The local phone industry last week dialed 911, hoping regulators in Washington would answer the distress call.
Slammed by the worst recession to hit the industry in decades, incumbent local-exchange carriers claim that many of their problems were created by the Federal Communications Commission in 1996, through rules that allegedly tilted the playing field in favor of competitive entrants.
"The good news is that this climate was man-made. It can be man-unmade," said telecom executive Arne "Skip" Haynes, who just stepped down as chairman of the United States Telecommunications Association.
Haynes, president of The Rainier Group in Eatonville, Wash., joined about 1,000 local phone executives at the USTA's annual convention here. If the trade group's forces had one message, it was that FCC policies had to change, or the financial risks to carriers of all sizes would begin to mount.
"The survival of our industry is at stake," said Margaret Greene, president of regulatory and external affairs for BellSouth Corp. and USTA's newly inaugurated chairman. "Without question, it's time to stand our ground and fight."
Blasts FCC creations
The phone incumbents saved their harshest criticisms for two FCC inventions.
The first is called the unbundled network-element platform, or UNE-P, and the second is called total element long run incremental cost, or TELRIC. The combination of the two has been lethal, the USTA claims.
Under UNE-P, a competitor can lease an incumbent's entire network at TELRIC rates, which some analysts said generates a wholesale discount of 50 percent to 70 percent.
The phone incumbents said UNE-P grants automatic access to non-bottleneck elements, while TELRIC prices those elements well below cost.
The result: The incumbents have no incentive to invest in networks that lose money, and — because UNE-P and TELRIC give them what they need on the cheap — competitive entrants have no incentive to build their own facilities.
Greene said her mission over the next year was the abolition of UNE-P and TELRIC.
FCC policies "cannot continue to defy basic laws of economics without ultimately destroying those it regulates," Greene said.
As an example, she said BellSouth's average line cost is $44 per month, but state regulators require the company to lease those lines for $20 a month. "You do the math," Greene said.
Competitive local-exchange carriers, many of which took on too much debt, have gone bankrupt by the dozen, despite favorable FCC policies.
The remaining CLECs argue that the phone incumbents are exaggerating the financial impact of UNE-P and TELRIC. They claim the Baby Bells' real goal is to snuff out competition.
The FCC, under chairman Michael Powell, is expected to rollback UNE-P and TELRIC, though it is unclear how far the agency is willing to go.
FCC member Kevin Martin, who has advocated general support for rules that emphasize investment in facilities, didn't tip his hand on the substance of the FCC's ruling, which is expected by the end of this year or early next year.
"I don't think I can give you a sense of what the whole commission will end up doing," Martin told the USTA audience.
The FCC is under pressure from the courts and Congress to act soon. Last Wednesday, Senate Majority Leader Tom Daschle (D-S.D.) sent Powell a letter urging him to resolve the debate over local phone competition.
Legg Mason telecommunications and media analyst Blair Levin said he's felt for some time that the FCC would accommodate the Baby Bells with new policies.
"I've been advising our clients for a fair amount of time that the incumbent local phone companies are going to make considerable progress … particularly on [unbundling] and broadband deregulation," Levin said.
Powell: Rules 'Cracked'
In a speech last week, Powell said the FCC's local phone competition rules "cracked" when they could not protect new entrants from massive capital flight, after it became apparent that their revenue could not support the billions of dollars in debt incurred.
Powell reiterated his support for rules that elevate facilities construction over network sharing by incumbents and their rivals.
"Only through facilities-based competition can an entity bypass the incumbent completely and force the incumbent to innovate to offset lost wholesale revenue," Powell told Goldman Sachs & Co.'s Communacopia conference in New York City.
Some see a grand compromise in the works. It would preserve UNE-P and TELRIC in recognizable fashion for the legacy copper network, but abolish them for any new investment made in fiber-based high-speed-data networks.
"The idea here is, stimulate investment without cutting off competition," said Timothy Regan, senior vice president of government affairs for fiber builder Corning Inc., a supplier to telecom carriers whose stock closed last Thursday at $1.36, after trading at $113 as recently as late 1999.
Under current FCC rules, Corning estimates that 5 percent of homes will be connected to fiber by 2013. If the commission's unbundling rules did not apply to fiber, the figure jumps to 31 percent by that year.
"There is a solution out there," Regan said.
USTA president Walter McCormick said he didn't see much sense in drawing a distinction between copper and fiber.
"It sounds to me a little bit like making the pony express ride after the telegraph was discovered," he said.
BellSouth's Greene said the FCC's broadband policies are out of step with market realities. Her company is saddled with network sharing rules, she said, while cable operators — with an industry leading 10 million paying data subscribers — copes with none of those rules.
"It's like a horse race in which you give the first horse a 100-yard lead and make the second horse pull a chuck wagon," Greene said.
Cable operators are deeply involved in the broadband debate. USTA, for example, wants a portion of cable-modem revenue to flow to universal service, the program designed to keep local phone service affordable for the poor and costly to service rural consumers.
"We want to see symmetrical regulation across the board. To the extent that cable modem access is accessing an interstate service, we think it should pay into universal service proportionately to those who access interstate voice service," McCormick said.
Many small phone companies rely on long-distance access charges to promote universal service and earn a profit. But that revenue stream has come under attack from electronic mail sent over flat-rate monthly Internet accounts and one-rate wireless phone pricing plans.
The problem is expected to worsen with the introduction of voice-over-Internet protocol telephony technology.
The local phone incumbents are now making their move to broaden the number of players required to contributed to the federal government's universal service fund.
Some cable operators already contribute to universal service, a point raised by Alexandra Wilson, vice president of public policy for Cox Enterprises Inc., whose Cox Communications Inc. MSO subsidiary provides local phone service and high-speed data over its cable lines. A portion of Cox's voice revenue goes to universal service, and Cox is even a recipient of universal-service funding.
BellSouth's Greene noted that digital subscriber line service — cable's chief high-speed data rival — is a contributor to universal service, giving cable a regulatory advantage.
AT&T Corp. general counsel and senior vice president James Cicconi, the first executive from that company to attend a USTA show in many years, said he shared the telcom group's view on regulatory parity with regard to universal-service contributions.
"It may come as a shock to some of you that I believe, we believe at AT&T, that the disparity between DSL and cable modems on universal service needs to be fixed, that they ought to be treated similarly," Cicconi said.