NARUC SPEAKERS SEE LINKS BETWEEN INVESTMENT AND UNE-P

CHICAGO -- Speakers at NARUC annual meeting here Tues. said incumbent telcos, CLECs and regulators had mutual interest in making telecom market once again attractive to investors and in resolving role of unbundled network element platforms (UNE-Ps) in development of competition. Speakers agreed investment and UNE-P issues were linked but remained far apart on how matters could be addressed.

SBC Chmn. Edward Whitacre outlined 3 steps policymakers must take to reverse slide of telecom industry. He said first task was to create environment that encouraged investment by doing away with counterproductive rules such as those requiring sale of UNE-P at uneconomic prices. He said 6 years of experience had shown industry what real costs were. Secondly, he said, regulators must ensure sustainable and economic competition takes root and expands. He said new CLEC entrants should have option of using UNE-P and other wholesale services from incumbents but only if incumbents’ prices were at level that recovered their costs. He said regulators must ensure that customer segments not targeted by competitors were protected. CLECs today are entering residential market Whitacre said, but only seek top 25% of residential customers “who generate all our profits.” He said cherry-picking was threat to all players. He said UNE-P provided subsidies to SBC’s competitors but not to its customers. Whitacre said demise of Bell companies’ exclusive local monopoly franchise meant they no longer could afford costs of subsidizing public policy goals

Paul Vasington, chmn. of Mass. Dept. of Telecom & Energy, said if UNE-P were truly proxy for facilities rather than just resale at different price, it could be valuable tool for exposing inflated costs of incumbent. Experience has shown that impact of UNE-P on costs and markets varies from state to state, he said, and it should be left to states to determine whether particular UNE should be included or removed from platform services. He said TELRIC costing model was intended to serve as reality check on costs and states were learning by experience just how TELRIC functioned as cost check in their own markets.

Joel Lubin, AT&T vp-public policy, said achievement of ultimate policy goal of facilities-based competition would be much harder on incumbent telcos’ finances than was UNE-P. He said net revenue loss to incumbent when retail customer migrated to facilities-based CLEC could be up to 3 times greater than if customer migrated to CLEC using UNE-P because there would be no wholesale revenue from UNE-P to partly offset retail revenue loss. For Bell companies, he said, long distance revenue gains could cover residual loss of local retail revenue to UNE-P competitors but not local revenue losses to facilities-based competitors. He said no carrier today went it alone -- they all leased network piece parts from one another in order to provide ubiquitous service. If there were no system impairments to facilities- based competition, he said incumbents might find themselves lobbying to keep or restore switching UNE to platform on ground that some revenue was better than none.

Regina Costa, research dir. for Cal. consumer group TURN, said some form of UNE-P would remain essential to residential and small business local competition for some time to come, but would vary state by state and market by market. She said it was it “imperative” that states have authority to determine UNE-P availability. She said states, unlike FCC, had stuck to evidentiary hearings and verdicts based on preponderance of evidence, tested by judicial review. Costa said customers could get hearings at state level: “The FCC rarely faces the issues of real concern to consumers.”

Verizon Senior Vp Tom Tauke said incumbents and CLECs had mutual interest in making telecom market a place where investors wanted to put their money. He said competition in wireline sector was essential to continued evolution of telecom services and technologies and encouragement of network investment. But he said regulatory policies weren’t creating genuine competition but rather artificial and unsustainable simulation of it. UNE-P “is resale at a different price” and is discouraging investment by both incumbents and CLECs, Tauke said. He said incumbents didn’t want to invest in new network capabilities that would be used against them by their competitors at discount prices while CLECs didn’t want to invest because it was cheaper to lease incumbents’ networks. He called for regulatory transition for UNE-P from current below-cost rate to resale rate and said rational transition process was key for reinvigorating telecom investment. Tauke said any discounts from resale rate should be subject of exclusive negotiated commercial contracts. He said Verizon was willing to negotiate wholesale terms with CLECs, but as long as regulations allowed one CLEC to pick and choose contract terms incumbent negotiated with another CLEC, telecom industry never would develop normal wholesale commercial relationships such as existed in other industries where retail competitors also were wholesale customers.

Panel of Wall St. analysts concluded that structural separation of Bell companies into independent retail and wholesale businesses could encourage telecom investment but only if web of direct and indirect cross-subsidies between wholesale and retail was eliminated and new units were allowed to recover their costs through their rates. Analysts also agreed that without major changes, investment outlook for telecom remained bearish for next several years.

Analyst Anna Marie Kovacs of Commerce Capital Markets said if Bell companies were losing money at current wholesale rates and companies were separated structurally, no investor would want to put money into wholesale entity. She said elimination of all internal subsidies and separation of companies would result in higher wholesale rates and possibly higher retail rates as companies strove to cover costs and show profit.

Richard Lukaj of Babcock Capital Partners said structural separation “isn’t a bad idea if you can wring out all the cross-subsidies and put all prices at economic cost first.” He said accomplishing that task would require redistribution of prices among services rather than across- the-board increases, but said that would produce winners and losers and move entire matter from realm of economics to realm of politics. Analyst Alain Bourdeau de Fontenay with de Fontenay, Savin & Klass said incumbent telcos’ own organizational inefficiencies were hurting them in investment marketplace by sending inaccurate signals to markets and regulators. He said markets rewarded efficiency with investment but tended to punish those who were inefficient.

David Sappington, public policy research dir. at U. of Fla., on earlier panel, said his study of alternative regulation showed that shift from rate-of-return regulation to alternatives such as price caps had encouraged network investment. He said network investment on average increased 5% annually after alternative regulation methods were put into place. But alternative regulation by itself, he said, had had little effect on price levels, carrier efficiency or service quality. Only when combined with local competition did alternative regulation generate improvements in these areas, Sappington said. Meaning of that for regulators, he said, is that addressing competitive issues in alternative regulation dockets can expand public policy benefits from alternative regulation. CLECs, he said, have become active in proceedings on incumbents’ alternative regulation plans as they pursue their own agendas but regulators can use that involvement as public policy tool. -- Herb Kirchhoff

Editor’s Note: Additional coverage of NARUC conference was included in special report e-mailed to most subscribers Mon. To obtain copy, please call 800-872-9202 or e-mail us at info@warren-news.com.