Welcome to the Winter 1999 issue of the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW, a free semi-monthly newsletter covering significant industry and regulatory developments in the telecommunications and technology industries. The newsletter is published by Hellerstein & Associates, www.jhellerstein.com, a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis of broadband access, competition policy, and wireless issues.

Please send all comments or suggestions to Judith Hellerstein Judith@jhellerstein.com.

This month's issue will focus on some of the topics discussed at the recent FCBA/PLI Telecom Policy and Regulation conference held on December 9-10 1999. The conference focused on regulatory developments in wireline and wireless telephony, both domestic and international. It also included a lively debate on open access that was skillfully moderated by former Commissioner Chong. While talks on the effects on the telecom industry of the convergence between telecommunications and technology were also discussed, the conference focussed primarily on local competition, both wireline and wireless.

The most interesting part of the conference were the comments made by Common Carrier Bureau Chief Larry Strickling about the problems the FCC is experiencing both in measuring the level of competition and in implementing its Rules and Orders. Larry Strickling spoke about the specific problems the FCC was having in obtaining the necessary data to analyze both the state of local competition and the state of broadband deployment. Readers will recall that in October 1998, the FCC released an NPRM on Local Competition and Broadband Reporting where the FCC sought to impose mandatory data collection requirements on all carriers to enable it to better assess the state of local competition and of broadband deployment in the marketplace. Strickling reported that the FCC would be releasing its Order sometime in the first quarter of 2000.

Closely related to this issue, the inability to obtain the necessary statistics on local competition and broadband deployment, is that of enforcement of current FCC Orders on local competition. Strickling expressed his frustration on the lack of enforcement of the FCC's existing local competition rules. The FCC has had a tough time issuing rulings and orders that they have deemed critical to opening up the local competition market and which will not be challenged in court, but has had a much harder time getting companies to comply with these rules and to implement them in the market. Strickling bemoaned that although the FCC's order on cageless collocation was issued back in March 1999, it has yet to be implemented. He stated that this lack of compliance by companies was widespread and it is making the FCC's job much harder. Combined with the FCC's lack of adequate data on local competition and broadband deployments, this issue has become a real problem for the Commission.

Hellerstein & Associates believes that enforcement of the current rules on local competition is critical. The FCC adopted these measures after a thorough market analysis and after determining that a specified market failure had occurred which needed to be rectified. The FCC took the first step towards opening up the markets and ensuring that both CLECs and ILECs are able to compete equally in the market. Now it is time for the FCC to take the second step and ensure these rules are enforced. This lack of compliance is indeed troubling and not just for what it says about the problems in opening up local wireline markets, but for the problems it portends in other markets and especially in the broadband access markets. Lack of compliance to FCC rules is what many CLECs fear most if the incumbent LECs are given "premature" entry into the long distance marketplace before the local market is open and competitive.

Competitive carriers offer broadband services by gaining access to the local loop and through collocation with ILECs in central offices. If incumbent carriers are not complying with FCC regulations or are challenging these regulations in Court, these same carriers will be greatly hindered in their attempts to gain access to these loops that are critical both to the roll out of local wireline competition and to their broadband deployment plans.

Last month the FCC issued its historic line sharing order which, if implemented, will dramatically reduce the costs to consumers for broadband access. It is expected that costs to consumer will fall between 20-25%, a significant decrease, as CLEC loop costs fall. What should concern everyone is whether the ongoing compliance problems in adhering to FCC orders in the local wireline marketplace will creep into the broadband marketplace, resulting in significant delays in implementation of the Line Sharing Order. If CLECs are stymied in their attempts to gain access to the high frequency portion of the local loop, all consumers will be harmed as broadband access deployments will be slowed considerably. Deployment of broadband access, mostly DSL, to residential and small business customers will still occur, but at a much slower pace than would be expected if the Order was fully implemented and implemented in a timely manner.

Hopefully the creation of a new more powerful Enforcement Bureau at the FCC will take up this challenge and ensure that the local competition and broadband access playing fields remain open to all, and that consumers are able to reap the benefits of competition and of choice in providers. Although Hellerstein and Associates strongly believes that competition not regulation is the most effective means of bringing consumers more services, better quality, and lower prices, in many cases regulation is necessary to rectify proven market failures, as was the case in the FCC Collocation Order and in recently released Line Sharing Order. Until these FCC rules are implemented by all carriers, the market cannot function correctly and the existing market failures will continue to deprive consumers of the benefits of competition, innovation, and choice.

CONVERGENCE

Several panelists spoke about the convergence of telecommunications and technology, but the real question facing the FCC and the entire communications industry is how does the present regulatory framework apply to data and advanced services? Section 706 of the Telecom Act directed the FCC and the State Regulatory Commissions to "encourage the deployment on a reasonably timely basis of advanced telecommunications capability to all Americans." However, the Telecom Act did not distinguish between voice and data. A bit is a bit whether it travels on the voice network or on a data network. However the FCC regulates the two networks differently. Hence the problem. The FCC uses two, even three, frameworks for regulating what essentially is the same service? Moreover, Congress, despite having held hearings throughout the year on broadband access, has tacitly endorsed the perpetuation of these two conflicting regulatory structures, mostly because the current framework presents the best way of introducing competition and choice for local service. More and more voice is travelling on data networks, in the year 2000 many broadband carriers will be commercially releasing voice over DSL solutions to their customers. These solutions will allow customers to transfer their voice traffic from their voice networks to the data networks. Moreover, as advances in technology and the construction of new IP centered networks continue, the voice network as we know it is becoming obsolete. Already today, Level 3 is beginning to offer customers voice quality indistinguishable from traditional telephone networks, but with the efficiencies and inherent cost advantages of IP. Thus the question remains, how does the present regulatory framework apply to data and advanced services? A new regulatory paradigm needs to be developed. One can only hope that the FCC will find a way to resolve the inherent tension between protecting the values that have grown up under past regulatory regimes; the stated goal of the Telecom Act to bring choice for local telephony service; and its policy goals of promoting competitive and technology neutrality.

Hellerstein & Associates is interested in learning what its readers think of these issues. Please send all comments directly to Judith Hellerstein at Judith@jhellerstein.com. If you would like more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com.
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Hellerstein & Associates is a telecommunications and technology research group that provides its clients with acompetitive edge through market research, competitive intelligence, and regulatory analysis on broadband accessand competition policy issues. We look forward to hearing from you and will strive to meet all topic requests.Redistribution of this newsletter is encouraged provided it includes this paragraph.

Topics covered in the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW were chosen because of theirinterest to the work of Hellerstein & Associates. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.

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