ALTS: Publicly held CLECs have turned corner

The 19 publicly held competitive local exchange carriers (CLECs) collectively will produce an EBITDA (earnings before interest, taxes, depreciation and amortization) profit in 2002, barring unforeseen developments, according to a study released today by The Association for Local Telecommunications Services.

If that happens, it would mark the first time CLECs have turned a profit since the passage of the Telecom Act in 1996.

“This is a very significant development,” said ALTS President John Windhausen. “The reported death of competitive carriers is woefully premature. CLECs are turning the corner.”

According to the study, the 19 CLECs – which include Allegiance Telecom, Covad Communications, Focal Communications, Time Warner Telecom McLeod USA and US LEC – posted EBITDA earnings of $140.4 million through the first six months of 2002. If the three CLECs that filed for Chapter 11 bankruptcy protection – Covad, McLeod, Mpower and XO Communications – were taken out of the mix, EBITDA earnings would have been $154.9 million. Three of those companies – Covad, McLeod and Mpower – have emerged from bankruptcy.

However, the 19 publicly held CLECs included in the study have a long way to go before they achieve full profitability. Collectively, they racked up a net loss for the first half of 2002 of $5.5 billion. “Only two of these companies (McLeod and Talk America) are on course to make a bottom-line profit this year,” Windhausen said. “Obviously we need to turn that around before we can say we’re out of the woods.”

According to Windhausen, the success to date has come from the paring of expenses and debt, to the point where some CLECs have cancelled their plans to enter additional markets. He said the trend would continue.

“The CEOs I’ve spoken with are still looking for ways of becoming as efficient as possible. The bottom line is to cut costs and to operate more efficiently than ever before.”

While a number of carriers were forced to take write-downs when WorldCom filed for bankruptcy protection, Windhausen said the CLECs included in the study have not suffered any actual revenue loss because WorldCom thus far is paying its bills.

Looking ahead, Windhausen said capital is available to CLECs that have made significant progress in reducing their expenses and debt loads and demonstrated that they are on “a course to future profitability.” He added that $1 billion has been invested in competitive carriers in the past nine months.

Windhausen took a shot at a recent study published by the Progress in Freedom Foundation that “danced on the graves of CLECs” and which criticized FCC policies that resulted in too many competitive carriers entering the market, which contributed to their eventual demise.

“That doesn’t make any sense to us. After a market has been opened, you would naturally expect that more companies would enter the market than the market could sustain,” Windhausen said. “That CLECs have failed shouldn’t be taken as an indictment of the FCC’s policies.”

The real problem is that the FCC and state commissions haven’t done an effective job of enforcing their policies and rules, a situation that has allowed incumbent carriers – notably the Bell companies – to drag their heels on making their facilities available to CLECs.

“These are not abstract rules, but rules that go fundamentally to our revenues,” Windhausen said. “If CLECs can’t connect, they can’t bill, and if they can’t bill they can’t generate the revenues they need to cover the investments they have made.” He added that the unbundled network element platform– which the Bells have worked hard to abolish – would have been unnecessary if incumbents had provided non-discriminatory access to their network facilities.

He also defended the TELRIC (total element long run incremental cost) pricing formula used to determine the rates ILECs can charge for UNEs – another sore point for the incumbents – which is based on the forward-looking costs of provisioning and maintaining a “most efficient” network.

“It’s the right way to go. To do anything else would reward the Bell companies for their old, inefficient investments,” Windhausen said.

SBC Communications' Senior Vice President-FCC James Smith said it was "hardly remarkable" that CLECs have been able to use UNE-P on a profitable basis, since the platform is "priced well below the cost of providing local service."

He added that while UNE-P may create "fat margins" for some CLECs, it does so at a heavy price.

"By allowing below-cost access to the incumbent's network, the UNE-P discourages investment by new entrants and incumbents alike," Smith said. "Without such investment, the health of today's telecom infrastructure is at risk and the industry will remain mired in recession, exerting a drag that affects the entire economy."