Win a few, lose a few

As local markets have begun to open up, so have opportunities for carriers to improve their bottom line-or hurt their competitors'-through litigation. As a result of last week's decision on reciprocal compensation, for example, numerous competitive local exchange carriers may have to seek new revenue sources to replace the stream they eventually will lose (see story on page 7).

The recent Supreme Court decision on pricing authority ultimately may have an even greater impact on carriers' profitability. Butin this case, CLECs have the potential to see a windfall, a significant improvement in the economics of entering the local exchange market. The particulars will take awhile to sort out, but what it boils down to is that CLECs won't have to invest so much to enter local markets.

The Supreme Court said that in selling their networks to competitors, incumbent carriers should not separate elements that previously were combined. It also directed the FCC to reconsider the elements that incumbents must offer CLECs and put together a new list. The list should include any and all "necessary" network elements-elements not readily available from alternate sources.

Some CLECs are interpreting this to mean that the unbundled platform-a combination of network elements that eliminates the need for a CLEC to build its own network-is alive again. But some incumbents argue that some elements that go into that platform, particularly switching, may be available from other sources-at least in some areas.

Certainly CLECs have installed a lot of switches-and it may not matter that they have not offered to wholesale their switch capacity to other carriers. Incumbents may argue that if one CLEC can afford to put a switch in a metro area, another CLEC could afford to do so in a similarly sized metro area.

"What's important are distance, density and demand," says John Lenahan, assistant general counsel for Ameritech.

That logic could relegate the unbundled network element platform to sparsely populated areas. But the extended link concept could still be alive-and that, ultimately, may be more important to competition.

Extended links are a limited combination of elements, including a local loop and interoffice transport -but not switching. Incumbents may have a harder time wriggling out of offering extended links. No one is arguing that loops aren't "necessary"-and as Cindy Schonhaut, executive vice president of government and corporate affairs for ICG, points out, there are few, if any, metro areas where CLECs have built transport to and from every single CO.

Extended links would eliminate the need for CLECs to co-locate in every CO where they want to offer service, potentially saving tens of thousands of dollars per CO. CLECs still would have to buy a switch-but many of them will want to do that anyway to differentiate their service offerings.

CLECs may gain other benefits from the Supreme Court decision, too. OpTel hopes the FCC will add sub-loops to the new list of elements that must be unbundled.

That CLEC wants to offer voice, video and data service over microwave to campus-style apartments and townhouses. Rather than buying a loop all the way from each customer to the CO, OpTel wants to purchase only the campus wiring.

"If the whole street is essential, why not the last 100 yards?" says Michael Katzenstein, OpTel vice president and general counsel.

Depending on where they operate, CLECs also may benefit from the new requirement for de-averaged unbundled loop pricing. In general, local loops cost less to operate in densely populated urban areas, but in many states, unbundled loop prices do not reflect that. De-averaging would establish different prices for urban, metropolitan and rural areas. CLECs such as ICG that target urban areas hope to get lower loop prices as a result.

But the biggest winners from the Supreme Court decision may be interexchange carriers. Like CLECs, they too will be able to minimize their costs in entering the local market. They'll also gain lower operating costs for their long-distance business: For every local customer they pick up, they'll avoid paying access charges to the LEC. Considering that those charges represent 30% to 40% of IXCs' per-call costs, that may be the biggest windfall of all.