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

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The summer issue discusses some of the insights gained at the Phoenix Center’s Telecom Symposium. The Center’s Telecom Symposium heavily focused on how the economics behind local competition since the 1996 Telecom Act resulted in the problems today’s CLECs are facing. Specifically, how an understanding of the economic issues facing the industry can explain the lack of local competition today and the melt down of many CLECs. Issues such as the effect of sunk costs on carriers, the ease and ability of obtaining UNEs (unbundled network elements), provisioning of services, the creation of scale economies, and the penetration rate needed to break even and make a profit. were discussed and debated. However, the most thought provoking panel was the one titled, "Separating the Reality from the Rhetoric-What Steps are needed to move the Competitive Process Forward Constructively." What made this panel so insightful and thought provoking was the lively debate between the panel members, who included Bob Atkinson, Robert Berger, Brian O’Connor, and others. Bob Atkinson is a former Deputy Chief in the Common Carrier Bureau of the FCC during the time the FCC was writing the local competition rules. Prior to this, he was the Senior VP of Teleport Communications Group (TCG), one of the first CLECs until it was purchased by AT&T in July 1998.

Atkinson started off the discussion by stating that he thought that Congress should repeal the Telecommunications Act of 1996 and begin a new. He favored granting the FCC some new powers in enforcement, the ability to issue sanctions, and to create structural remedies as well as re-organizational issues. He felt that once this framework was in place, the FCC should delegate to the State Public Utility Commissions (PUCs) all other issues surrounding local competition. Atkinson opined that the FCC’s role should be more of an appellate jurisdiction, rather than as the creator of all-new laws and regulations. Most of all, he stated that Congress must trust the FCC and the State PUCs to issue regulations and take actions as they see fit, instead of constantly challenging the FCC, tying its hands, or seeking to micro-manage every single action

The goal of the Telecom Act of 1996 was to open up the local exchange market to competition and to bring consumers the resulting benefits—increased innovation, greater choices, higher service quality, and lower prices. Atkinson felt that the Telecom Act as presently written and passed was the single biggest cause for the failure of local competition. The only way, he felt, to jump start competition today was to gut the Act and bring back the MFJ (Modified Final Judgement). Atkinson’s reasoning was that the passage and signing of the Act, put a halt to any innovation and experimentation by the State PUCs. Prior to this, approximately 20 or so State PUCs had been experimenting with different forms of local competition, but once the Act was passed, all this experimentation was halted.

The Connecticut Department of Public Utility Control (DPUC) as well as the Illinois Commerce Commission had been leaders in innovation and experimentation into local competition. Prior to the Telecom Act, the Connecticut DPUC had instituted a plan where all residents would be able to choose a local carrier from a selection of CLECs who had registered with the State to offer local exchange service to residents. Residents could also opt to stay with the incumbent. Most unusual was that those residents who had not voted for a carrier would not automatically receive Southern New England Telephone (SNET), now an SBC company, as their local carrier. Rather, the undecided and absent ballots would be divided up proportionately among all the other carriers participating depending on the percentage of the votes they received in that area. With the Act’s passing, all these innovative proposals were put aside while the State PUCs struggled to implement the Act according to the FCC, Congress, and the Courts wishes.

The Act profoundly changed the relationship between the FCC and its counterparts in the State PUCs as the Act amounted to Federal preemption of certain State regulations. The Act resulted in a shift in the balance of power in favor of the FCC and this balance of power continues to change with each passing decision, order, or legal action.

Since the Act’s passage, the various State PUCs have become mired in mounds of trials, court battles, cumbersome legal proceedings, and tests. Thus instead of continuing to conduct limited and controlled experiments and determine the best approach to achieving fair and open local exchange competition, the State PUCs had to stand on the sidelines until the FCC acted. The FCC did not have the luxury of being able to conduct controlled or even limited experiments in different localities, analyze these experiments and then determine the best solution. Instead they had to try and create regulations that would open up the market to competition in one full swoop. Only after guidance and/or regulations were passed, could the State PUCs begin to work on implementing these regulations.

According to Bob Atkinson, the main purpose of the Act was to clarify all the gains made by CLECs, such as Teleport, in competing against the ILECs. These gains were then frozen in time, instead of continually being increased. The real problems, according to Atkinson, were that after the Act’s passage, States stopped experimenting and innovating. Instead they got stuck waiting for the Federal Government to set the rules of the road that the States must now flesh out and implement. Not only were States forced to wait for the FCC to act before they could implement a policy or new rules and regulations, but they also had to follow extremely cumbersome procedures in implementing the new local competition rules.

Atkinson stated that the FCC simply did not have the necessary staff, time, or energy to handle all these tricky local competition and deregulation issues. Prior to the Act, the work on local competition and deregulation was spread out over the 50 state PUCs; with about 20 or so PUCs being heavily involved, now all this work became concentrated in one place—the FCC.

Although some States showed no inclination to move towards deregulation without the extra push by the Federal Government, Atkinson stated that close to 50% of all State PUCs were actively experimenting with innovative approaches to jump starting local competition. As discussed previously, the Connecticut DPUC had been in the forefront of local competition and was on the way to creating an even playing field for all carriers.

The 1996 Telecommunications Act envisioned three modes of local exchange competition: resale of the incumbent carrier's services, use of "unbundled network elements" or UNEs, and deployment of competitive facilities. Although all three modes of local exchange competition were specified, resale of the ILEC facilities was never viewed as a viable option, even if it was only as an intermediate stage to becoming a facilities-based competitor. Proof of this can be seen in the many CLECs who have gone bankrupt because they relied too heavily on resale. Hellerstein & Associates agrees with Atkinson and others that facilities-based competition is the only method that can produce the greatest consumer benefits. The value behind owning one’s own network cannot be understated. The need to own one’s own facilities to offer local service can best be seen by the purchases by WorldCom of Brooks Fiber and MFS Communications, two large facilities-based providers, and AT&T’s purchase of Teleport, one of the original facilities-based providers.

Atkinson’s comments on the Act are extremely interesting and thought provoking. He makes some valid points about the halt to experimentation and innovation. While these reflections are correct, we are not sure there is a direct cause and effect here. Was the Act directly responsible for the end of experimentation by the State PUCs? Or was it that there was too much work to be done by State PUCs in implementing the Act. Did the Connecticut DPUC decide not to go ahead with their innovative and ground-breaking proposals because of the Telecom Act? Or was there another reason?

Hellerstein & Associates is interested in learning what its readers think of these issues. Do readers think that the Telecom Act needs to be repealed? Is a return to the MFJ a viable option, or is there another option available?

If the Act is repealed, what are the chances that a new law will be enacted and that it will meet with greater success? If we enact a new law, will the industry have to struggle with an additional five more years of litigation as each side battles the other in Court, as we saw with the current Telecom Act? Or has the industry learned from its past mistakes?

Is it correct to say that the Act put an end to any and all innovation by the State PUCs, or was it the fear of constant Court challenges that halted innovative approaches? Or could it simply have been that a shift in the balance of power between Federal and State regulators made experimentation not possible?

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 www.jhellerstein.com is a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis on broadband access, competition policy, and wireless 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 their interest to the work of Hellerstein & Associates www.jhellerstein.com. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.