FCC sides with Rhythms' customers

The FCC's order for bankrupt DSL provider Rhythms NetConnections to keep its network operational may mark the commission's intention to more vigorously protect customers at risk of being left without communications services.

Though representatives from Rhythms declined to comment, analysts said the company, with about $133 million in cash and cash equivalents as of early August, will have no trouble paying to keep its network running for two weeks beyond its intended Sept. 10 shutdown date. Rhythms had earmarked that money to pay bondholders some of what they are owed.

The commission denied Rhythms' request to discontinue operations based on procedural points. The commission did not acknowledge Rhythms' request to discontinue operations in time to match the company's deadline. Furthermore, an emergency appeal was rejected, according to an FCC order, because 36 Rhythms customers told the commission that they would be unable to find alternate service by the shutdown date (see timeline below). The commission's need to explore those complaints resulted in the rejection of Rhythms' request.

“While the commission is sensitive to [Rhythms'] financial difficulties, we cannot overemphasize the importance of our charge to protect the public interest by ensuring consumers have adequate notice and a reasonable opportunity to obtain new service,” the ruling said.

In rejecting the appeal, the FCC is recognizing that the one-month notice companies must give to discontinue service — though authorized by the '96 Telecom Act — may not be sufficient to transition the 100,000-plus Rhythms customers, according to analysts.

“Just to write the orders would take at least that much time,” said Ernie Bergstrom, senior analyst for Cahners In-Stat Group.

The situation is reminiscent of the fiasco surrounding the shutdown of bankrupt DSL provider NorthPoint Communications last spring. Many NorthPoint customers were stranded without Internet access, an occurrence the FCC is likely trying to avoid. “[This ruling] certainly seems to indicate that,” said Eric Rasmussen, senior consultant for TeleChoice. “There have been some DSL operators that have left their customers pretty high and dry.”

The commission may have insisted on extra time in the hopes that Rhythms' customers could find new providers or that Rhythms could sell its assets and customer base in a deal that would allow service to continue uninterrupted, Bergstrom said.

The latter would be especially desirable considering Rhythms' current customer base consists largely of business customers. In the short-term, DSL has become almost the exclusive realm of the ILECs, which generally take several weeks to install service and use a flavor of DSL that is better suited to the residential market.

Business and enterprise customers that contacted the commission likely instigated the decision in the first place. In ordering Rhythms to continue operating, the FCC, for the first time, has ruled that “as dial-tone service is to residential, high-speed Internet is to the business customer,” said Terry Barnich, president of New Paradigm Resources Group. “Whether you agree or don't, it's a policy that probably ought to be discussed before it is implemented.”