Tucked away in the FCC's triennial review is a provision that sets up an annual contest between CLECs and the local phone company. It is a high stakes game for the CLECs, but penne ante for the phone company.

by Alex Goldman ISP-Planet Associate Editor [October 17, 2003]

The FCC, in 1996, ordered ILECs to provide Enhanced Extended Loops (EELs) to carriers who have a large volume of voice customers and need a combination of the last mile plus interoffice transport. Four years later, one attorney wrote:

To date, no action has been taken. The ILECs have raised the argument that EELs, if not restricted, will result in the loss of too much ILEC revenue from special access services the EELs can replace. This has triggered months of negotiations over how EELs will be restricted to minimize ILEC revenue loss—and the debate continues at the time of this writing—delaying EEL deployment.

There is some good news. Regardless of this delay, CLECs are placing orders for EELs. This will allow CLECs to sue ILECs for the difference between the higher prices they paid for special access circuits and the lower EEL rates CLECs would have paid if the ILECs provided EELs when they were requested.

In the triennial review, the FCC seeks to allay ILEC concerns by creating a system that it says will "safeguard the ability of bona fide providers of qualifying service to obtain access to high-capacity EELs while simulatenously addressing the potential for gaming."

The FCC warns that qualifying for EELs will not be easy. It says, "in devising a gating mechanism...we must go beyond superficial indicia and require satisfaction of multiple network-specific and circuit-specific criteria to ensure that the requesting carrier demonstrates a commitment to a local voice market."

The FCC is working hard to ensure that data carriers do not get circuits at prices designed to allow competition by voice providers. In doing so, it is listening only to ILEC concerns. The FCC admits that in its EEL ruling, "we adopt rules based largely on elements of the proposed architectural solutions advanced by SBC, Qwest, and BellSouth."

The FCC proposes an audit system, noting the ILECs and CLECs disagree about the value of audits:

On the one hand, several incumbent LECs argue that the safe harbors have provided certainty and accountability, have survived judicial review, and urge the Commission to retain them. On the other hand, many competitive LECs submit evidence that the safe harbors and auditing procedures have proved to be unworkable and susceptible to abuse by the incumbent LECs.

The FCC even admits that the Competitive Telecommunications Association (CompTel) said that the audit procedure is "a mad science that challenges network engineers, marketing personnel, and provisioners—and leaves far too much opportunity for creative interpretation by the ILECs." The FCC takes note of but does not act on the CLEC complaints. It establishes an audit procedure.

Playing poker in the ILECs' casinos
Paragraphs 620 through 629 of the triennial review describe in detail the audit procedure that a CLEC must undergo if an ILEC accuses it of not being a true local voice provider. The ILEC must pay for an independent audit, and if the audit finds the CLEC is not a true local voice provider, based on a sample of that CLEC's circuits, it must pay the audit fees incurred by the ILEC and transfer circuits found to be in violation off the local network and onto its own network.

There are several obvious flaws with this system.

Rather than provide a perfect audit procedure, or do the audit itself, the FCC asks the ILECs to pay for the audit, and if disputes arise, imposes a burden on the local public service commission. The review says, "to the extent that the parties dispute the definition of an "independent" auditor and whether a given party satisfied the test for independence, the more appropriate forum for this determination is a state commission."

In other words, in addition to being audited every year, each CLEC, no matter how small, will also have to hire a lawyer to represent it before the state commission in order to get a fair and independent auditor.

Independence is a crucial issue because the auditor chooses which circuits to examine. The review says, "such audits require compliance testing designed by an independent auditor, which typically include an examination of a sample selected in accordance with the independent auditor's judgment." Of course, if the auditor is not impartial, a biased selection of circuits could impose real costs on the CLEC.

Penalties are harsh. The review says, "to the extent the independent auditor's report concludes that the competitive LEC failed to comply with the service eligibility criteria, that carrier must true-up any difference in payments, convert all noncompliant circuits to the appropriate service, and make the correct payments on a going-forward basis."

But the FCC doesn't think that's harsh enough, so it adds, "in addition... [the CLEC must pay] the audit costs in the event the independent auditor concludes the competitive LEC failed to comply with service eligibility criteria."

The rich get richer
We are not arguing that the telecoms industry should not be policed. But ISPs regularly tell us that the ILECs break and warp the law in numerous ways (some of which are enumerated in the triennial review). While those covered in the review will be the subject of a future article, let's take just one example: The triennial review acknowledges that ILECs have failed to transfer customers from their networks to their comeptitors', which is a disincentive for CLECs to build their own facilities.

The triennial review then goes on to ask the states to figure out how to fix this problem. Since the problem is endemic, it would be reasonable to require an annual performance audit of ILECs, to see whether or not they are complying with the rules, especially since the record shows—and the FCC admits—that they have consistently failed to do so.

It appears, then, that the triennial review is applying a flagrant double standard, trusting ILECs to do the right thing (absent any likelihood of their doing so), while imposing onerous burdens on CLECs. One might go so far as to conclude that the rules pander to special interests—to the companies that provide the large campaign donations—while punishing smaller companies that abide by the rules because they cannot afford the high stakes poker game faced by consistent violators.

The RBOCs—and SBC in particular—have been waging a publicity campaign against all competitors, but especially against MCI and AT&T, for a very long time. On October 8, 2002, SBC chairman Ed Whitacre told the Lehman Brothers' annual CEO Summit in Arizona, "UNE-P is not real competition. It is simply a subsidy for companies like WorldCom and AT&T. . . UNE-P is simply false competition. It relies on subsidies, invests nothing, builds nothing and ultimately hurts everyone's ability to raise capital and invest."

This might be viewed as an extraordinarily disingenuous statement, given that AT&T at the time was a large cable, Internet, wireless, and telephone provider, and WorldCom owned (and still owns) the largest Internet backbone in the world, UUNet.

What made the statement particularly galling to many in the industry, however, was the fact that SBC was about to be fined by the FCC for failing to abide by the rules. FCC Chairman Michael Powell said, "Such unlawful, anti-competitive behavior is unacceptable. Instead of sharing, as the law requires, SBC withheld and litigated, forcing competitors to expend valuable time and resources."

Fined, yes; but truly punished? H. Russell Frisby, Jr., president of CompTel, noted, "the fine represents less than a month of the CEO's salary. SBC's actions cost consumers well over $6 million and allowed the company to retain more than $6 million of business. The problem is that the FCC doesn't have sufficient authority to levy a fine that will be meaningful."

While the Bells seem to get away with breaking the law and occasionally paying fines that don't materially harm them, the FCC is doing very material harm to CLECs. When the FCC imposes additional regulatory burdens on CLECs while trusting ILECs to abide by the law (unaudited), it is promulgating rules that will destroy competition.

The irony is that if Powell had gotten the review he lobbied for, and the FCC had simply, in effect, declared an end to telecom competition, that decision could have been challenged in one place: the U.S. Supreme Court. As things now stand, however, the triennial review is likely to ignite hundreds of lawsuits across the 50 states (plus Washington, D.C.), each arguing about one piece of the rulemaking and its application in that state—in addition to numerous federal lawsuits. The uncertainty currently plaguing the telecommunications industry will continue.

—End