FCC Proposes to Eliminate More Local Market Opening, Pro-Competitive Provisions of Landmark 1996 Telecom Act Through Release of Rulemaking Entitled “Modernizing Unbundling and Resale Rules in an Era of Next-Generation Networks and Services”

The Federal Communications Commission’s (“FCC”)  Wireline Competition Bureau (“Bureau”) announced its intention to open a rulemaking proceeding in which to consider eliminating a number of Incumbent Local Exchange Carrier (“ILEC”) network unbundling requirements and take other measures aimed at freeing ILECs from the local market opening provisions at the heart of the 1996 Telecom Act.  The text of the Notice of Proposed Rulemaking is currently being circulated with the Commissioners and is already scheduled for a vote at the FCC’s November Open Meeting.

There does not appear to be anything in the public record indicating that an outside group pressured the FCC to open the proceeding.  Which begs the question, what is the purported basis for the ‘unprompted’ rulemaking?  And why so soon after the FCC just finished handing out multiple victories in earlier ILEC efforts to loosen regulations that were designed to stimulate competition? 

According to the Bureau, enough competition now exists in local markets impacted by the additional proposed de-regulation and, therefore, the current rules create unnecessary burdens on ILECs and should be eliminated.  The rulemaking proposes to modernize the FCC’s unbundling rules for local loops, dark fiber transport, and other types of network elements to reflect the vastly changed communications environment since the agency last examined unbundling obligations.  The Bureau goes on to assert that the legacy obligations it seeks to dismantle no longer appear to make sense in many geographic areas due to vigorous competition for business data services, mass market broadband services, and numerous intermodal voice capabilities and services.  Therefore, the Bureau claims, these obligations appear to both discourage the deployment of next-generation networks and unnecessarily burden incumbent LECs.

Specifically, the rulemaking proposes to:

  • Remove certain unbundling requirements, including those for:
    • DS1 and DS3 loops in counties and study areas deemed competitive in the BDS Order and the Rate-of-Return BDS Order, with an exemption for DS1 loops used to provide residential broadband service and telecommunications service in rural areas;
    • DS0 loops in urban census blocks;
    • Narrowband voice-grade loops; and
    • Dark fiber transport in wire centers within a half-mile of alternative fiber.
  • Remove avoided cost resale requirements in non-price cap incumbent LEC service areas

A brief look at how the various UNEs are used by competitive carriers to provide service is necessary to define the potential impact of this pending regulatory action.  The below diagram depicts the typical network used to connect customers to CLEC networks:

The major components of the ILEC network that CLECs use to connect customers are the Loop between the customer premise and the serving ILEC wire center and Transport from the serving wire center to the wire center where the CLEC POP is located.  The impacts of this rulemaking and the recent UNE Transport Forbearance Order can be summarized as follows:

  • The recent UNE Transport Forbearance Order gave the ILECs relief from most of the remaining obligations they had to provide unbundled transport between ILEC wire centers. This further relaxation of the Telecom Act certainly will cause many of the remaining CLECs to have to seek out alternative network suppliers, but, for the most part, this can be completed in the allotted transition period, on economically attractive terms and most importantly, not impact the customer.
  • The current rulemaking is mostly focused on removing access to unbundled loops of various types and is far more impactful and will be a threat to many CLECs still utilizing these network elements. Transitioning off ILEC loops will directly disrupt the customer’s existing service and will obliterate existing profit margins as the replacement services, where available, will come with a much higher price and likely higher bandwidth.  The problem with this scenario is that CLECs most likely lack appropriate language in existing customer contracts to pass the increased costs onto the customer. As such, extensive negotiations, not to mention significant analysis and network grooming / coordination will be required to complete the transition. These activities will cause significant disruption and financial impacts and are likely to eliminate some CLECs from the marketplace.

The proposed elimination of the Avoided-Cost Resale provision is a particularly damning development for competitive carriers purchasing network inputs from the ILECs at wholesale rates (ILEC wholesale rates are, by-and-large, set forth in Interconnection Agreements approved by State Utility Commissions).  The 1996 Telecom Act included the Avoided-Cost Resale provision that requires incumbent LECs to “offer for resale at wholesale rates any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers.”  Congress prescribed the method for determining the wholesale rate as “retail rates . . . excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier.”

Elimination of the Avoided-Cost Resale provision will invariably lead to what could be material increases to the wholesale rates charged by ILECs, thus raising their CLEC customers’ cost of doing business, and ultimately raising rates (and/or reducing margins) for CLECs and their customers.

The FCC seems to justify these sua sponte proposed rule changes as a natural extension of the de-regulatory work the agency has already completed at the behest of USTelecom, the trade association representing the nation’s largest ILECs.  Earlier in the year, the FCC granted ILECs relief from certain unbundling and resale requirements that the agency concluded no longer served the public interest and were unnecessary to protect consumers.  According to the FCC the proposed rulemaking would update ILECs’ remaining unbundling and resale obligations to reflect the marketplace realities of intermodal voice and broadband competition.  Further, that its proposals are consistent with its continuing efforts to remove unnecessary regulatory burdens that can inhibit the deployment of, and transition to, next-generation networks and services that benefit American consumers and businesses.  At the same time, however, the FCC recognizes that unbundling requirements may have continued benefits in promoting broadband access to consumers where facilities-based competition is less likely to occur.  Thus, it will leave the rules untouched with regard to mass market broadband-capable loops in rural areas.

On the one hand, the FCC is promoting the proposed rule changes as ‘deregulation in the name of increased competition and reduced regulatory burdens.’  Aggrieved CLECs (and the customers that depend on CLECs for network access; connecting customer premise to the PSTN or the “Cloud”) will likely view the surprise Notice of Proposed Rulemaking as an early, ill-advised Christmas present for the ILECs and the lump of coal in their own stockings!

As noted, the Notice of Proposed Rulemaking will be voted on at the FCC’s November Open Meeting.  If approved (likely, a foregone conclusion), the FCC will set a calendar for the industry to file Comments and Reply Comments once the Notice is published in the Federal Register.  If your company is impacted by the proposed rule changes and would like to participate in the rulemaking process, please contact Jonathan Marashlian, Managing Partner of Marashlian & Donahue, PLLC, at jsm@commlawgroup.com or 703-714-1313. 

If your company is interested in understanding how to best prepare for and adapt to these changes, please contact Chris Lee, CEO of Cloud Age Solutions, at clee@cloudagesolutions.com or 703-407-7735.

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