RBOCs given the success of the MCI Neighborhood program.
Hopefully the Bells were be paper tigers after a couple years of residential market loss.

PUCs in the key states of New York, Illinois and Texas have no intention of undermining UNE-P. The progressive PUCs are going to show the backward parts of the country how local competition can be made to work.

And please spare us the nonsense about 'free ride'. Work on your economics and report back when you have a basic education. TELRIC includes a healthy return on capital. The simple fact is that the network is cheap. The reason Verizon and other criminal organizations charge high rates is not cost - it is just margin.

Wrong again, if you took the time to read the 1996 Telecom Act, you would know that encouraging broadband deployment was a key goal of the Act.

You also have a very limited understanding of broadband. DS1s, D3s, OCX, Fast Ethernet, GigE, all fall in the broadband category. The CLECs have done more to reduce the 90% profit margins and bring affordband broadband access than the RBOCs have in their 100 years of pathetic execution.

lastmile 12/5/2012 | 12:51:44 AM
re: Senators Skeptical of Deregulation Dear Consultant,
You said:
You also have a very limited understanding of broadband. DS1s, D3s, OCX, Fast Ethernet, GigE, all fall in the broadband category. The CLECs have done more to reduce the 90% profit margins and bring affordband broadband access than the RBOCs have in their 100 years of pathetic execution.
My response:I agree.
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You said.
And please spare us the nonsense about 'free ride'. Work on your economics and report back when you have a basic education. TELRIC includes a healthy return on capital. The simple fact is that the network is cheap. The reason Verizon and other criminal organizations charge high rates is not cost - it is just margin

My response:I agree with that too!
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Based on my limited knowledge I would like to ask you how you would treat the RBOCs if they ever decide to start a massive fiber build to compete with their (unregulated) cable counterparts. Would you continue to call them a monopoly and expect them to open the new infrastructure to someone who wants to piggyback?
If this is the so called law, they will never do it and that is why the RBOCs are reluctant to progress.

PS: I am not a shill for RBOCs. If I had a say for the RBOCs you would have seen me sitting somewhere (close) to Powell during the Senate Commerce Committee hearing. I am convinced that the telecom act has been messed up completely. The FCC has 5 members and I am sure that they will reach a reasonable conclusion soon.
boozoo 12/5/2012 | 12:51:43 AM
re: Senators Skeptical of Deregulation "I believe that instead of creating CLECs and focusing on UNE-P, the government should have sub-divided ILECs and IXCs in thousands of entities"

I don't think CLECs were created by the government :-)

Boozoo
BobbyMax 12/5/2012 | 12:51:43 AM
re: Senators Skeptical of Deregulation The government has made every effort since 1980 to fragment the telephone industry. Thousands of lawyers are idling in the Department of Justice doing nothing but bring law suite against businesses on flimsy grounds. These attorneys have not been able to bring any competition in the area of energy, education, and employment. Something tricky, bordering deception, is always going on.

I believe that instead of creating CLECs and focusing on UNE-P, the government should have sub-divided ILECs and IXCs in thousands of entities. This would have greater competion than the government can think of.
whyiswhy 12/5/2012 | 12:51:39 AM
re: Senators Skeptical of Deregulation Booby said:

"I believe that instead of creating CLECs and focusing on UNE-P, the government should have sub-divided ILECs and IXCs in thousands of entities. This would have greater competion than the government can think of."

So Booby, you seem to forget these guys are natural monopolies no matter how many times you cut them in half. The Copper lines to your house come from one CO.

The government did exactly the right thing in breaking the national monoploy into RBOCs, then imposing structural separation between LH/Local, then UNE-P to provide virtual (rather than facilities based) local competition. Even then, nobody was going to invest in new infrastructure for local (residential) voice, and it was the biggest game in town (in those days).

New infrastructure and bandwidth will come with new modalities (technologies like wireless, satellite, cable), or new business models (like bundling), and no other way. If the government gives SBC its blackmail, they might build broadband to the home, but more likely they will use the money to increase their dividends and NOTHING more.

The way to decrease your communications expenses and at the same time increase your bandwidth is to impose competition (UNE-P) where there is no structural or facilities based competition, and to back off where there is. Case by case, drop by drop.

-Why
rjmcmahon 12/5/2012 | 12:51:38 AM
re: Senators Skeptical of Deregulation I would like to ask you how you would treat the RBOCs if they ever decide to start a massive fiber build to compete with their (unregulated) cable counterparts. Would you continue to call them a monopoly and expect them to open the new infrastructure to someone who wants to piggyback?
__________________

It's in the public interest that our last mile communications infrastructure supports the principle of common carrier. We made a mistake by selling exclusive use of our ROWs to the cable companies. Doing it again is just another huge mistake.

Piggybacking, as you call it, is the only way to enable societal progress. We let cars and trucks piggyback on our roads. We should let alternative energy producers piggyback on the electrical grid. We allow letter writers to piggyback on the US postal system. We let pedestrians piggyback on our sidewalks. We let citizens piggyback on their city services like parks, schools, police, libraries, etc.

The RBOCs can become an anchor tenant and sell PSTN switching services to legacy phone devices. Other than that, they really don't have much of a future.

I'd watch out for anything they promise. They have made a bunch of stupid decisions and now have too much debt. They'll probably take the lead from other Federally "backed" companies, Enron and Raytheon, and start dumping their debt on unsuspecting investors.

If you want an income stream, buy quality municipal bonds.
jstatad 12/5/2012 | 12:51:37 AM
re: Senators Skeptical of Deregulation The RBOCs can cry all they want about how they are providing UNE-P at a loss to their competitors. Their SEC Quarterly financial reports tell otherwise. The 10-Q's reveal that any losses they may be suffering are from mismanagement not from UNE-P.

SEC reports are submitted under oath, and as Qwest has found out, its generally not a good idea to "fudge" the report.

When the SBC's of the world go back and restate their losses on their 10-Q's I'll believe they are loosing on UNE-P, until then its all just propaganda.

Great report at http://www.phoenix-center.org/...
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