Posted: 01/2001

Separate Entities
As Convergence Alters Telecom Policy,
Local Competition Needs to Separate BOC Affiliates
By Kim Sunderland

Competitive carriers want state and federal regulators to require the RBOCs
to split their local exchange service operations into separate retail and
wholesale affiliates.

If not, the onslaught of cross-subsidization and discriminatory access to
competing carriers can be expected to increase, the companies say.

In a speech at the National Association of Regulatory Utility Commissioners’
(NARUC, www.naruc.org) fall meeting, H.
Russell Frisby Jr., president of the Competitive Telecommunications Association
(CompTel, www.comptel.org), urged lawmakers
to require such a split.

Policymakers "must consider whether the Telecommunications Act’s
market-opening provisions and the rules to implement them are, by themselves,
sufficient to open up markets quickly, and whether they can prevent the stalling
that hurts competitors both operationally and financially," Frisby said.
"The difficulty with enforcing the market-opening provisions of the
[Telecom] Act is that it is hard, if not impossible, to incent a monopolist to
relinquish its monopoly. The alternative is structural separation."

Participating in a NARUC panel discussion about "The Future of
Regulation," Frisby said, "Pennsylvania got it right when it required
structural separation." His reference was to the Pennsylvania Public
Utility Commission’s (PUC, http://puc.paonline.com)
1999 order that required Verizon Communications (www.verizon.com)
to separate its wholesale and retail operations in that state. The PUC
specifically found that structural separation of Verizon’s wholesale and retail
operations was necessary to prevent cross-subsidization and discriminatory
access to competing carriers.

The Pennsylvania commission also said that, without structural separation, it
could not fulfill its duty to promote and encourage competition throughout the
state.

Frisby added that functional separation within the RBOC organization isn’t
enough, that it must be a structural separation.

Frisby noted that structural separation has many advantages:

* It is the best way to minimize or eliminate the conflict that results from
an RBOC’s competitor/supplier roles;

* It creates a level playing field in that the RBOC’s retail affiliate can
deal with the wholesale affiliate on the same terms as it deals with a CLEC; and

* It reduces the need for regulation over the long term, as the need for
oversight decreases with competition increases.

Frisby said, "The same conditions that the Pennsylvania PUC addressed in
its order exist all over the country. Other states should consider structural
separation as a regulatory approach to speed the process."

Convergent Idea

Forcing BOCs to structurally separate is becoming an issue because of
convergence, which is changing telecom policy and will force revamping of
federal laws and the official bodies governing them.

"Regulatory changes are a matter of course for the industry, but faster
innovation creates industry changes," said Gino O. Picasso, president and
COO of ACE*COMM Corp. (www.acecomm.com), a
convergent mediation vendor. "The laws on the books no longer apply.
Regulators are caught in trying to keep pace."

Local service providers that use converged technologies to offer bundled
services say such services aren’t as complicated as the rules, regulations and
laws that surround them.

"The question becomes, now that service providers can offer the same
content over various forms of media, how do you get to the fairness of selling
your wares, in which a company’s rise and fall is based on its own merits in the
marketplace and not because of some anomaly of antiquated regulation?"
asked Ed Young, senior vice president of federal government relations for
Verizon.

Clearly, the BOCs are the most highly regulated communications companies in
the industry. Because of that, they wonder how a cable company can offer
high-speed broadband services that aren’t regulated, but when they offer the
same services, they are regulated.

"If companies are providing the same services, the [BOC] preference is
that they’re not regulated at all," Young said. "But if you have to be
regulated for certain reasons … how do you regulate so that it’s not the
vehicle by which companies succeed or fail?"

For example, in the model of BOC separation, the wholesale side provides
telephony to service CLECs. The retail side acts as a direct competitor to the
wholesale side and provides broadband data services.

The BOCs are lobbying federal lawmakers to have broadband data services
exempted from regulations. But if this were allowed, CLEC sources say the BOCs’
incentives to open up their local markets are eradicated.

The BOCs already are investing more in their unregulated business to the
detriment of the regulated networks, pointed out Jeffrey J. Binder, a Washington
telecom attorney with Dickstein Shapiro Morin & Oshinsky LLP (www.dsmo.com).

"The RBOCs are deploying technology more and more out into the loop
rather than the central office," Binder said. "Deploying DSLAMs out
into the loop gives the interconnection advantage to the Bells."

Binder believes that the more the BOCs can do without opening up the local
loop, the more that local competition will suffer.

"The FCC and Congress will have to think this through," Binder
said. "The more the Bells can provide converging services without
regulation, the harder it will be for policy to get us where we need to
be."

Separation Anxiety

Equipment vendors also find the challenges of convergence and telecom policy
daunting.

"The service providers are all going after the same type of space to
combine services into an attractive package to market," explained Sean
Parham, vice president of product management for General Bandwidth Inc. (www.genband.com).
"Competition and technology use are all coming together, and it’s happening
in light of major regulatory changes."

For example, the BOCs face new technology and new opportunities, but have old
networks, Parham said. Their networking, people, facilities and switching have
been in place for decades. The BOCs are also dealing with regulations on how and
in what ways they can compete.

How is this made to happen for a large ILEC customer dealing with these
variables?

"We have to go into a highly regulated space, and we have to appear
native and behave like an established equipment vendor," Parham explained.
"We also have to be able to take the same system and use it in radically
new ways for the ILEC to operate as an unregulated CLEC in a highly constrained
environment."

Equipment vendors have learned how to operate in regulated and unregulated
environments, just as the carriers have done.

General Bandwidth, for instance, can help a provider deal with copper exhaust
where they’re simply running out of wires in the ground. There’s an installed
base of customers who want more lines but a carrier simply may not have the
facilities to provide them.

So General Bandwidth will install new CPE next to existing infrastructure.
Parham said this allows for DSL provisioning and multiplies the number of lines
over copper twisted pairs. This can provide more phone lines and more bandwidth.

"If we can’t provide the right kind of equipment … they’ll limit what
and how they provide services," Parham said of local service carriers in
general. "Our challenge is to be a lot of things to a lot of
carriers."

In essence, this affects deployments and advances in technology. That means
equipment providers must offer bleeding edge technology that’s also conservative
and strict with pre-existing regulatory and physical environments, Parham said.

Picasso added, "All these converged services pose a great deal of
challenges. Regulations need to be updated as more challenges are
presented."

Is 2001 the Year?

It’s not likely going to happen on Capitol Hill this year, said Cronan
O’Connell, executive director of the Internet Service Provider Business Forum (ISPBF,
www.ispbf.org).

"I don’t think there’s anyone on the Hill who will exert the energy on
this during 2001," O’Connell predicts. "They’re going to be more
interested in health care and in the proliferation of international enemies. I
don’t foresee the Hill wanting to take up the charge on this issue."

She also doesn’t see the issue as a major one for the FCC (www.fcc.gov)
to address.

For one thing, when a new commission chairman is appointed, the FCC will be
in a temporarily frozen state while the chairman develops a new regulatory team.

"The RBOCs today can provide voice and data over their facilities, and
they do it. So give them data relief," O’Connell said. "But make it so
that the BOCs remain the carrier of last resort. They continue getting universal
service money, which is a nice chunk of change, but they keep the residential
customers. They can’t offload them."

No one really knows what the BOC’s T1 lines now carry, O’Connell noted:
"And once ATM/IP-based networks take over, there’s no way we’ll ever know
who’s violating what rules. There will be no way to prove they’ve combined both
services."

By giving the BOCs data relief and retaining strong enforcement, O’Connell
believes the BOCs won’t have to be split up into separate companies.

But Binder questions whether the Telecom Act has failed, and if local
competition is only a dream.

"The Bells are in long distance," he said. "I don’t know how
policy can help competition now. We’re at a critical stage. Verizon and SBC are
now supercarriers. We’re back to where we started with a monopoly in the local
loop. It looks a little gloomy here."

Binder sees splitting up a BOC as a second divestiture, in which it must be a
wholesale supplier to competitors while also competing with them.

And that’s just the opposite of human behavior, Binder said. There’s no model
for it having worked.

Although now that Pennsylvania regulators have ordered Verizon to separate
its wholesale and retail arms, and the 6th U.S. Circuit Court of Appeals upheld
structural separation, there are some guidelines to review; some blueprint to
analyze during convergence.

The issue is big right now, said Young, and it isn’t going away. He suggests
that the FCC take a step back, allow facilities and spectrum to be used in
nondiscriminatory and noninterfering ways, and let the companies arrange
carriage and content in arm’s-length deals on their own.

"Let the marketplace decide who gets carried and who carries what
content," Young said. "Regulators should then interfere only if a
customer has no alternatives, or if there are major public health and welfare
threats."