Posted:  01/2000

The Future of Regulation Powers
Forward
By Kim Sunderland

There’s no sense looking back now. It’s time to buckle down, look straight
ahead, and motor into the next phase of federal telecommunications regulation
and legislation. As competitors know all too well already, this year won’t be
any easier than the last four years since the Telecommunications Act of 1996
became law. But it’s the dawning of a new day, a new century, as the nation’s
competitors enter the vast unknown of a post-271 regulatory environment.

"The most important regulatory issue for everybody in 2000–wholesalers,
retailers and everyone else–will be Bell entry into long distance," says
John Nakahata, a telecom attorney with Harris, Wiltshire and Grannis LLP (www.harriswiltshire.com).
"2000 is looking like the year Bell entry actually begins to happen.
Operations support and other customer care-related checklist items will be of
critical importance to retail resellers. But Bell entry will also likely change
the marketing environment for everyone, as the LATA becomes an historic
footnote."

A whole new world will be opened up once a Bell gets into interLATA services,
agrees consultant Jeffrey J. Binder, president of Jeffrey Binder & Co.
"The big fallout of the BOCs getting into long distance will be how the big
providers get directly involved in Internet service."

Part of what’s fueling this fire will be the ILECs’ desire to provide
out-of-region long distance service. "When it all shakes out," Binder
says, "telecom carriers will absorb the ISP functions. We can already see
this happening with deals like SBC [Communications Inc.] (www.sbc.com)
and Prodigy [Communications Corp.] (www.prodigy.com)."

Nakahata adds that a "critical sleeper issue" will be how the FCC
(www.fcc.gov) and Congress continue to deal with the blurring of boundaries
between traditional telecommunications services and information services.
"The FCC’s challenge will be to avoid the temptation to apply old-style
regulation to the New Economy," Nakahata says.

Such marriages as that of the telecom carrier and the ISP then will
significantly accelerate not only convergence, but also globalization. "The
SBCs, the MCI WorldComs (MCI WorldCom Inc.,  www.wcom.com),
Level 3s (Level 3 Communications Inc., www.l3.com)
and Qwests (Qwest Communications International Inc., www.qwest.com)
will get more involved in foreign alliances," Binder says. Once united,
these global supercarriers will force the pieces of telecom "to come more
and more together," he says.

Global or national, megamergers will continue to be a front-burner issue.
"As consolidation continues, as it will, one question will keep coming
back: Are facilities being concentrated in a way that will reduce competition,
particularly in wholesale markets?" Nakahata asks.

"Mergers and consolidations are like death and taxes," muses H.
Russell Frisby Jr., president of the Competitive Telecommunications Association
(CompTel, www.comptel.org). "They will
continue." Nonetheless, the market is expanding. Even with consolidations,
more companies will be "founded, funded and provide services," he
says. "And other folks will move into a new company or begin upstarts,
creating new markets and new businesses."

The regulatory framework is, for the most part, pro-competitive, says
Jonathan Atkin, telecommunications services analyst with Ferris, Baker Watts
Inc. (www.fbw.com). "The key will be
implementation and follow-through at the network deployment and operational
levels, as well as rapid dispute resolution procedures that mitigate, rather
than contribute to, uncertainty." In addition, Atkin says that conditions
attached to BOC (SBC-Ameritech) and IXC (MCI WorldCom-Sprint Corp., www.sprint.com)
mergers will likely have indirect but quite meaningful impacts on the CLEC
operating environment.

Therefore, Frisby says, competitors will monitor three critical issues:
Making sure the BOCs’ systems work; if they don’t, making sure that the proper
conditions force the BOCs to make them work; and if the BOCs don’t, can’t or
won’t, there needs to be meaningful anti-backsliding measures in place, or
competitive carriers should be compensated. For instance, if a small CLEC loses
a customer because a BOC won’t cut that customer over fast enough, "then
that customer is gone forever," Frisby says, "and that CLEC has made a
major investment to get that customer in the first place. The CLEC should be due
some sort of compensation."

CompTel has submitted an anti-backsliding blueprint to the FCC that proposes
the following:

Completion of access charge and universal service reform also will be
critical to ushering new opportunities for entrepreneurial innovation, Nakahata
says. "The FCC has a unique opportunity to resolve long-standing interstate
access charge and universal service disputes," he adds, mentioning a
proposal he spearheaded between IXCs and LECs to revamp these contentious
issues.

On the resale front, the resale of local telephony services at reasonable
rates remains a priority. Many of the resellers of long distance services from
the 1980s have reinvented themselves as CLECs, offering a wide variety of
services, says analyst Fred A. Joyce, principal of Joyce Telecom Group LLC (www.joycetelecom.com).
"Problem is, very few, if any can profitably resell the ILECs local
services." Therefore, he thinks the most important regulatory issue facing
wholesale competitors and resellers in 2000 will be the strong enforcement of
the Telecom Act. "The FCC should stick to its guns and not allow the ILECs
to offer competitive data or long distance services until they first meet all
the provisions indicated in Telecom Act checklist," Joyce says (see related
story on page 38).

On Capitol Hill this year, competitors will be watching such issues as
broadband legislation and merger oversight–not to mention the presidential
election. Washington will be a very busy town in 2000 in more ways than one. For
instance, Sen. John McCain, R-Ariz., chairman of the Senate Commerce Committee
and presidential contender, plans to launch merger hearings. Prompted by the MCI
WorldCom/Sprint merger proposal, McCain is interested not only in what authority
the FCC has over mergers, but also whether a merger such as this is in the
public interest. The industry’s prediction is that these congressional hearings
must be watched closely because, for one thing, they could slow any pending
legislation aimed at lessening the FCC’s merger approval.

On the broadband front, Frisby notes that while several broadband initiatives
on Capitol Hill failed to reach a vote in the previous session of Congress, they
will return with vigor this year.

Probably one of the most controversial court battles to be waged in 2000 also
may concern Bell Atlantic Corp.’s (www.bellatlantic.com)
quest to provide in-region long distance service in New York. Not only did Bell
Atlantic threaten to sue the FCC if the commission didn’t approve its bid, but
competitors also are lining up, getting their lawyers in a row to figure out how
to stop the first car in a steam-rolling train. That train is gonna keep on
rollin’, too. SBC Communica-tions Inc. follows closely in Bell Atlantic’s
footsteps in its attempt to obtain in-region long distance approval from the
FCC, with BellSouth Corp. (www.bellsouth.com)
not far behind.

There are appeals court battles looming on the horizon this year, as well.
For instance UNE rate deaveraging is before the 8th U.S. Circuit Court of
Appeals, which will determine if the FCC can delay rules requiring several UNE
rate zones per state until six months after the agency’s universal service rules
are in effect. According to Scott C. Cleland, managing director of Legg Mason
Precursor Group (www.leggmason.com), such
a delay gives states time to adjust rates and universal service programs to
account for the new FCC rules. Geographically deaveraging UNE rates fosters
efficient competitive entry by relating costs and wholesale prices. But the
ILECs also must be able to deaverage retail local and access rates, or else a
price umbrella can exacerbate subsidy arbitrage, he says.

In a related pending ruling, the D.C. Circuit Court of Appeals is expected to
rule on whether the FCC can give the ILECs immediate deaveraging for interstate
switched transport and price deregulation for interstate interLATA and new
access services. This pricing flexibility for the ILECs would allow them to
better compete on inter-state access.

"Both of these issues will take longer to parse out because you’re
talking about rate restructuring," Binder says. "This is a highly
political process and the FCC will just have to watch and watch and watch and
slowly bring it along."

Finally, the 9th U.S. Circuit Court of Appeals is considering cable open
access and whether localities have the authority to require open access to cable
for unaffiliated ISPs. The case in general raises an interesting point Binder
brings up: There are different types of technology and they’re all regulated
differently even though they’re all still just a phone call. "Policy
makers," he says, "will have to deal with asymmetrical decisions now,
and the Portland cable case will raise this initially."