UNE-P Crunch Time at the PUCs

Published June 28, 2004

The U.S. Supreme Court decided on June 15 not to review the D.C. Circuit Court’s rejection of the Federal Communications Commission’s (FCC) Triennial Review Order. Yet the debate is likely to continue.

The FCC and state public utility commissions (PUCs) regulate the wholesale rates that competitive local exchange companies (CLECs), such as AT&T and MCI, pay to incumbent local exchange companies (ILECs), such as SBC Communications, Verizon, and the other former Bell companies, for specific network components used to deliver local phone service, the so-called UNE-P, or Unbundled Network Elements Platform.

Pressure is likely to increase at the state level as CLEC industry lobbyists, including organizations such as Voices for Choices and the Illinois Coalition for Competitive Telecommunications (ICCT), fight to keep the status quo.

According to one ICCT ad, abandoning UNE-P would mean “skyrocketing” rates, the old Bell monopoly would return, and consumers, particularly low-income consumers, would be gouged and have no place to turn.

Such jeremiads don’t hold up to scrutiny.

Specious Arguments Abound

CLECs are the only ILEC competitors who claim their competitive sustainability requires a subsidized ride on facilities owned by others. Wireless, cable televison, and voice over Internet Protocol (VoIP) service providers, using their own resources, all have created different ways of reaching the customer. Wireless and cable companies built new networks. VoIP carriers combined their own infrastructure with bandwidth leased at negotiated market rates.

In an environment where diverse service providers can bridge the “last mile” using a number of competing technologies, the CLECs’ demand for subsidized wholesale rates, coupled with their claim that without subsidies competition will vanish, doesn’t ring true.

What really happens when ILECs are allowed to raise wholesale rates? An ICCT advocacy ad that appeared in the Chicago daily newspapers on June 1, 2004 claimed “massive” price increases for local service occurred in Ohio after the PUC granted SBC’s request for a wholesale UNE-P rate increase.

It’s debatable whether the increases were as large as ICCT claimed. According to the fine print in the ad, the monthly price of SBC’s basic local service package increased by $1, to $16.95 a month. ICCT clouded the issue by citing hefty SBC increases on several operator-assisted services. But those labor-intensive services, which no consumer is required to use, are separate from the UNE-P suite, so it’s specious to tie them to a UNE-P argument.

A visitor to the Web sites of AT&T and MCI will find neither company has a local service package in Ohio priced below $29.99 a month. Even with its rate increase, SBC local service can be purchased for almost half of what two of the country’s largest and most vocal CLECs offer!

CLECs Ignore Low-End Market

This simple fact–that CLECs target the middle- to high-end of the market–speaks volumes as to their motives. CLECs have never claimed the Bells were competing unfairly by underpricing them. On the contrary, their “public interest” argument is that without wholesale price controls, CLECs would be unable to price services low enough and users, especially low-income users, would be hit hardest.

Although they are matching ILECs at the high end for revenue-rich bundled services, in most parts of the country, including Illinois and Ohio, we have yet to see AT&T and MCI compete with ILECs at the low end. Their utter lack of low-priced plans suggests they are not interested in passing on to customers any UNE-P savings, choosing instead to pocket the difference as pure profit.

This lends substantial credibility to the position of some business analysts who say CLEC profit margins from local service derive from UNE-P subsidies, not sales. This “artificial” margin–which allows them to maintain what would otherwise be unsustainable businesses at the revenue-rich high end–may explain why some CLECs are fighting like cornered tigers to keep these subsidies in place.

Competition Is Here

Of course, most CLECs never said their business model would be sustainable in an unregulated market. Their justification for regulated UNE-P is that without it, the Bell System monopoly would return. For CLECs, wireless services, cable TV, direct broadcast satellite, and calling cards don’t exist. But those technologies can’t be willed away in an advocacy ad.

The ILECs will never regain their monopoly on local phone service. Those who need convincing of that fact need only consider the FCC’s May 6 report, which reported an 8 percent decline between 2000 and 2002 in access lines served by the Bell companies. The best evidence, however, is the way state PUCs and legislatures are frantically seeking ways to regulate and tax VoIP.

The future of local phone service will grow out of the vibrant competitive market that demonstrably exists today. Wireless, cable, and VoIP have proved there can be competition without subsidizing one group of players or creating obstacles for others. Consumers and businesses have alternatives, some of them extremely economical. PUCs and legislators must tune out the rhetoric and frame policy in that context.

Steven Titch ([email protected]) is managing editor of IT Update.