RBOC LEGAL WIN COULD BE HOLLOW VICTORY

The elimination of most FCC rules regarding RBOCs leasing unbundled network elements to CLECs at regulated prices prompted a flurry of political and legal activity last week, though the business signs of a clear RBOC victory are conspicuously absent.

The decisions by the Bush administration and the FCC not to appeal the U.S. Court of Appeals for the District of Columbia Circuit ruling on UNEs to the Supreme Court was a significant legal win for incumbent carriers. However, many observers believe it came at a price: RBOC assurance not to raise rates until after the November election, so phone bills would not join Iraq and gas prices as an issue in President George Bush's re-election campaign.

“I think that was a big part of it,” said telecom analyst Andy Regitsky, president of Regitsky & Associates.

Most think the Bush administration struck a deal with RBOCs to maintain UNE prices in return for not appealing the case to the Supreme Court. However, one person who would know for sure — SBC Communications Chairman and CEO Ed Whitacre — told Telephony the administration made no such request.

“No. It's a chaotic enough situation,” he said. “We've endured this for six or seven years, why not go six more months, now that it's not going to be appealed, to give the FCC a chance to write rules?”

Whatever the motivation, Verizon Communications has agreed to freeze UNE rates through the elections, and the other three RBOCs made a similar commitment through the end of the year.

But the administration wants more, asking FCC Chairman Michael Powell in a letter to freeze rates for all UNE items vacated by the D.C. Circuit for a full year.

Publicly, SBC and BellSouth expressed concern that maintaining wholesale pricing for such an extended period of time would undermine efforts to reach commercially negotiated deals. Privately, though, one RBOC official said, “I think [the administration] is trying to throw AT&T a bone.”

That may be the case, but the administration's moves underscore the fact that practical realities in the legal and political environments limit the potential for significant change on the UNE front, according to Precursor CEO Scott Cleland. As a result, much of the economic benefits RBOCs might have gained from the legal win have been nullified, he said.

“The administration agreed legally with the Bells, but now they're saying, ‘Yes, you won legally, but you don't get to do what you want to do, which is raise [wholesale] rates,’” Cleland said. “Whether that legal victory eventually results in changing the business situation on the ground is questionable at this point.”

It's just one of many questions, the most notable being what kind of rules the FCC will write after having courts reject the three sets of UNE guidelines it has established since the passage of the 1996 Telecommunications Act.

The latest rules were created by last year's Triennial Review Order, when Republican FCC Commissioner Kevin Martin broke political ranks and teamed with Democrat Commissioners Michael Copps and Jonathan Adelstein to approve a UNE regime that called for state commissions to decide much of the details.

The same threesome promised to appeal the D.C. Circuit ruling, which threw out the rules, but Martin changed his mind after Solicitor General Ted Olson decided not to support an appeal. Now, many analysts believe Powell will get an opportunity to write an order that largely eliminates TELRIC pricing for UNEs — something he forecasted almost two years ago. Such rules may be necessary to pass muster with the D.C. Circuit, according to Andy Lipman, a telecommunications attorney with the law firm of Swidler Berlin Shereff Friedman.

“This particular panel takes a very dim view of any unbundling,” he said.

Losing TELRIC-based UNEs could be devastating for CLECs, which are “already at the ends of their chairs financially,” said John Windhausen, president of the Association of Local Telecommunications Services.

“They can be written in a way that's legal,” Windhausen said. “The question is: Can they be written in a way that preserves competition? It will be tough, because the court has constrained the act an awful lot. Depending on how the rules are written, [RBOCs] could make our lives hell.”

Indeed, even if new rules are more favorable than expected, Regitsky predicts CLECs will be damaged because the financial community believes UNE-based business models are in legal jeopardy.

“It's going to be difficult [for CLECs to attract investors] because you can't depend on UNEs for the long term,” Regitsky said.

Guzman and Co. telecom analyst Patrick Comack agreed, noting that recent events also will make it easier and cheaper for RBOCs to buy the large IXCs such as AT&T, MCI and Sprint. As for smaller, independent CLECs, Comack put it bluntly: “They're toast,” he said.

Precursor's Cleland expressed doubt whether the FCC can “thread the needle” and write politically palatable rules that are legally sustainable after so many previous failures. Asked to predict what kind of rules the FCC would write, SBC's Whitacre declined to speculate.

“God only knows,” he said. “They've had three chances, and all of them have been illegal. We know it has to conform to the law. And we know that means that, if somebody else has facilities, we can't be compelled to sell ours. And that's really about all we know at this point.”

Adding to the confusion are state commissions, which could be potent wild cards. Many PUCs approved RBOCs' entry into the long-distance market in return for opening their local networks at UNE prices. If CLECs are denied low-cost UNE access, several state commissioners indicated they might re-evaluate their approvals.

Change-of-law provisions in interconnection agreements between competitors typically result in arbitration before state commissions. Whether a price freeze would make such provisions moot or RBOCs would agree that states still have such jurisdiction is unclear, according Michigan Commissioner Bob Nelson.

“In my memory, everybody's shown up who's been asked to show [for arbitration],” Nelson said. “But this could be a different situation.”

Meanwhile, despite all the attention paid to the UNE debate, growth of intermodal voice alternatives continues to diminish the importance of access to parts of the legacy network, Cleland said.

“This is like trench warfare in World War I,” Cleland said. “Basically, [the RBOCs] captured a trench — 100 feet more of a muddy, mustard-gas-infested trench. Is that really a victory? Everybody's a loser because they're fighting over their piece of a smaller pie. The wireline business is shrinking.”