Regulation - What is it Good For?

Eliminating Unbundled Network Elements (UNEs)

At the urging of USTelecom, the lobbying arm for the big telcos, the FCC has opened WC Docket No. 18-141 that is seeking to eliminate the requirement for the big telcos to offer unbundled network elements (UNEs) or resale for their products. Comments are due in this docket by June 7, with reply comments due June 22.

The requirement for the big telcos to unbundle their networks was one of the primary features of the Telecommunications Act of 1996. The Congress at that time recognized that there was little competition in the telecom market and decided that allowing competitors to resell or use components of the big telco networks would help to jump-start competition. The idea worked and within just a few years there were giant CLECs created that used resale and UNEs to create large competitive telecoms. I recall that at least six different CLECs salespeople visiting the CCG offices located just inside the Washington DC Beltway. Most of those big competitive companies imploded spectacularly in the big telecom collapse in 2000, but there are still numerous companies utilizing the unbundled elements of the big telco networks.

The docket talks about forbearance, which in this case means ceasing a regulatory requirement, and specifically this docket asks the FCC to forbear:

  • Section 251 and 252 of the FCC rules that require the big telcos to resale or offer unbundled network elements to competitors;
  • Section 272 of the FCC’s rules that specify timelines for the telcos to negotiate or respond to requests for service from competitors;
  • Section 271 of the FCC’s rules that lay out the rights for competitors to gain access to poles, ducts, conduits and rights-of-way.

This forbearance would be devastating to a number of competitive carriers. Consider just a few examples of how the industry still uses these sections of the FCC’s rules:

  • There is still a lot of resale of telco products. I know one Northwest rural area where a competitor resells nearly 90% of the rural DSL provided by CenturyLink. This reseller gained the business by knocking on doors and selling DSL to homes that didn’t even know it was available from the telco. In much of rural America the big telcos have almost no employees, no marketing and no customer service and resellers are making big telco products work even where the telcos don’t make any effort.
  • There are still numerous DSL providers that collocate their own DSL electronics in telco central offices and then use the unbundled telco loops to provide decent DSL to customers. These competitors offer newer generation and faster DSL where the telcos are often still only offering slow first generation DSL from twenty years ago.
  • Facility-based fiber overbuilders regularly use unbundled network elements to operate in areas where they have not yet built fiber. Or they use UNEs to serve distant branches of a fiber customer – for instance they might use UNEs to create a private network between locations of a bank with branches in several communities.
  • Any competitor that wants to offer facility-based long distance in a metropolitan market must have a physical connection to the primary big telco switching locations (tandems) in that market. These connections are needed due to requirements that the telcos have forced upon competitors since the 1996 Act to try to make it more expensive to compete. Nobody would build the massive network needed to connect these office just to provide voice and so competitors satisfy this requirement using UNEs.
  • Competitors routinely want to make connections between carriers located at the big telco hubs. They make this happen by buying UNEs that reach between carrier A and B within these hubs (might only require a few feet of fiber).

All of these situation, and the many other uses of the resale and UNEs would disappear if the FCC sides with the big telcos. The big telcos set to work to neuter the requirements of the Telecommunications Act of 1996 right after it passed. Over the years they have eliminated many forms of resale. They have made it virtually impossible for a competitor to gain access to their dark fiber. They have routinely made it harder and harder each year for competitors by introducing changes in their contracts with competitors.

This forbearance would be a huge victory for the telcos. This would have a huge chilling impact on competition and customer choice. This would mean that the only way to compete with the telcos would be by overbuilding 100% to reach customers and to interconnect networks. Numerous competitive providers would be quickly bankrupted and disappear. Huge numbers of customers, primarily businesses, would lose their vendor of choice as competitive carriers would no longer be able to serve them. This could even kill wholesale VoIP since the underlying carriers providing that service rely heavily within their networks on interconnection UNEs.

The big telcos argue that they shouldn’t have to continue to unbundle their networks because these requirements deal mostly with legacy TDM technology. But this is not only copper technology and many of the UNEs used for interconnection are on fiber. And even where this is being done on copper, it makes sense for the FCC to allow competitors to use that copper for as long as it exists. Copper UNEs will die a natural death as the copper disappears, but until then, if a competitor can use that copper better than the telco they should be allowed to do so. Competitors have used UNEs and resale to build thriving businesses that benefit consumers by providing choice and lower prices. Forbearing on resale and UNEs would be another giveaway by the FCC to the big telcos at the expense of competition and customer choice.

If you are a small carrier that relies on resale or UNEs you need to file comments in this docket by June 7. They need to hear real life stories of small carriers and the customers you serve, and hear why they should not kill UNEs. You don’t need to be a lawyer to tell the FCC your story, especially not if you have a good story to tell.

Current News

The FCC to Unbundle Fiber?

Chairman Wheeler at the FCC announced last week that he would be bringing two proposals to the FCC meeting on November 21 associated with the IP Transition. The first involves some rules that will insure that 911 continues to function on an IP network and there ought to be no controversy with that. But his second idea is going to be very controversial, which is to give competitors access to RBOC fiber networks in the same manner that they have access today to the copper network.

The Chairman says that he doesn’t want customers, particularly business voice customers, to lose competitive options – and he believes that the unbundled network elements that are in place for copper today have brought competition to that market.

Let me step back and look at this idea at the big picture level. What the Chairman is proposing is a form of arbitrage. In general, telecom arbitrage comes when regulators force an artificial price on a product or service. In this specific case, the arbitrage would come from having the FCC or state commissions define the price, terms and conditions for a competitor to gain access to a fiber network. Arbitration is not necessarily good or bad, but if the price is set too low then there is an larger demand for the product than ought to be expected.

The industry does not have a very good history over the last two decades of dealing with arbitrage and the last mile network. There have been three times when FCC-administered arbitrage turned out bad for a lot of the industry and the public. First was unbundled network elements on copper that the Chairman is now acknowledging – the primary one being the unbundled T1. This was incredibly popular in the late 90’s and dozens of huge CLECs were funded to compete in this business. I had an office then in a business high-rise near the DC beltway and I remember a dozen different CLECs knocked on my door trying to sell a bundled T1/data connection.

After that came UNE-P. This was a creation that was a virtual unbundling of the network. With UNE-P a competitor didn’t have to collocate to get access to the RBOC copper. Instead they just bought all of the UNE elements and reconstructed a network. Finally, there was resale which forced the RBOCs to give set discounts on many retail products. Both UNE-P and resale were mostly used to compete for residential customers and some giant companies grew in the space. I remember Talk America, for example, that had well over a million residential customers on resale.

But for the most part all of the companies that leaped into these arbitrage situations failed. I remember well over a dozen UNE CLECs that went public with a few dozen more hoping to do so. Heck, the telecom industry was so juiced in the late 90s that there were even several telecom consulting firms that worked for the large CLECs who tried to go public. But in the end, the arbitrage opportunity became less attractive, as always happens, and all of these companies crashed and burned. The same thing happened with UNE-P and resale and all of the companies that tried to make a business using these arbitrage opportunities ultimately failed.

Arbitrage is rarely permanent and this makes it almost impossible to build a business plan to take long-term advantage of an arbitrage opportunity. The main reason for this is that the RBOCs are really good at resisting and challenging arbitrage. They file law suits and lobby and within 5-7 years after the start of an arbitrage situation they largely get it killed, or at least weakened to the point of being useless for a competitor.

Now we are looking at a new arbitrage opportunity of allowing competitors to get access to fiber networks. I have dozens of questions about how this might work, because it’s not as obvious on a physical basis how one unbundles a fiber network in the same way that has been done for copper. With copper, in essence, the copper line from a customer is physically redirected to a CLEC. But that is not going to easily work for a fiber connection.

How big this opportunity might be depends upon how the FCC implements it. For example, if they only allow fiber interconnection in places where there had once been a copper UNE connection then this is going to be very limited in scope. But it’s hard to see how they can stop there. After all, CLECs that compete using RBOC copper have always been allowed to grow, and if a competitor can’t ever add a new customer then this form of competition will be nearly worthless.

But if all of the fiber in the RBOC network comes available to competitors, then we are looking at the possibility of a whole new major push of competition. Competitors have largely been kept from the RBOC fiber network and this opens up huge market possibilities.

My advice to my clients is going to be to be cautious about leaping into this kind of opportunity. History has shown us that AT&T and Verizon will be working to kill this kind of arbitrage from the minute that it’s proposed – and so it’s likely that this will only remain lucrative for a few years before those companies squeeze the ability to use unbundled fiber.

Don’t get me wrong. As a consultant this opens up all sorts of new work for me. But having lived through the last arbitrage trials in the industry, my alarm bells are already going off and I am going to be advising caution. If the FCC tilts the arbitrage opportunity enough in favor of the competitor then there is going to be money to be made, but I will be reminding everybody that whatever the FCC giveth they can also someday take away.

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