CHICAGO -- Competitive local exchange carriers have taken advantage of the regulatory arbitrage of Unbundled Network Element -- Platform (UNE-P) pricing to deploy more than 17 million lines. Yet the availability of UNE-P at current pricing is in jeopardy due to the U.S. Court of Appeals overturning key portions of the Federal Communications Commission (FCC) Triennial Review Order (TRO). Changes to UNE-P will have a material near-term affect on local exchange services, but the long-term outlook for the industry is unchanged, according to a report issued by Fitch Ratings.

As interim and final policy proposals regarding UNE-P are developed, Fitch believes there are several industry developments that appear certain. UNE-P will experience material rate increases both on existing and future line deployments that will reduce the competitive attractiveness of this vehicle. Competitors will change focus from UNE-P deployment to superior technologies such as voice over the Internet protocol (VoIP) to compete for customers.

While the regional Bell operating companies (RBOCs) could experience some near-term benefits from UNE-P changes, Fitch's long-term industry outlook remains unchanged: that the most successful telecom companies will be those that can provide most complete service bundles, the ability to service the broadest customer set with the most favorable cost structures. The report finds that the RBOCs could experience some immediate cash flow improvements due to price increases and a slowing of retail to wholesale service migration. However, over the long term, VoIP and wireless services will continue to exert significant pricing and substitute-service pressure on local exchange service, leading to lower prices and margin compression.

Fitch Ratings Ltd.