Update: FCC deregulates broadband services

Technical decisions 'Byzantine in nature'

WASHINGTON -- The U.S. Federal Communications Commission has voted to allow the regional Bells to stop sharing most of their broadband networks with competitors, but left the decision on sharing most pieces of local telephone service networks to state public service commissions.

The commission also voted Thursday to allow the four regional Bells -- owners of most local telephone networks across the U.S. -- to stop providing their switching facilities at a discount to other local phone providers, in the large business market. But the divided commission, in a split vote in which four of the five commissioners dissented with parts of the ruling, said that states should decide whether the regional Bell operating companies (RBOCs) should share switching facilities with competitors, collectively called competitive local exchange carriers (CLECs), in the home and small-business markets.

In a change from current policy, the FCC voted that the regional Bells would no longer have to provide "line-sharing" of the "last mile" into homes and business for competitors offering DSL (Digital Subscriber Line) service. Commissioners voting for that change argued that significant competition exists in the DSL market. In a vote one commissioner said could harm the Internet, regional Bells also will not be required to share newly installed "next-generation" broadband lines with competitors looking to provide broadband services.

Major DSL competitors America Online and Covad Communications said the decision wouldn't have a major impact on their businesses.

An AOL spokeswoman said her company has contracts with three of the regional Bells. "We are already delivering DSL access to our customers nationwide through the Bells, and today's decision will have zero impact on our ongoing ability to do that," the spokeswoman said.

Covad noted that the FCC action does not directly affect the company's access to second-line loops and T1 facilities that the company uses to serve business customers, which accounted for more than 60 percent of Covad's recurring revenues in 2002. But Covad President and Chief Executive Officer Charles Hoffman noted that the DSL decision could result in fewer choices and increased prices if the regional Bells set unreasonable prices for last-mile access.

"The ultimate effect on our consumer broadband business will depend on our ability to negotiate fair and reasonable prices," Hoffman said in an e-mail statement.

The decision, which could take several weeks to go into effect, is a defeat for FCC Chairman Michael Powell, who wanted to further deregulate telephone competition. He argued that leaving the telephone rules to the states, which have nine months to come up with their own unbundled network element rules, would give the telecom industry a "Picasso-esque regulatory backdrop" to maneuver.  Powell's dissent is available at http://www.fcc.gov/Daily_Releases/Daily_Business/2003/db0220/DOC-231344A3.pdf.

But fellow Republican commissioner Kevin Martin argued that the compromise, which FCC staff worked on up until the meeting at 11 a.m. EST, took a "principled, balanced approach."

"We deregulate broadband, making it easier for companies to invest in new equipment and deploy the high-speed services that consumer desire," Martin said.

The regional Bells, which include Verizon Communications and SBC Communications, argued that by having to share their broadband networks, they had little incentive to make improvements and offer new services. But commissioner Michael Copps disagreed. "We are playing fast and loose with the country's broadband future," he said. "Today we may be choking off competition in broadband. Consumers and the Internet itself may well suffer."

Reaction to the ruling was swift. The Information Technology Association of America (ITAA), a trade group, said that the ruling "killed consumers' chances to continue to enjoy the significant benefits of today's competitive broadband information services market."

Independent telecom analyst Jeffrey Kagan of Marietta, Georgia, called the ruling "a mixed bag."

Each side gets something from the ruling, but when it comes to the "big issue" of the unbundled network element, or UNE, discount AT&T and WorldCom benefit, while the Baby Bells lose out. "Before the ink dries on this vote, I think the Bells will be appealing it based on Powell's dissent and argument," Kagan said in comments sent by e-mail.

State regulators now will take on the "huge responsibility and burden" for deciding competitive telecommunications issues, he said. "That's where the real power is going to lie if this (ruling) is upheld."

Powell also predicted that the phone-service portion of the decision would land in state courts across the U.S., and that many of those cases will go to the 12 federal courts of appeals, and finally to the U.S. Supreme Court. "This process will take many years and will hardly be the quieting and stabilizing regime that was so craved by a rocky market," he added.

The FCC's vote Thursday was the result of seven years of work at the agency, following Congress' passage of the Telecommunications Act of 1996. Twice, federal courts have rejected the commission's efforts to referee the competition for local telephone service, the most recent in May 2001, when the U.S. Court of Appeals for the District of Columbia Circuit threw out the process the commission used to determine what network elements the RBOCs must share, calling the system fatally flawed.

Thursday's FCC vote addressed a number of technical issues, "almost Byzantine in nature," as Martin called them.

Here are highlights of what the commission did Thursday:

-- The regional Bells aren't required to share fiber-based, next-generation broadband loops with competitors, although the FCC requested that the Bells continue to share older broadband loops beyond the "last mile" into homes or businesses.

-- The Bells are no longer required to share that last mile of line with other DSL providers.

-- The Bells no longer have to share high-capacity loops such as DS-1, also known as T1, lines for business customers. States have 90 days after the 300-plus page order is filed to rebut the national finding. The filing date has not been determined.

-- For switching facilities, the "brains" of local phone networks, the states have nine months after the FCC ruling is published to set their own sharing rules for all but large business customers. If a state finds that the ability of the CLECs to compete is impaired, the commission set a three-year deadline for the CLECs to move off the UNE system and build their own facilities.

-- For large-volume customers, the regional Bells are no longer required to share switching facilities with CLECs.

Wayne E. Huyard, president of MCI Mass Markets for WorldCom, called the switching decision good for competition and said he's confident the states will "make the responsible decisions necessary to keep their local markets open." But Huyard, in a written statement, said the broadband rule changes will be detrimental to competition.

"This order prohibits competitors from accessing existing and future fiber in Bell networks, stifling their ability to provide consumers with the benefits of competitive choice," he said by e-mail. "... This will perpetuate the ultimate bottleneck in consumer access to competitive broadband services."

However, Walter B. McCormick, Jr., president and chief executive officer of the RBOC representative United States Telecom Association, said the commission abdicated its responsibility in important areas. "Had they been as forward-looking with regard to switching and (UNE) as they were with line-sharing and broadband, all of America would have benefited, but instead, the regulatory landscape is left uncertain and the economy is left to stagnate," McCormick said in an e-mail statement.

Two Republican representatives, Fred Upton, chairman of the House Energy and Commerce Subcommittee on Telecommunications and the Internet, and  Billy Tauzin, chairman of the House Energy and Commerce Committee, blasted the vote, saying the hurting telecom industry needed more deregulation.

"Today's decision is another body blow to the American economy," said Tauzin in an e-mail statement.  "Ironically, as President Bush campaigned around the country on behalf of a promising new program to create more jobs and more opportunities, a renegade Republican at the FCC assured the continuation of a tired old program that will only create more layoffs and more misery for working families in the future."

(Stacy Cowley in New York contributed to this report.)

Copyright © 2003 IDG Communications, Inc.