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On
March 2, 2003, Verizon and the other Bell Operating
Companies (BOCs) -- SBC, BellSouth and Qwest
-- won a major legal victory when the
federal Court of Appeals for the D.C. Circuit Court
overturned much of the Federal Communications
Commission’s (FCC) “Triennial Review
Order.” That regulation had required the
BOCs to share their local networks at
discounted prices with other companies
delivering telephone service to residential
and business customers.
Scuttling
the mandate may provide the BOCs some
temporary relief in the cut-throat battle for
market share, but the long-term
effect of the court’s decision will likely
drive competitors to aggressively deploy Voice
over Internet Protocol (VoIP) technology,
which uses broadband Internet connections to
bypass the BOCs' networks entirely. That, in
turn, will strand billions of dollars of BOC
investment in old, circuit switch-based
infrastructure.
As
part of the 1996 Telecom Act, Congress
required the BOCs to offer competitors
unbundled access to the BOCs’ local networks
-- central office switching, transport between
central offices and loops connecting customers
to switches -- at discounted prices.
The BOCs have battled their competitors
for years over which network elements must be
unbundled and the charges for those elements.
The FCC has generally required
large-scale unbundling at prices that the BOCs
deemed “deeply discounted” prices.
In response, they have appealed the
FCC’s unbundling policies to the courts --
generally with success.
The
FCC’s most recent attempt to write
unbundling rules in the Triennial Review
Order, which passed over the strong dissent of
GOP Chairman Michael Powell and Commissioner
Kathleen Abernathy, punted most unbundling
oversight to the state public utilities
commissions (PUCs), including Virginia's State
Corporation Commission.
The D.C. Circuit just ruled that the
FCC lacked authority to delegate this issue,
and vacated other parts of the order in a
manner that largely undermined the unbundling
mandate.
To
the extent that competitors cannot lease parts
of the BOCs networks at discounted rates, they
must either build their own circuit-switched
networks, lease components from the BOCs at
market prices, or move to VoIP.
Unless originated over dial-up Internet
access, VoIP bypasses the local telephone
company’s switch and is routed over
packet-switched networks.
While much VoIP traffic is still likely
to touch the BOCs’ networks at some point,
through origination on BOC-provided DSL
connections or through termination over a
BOC’s loop to other customers, VoIP would
not use a BOC’s switching services.
Moreover, as competitors move toward
lower-priced VoIP services, so, too, must the
BOCs. That
movement in the market would put recovery of
the BOCs’ huge switching investments at
risk.
Verizon
(excluding the former GTE Company’s
operations) has 267 central office switches in
Virginia. According
to recently released FCC data, Verizon
had, as of
year-end 2002, nearly $1.6 billion in central
office equipment (COE) investment and $2.4
billion in central office transmission (COT)
equipment in Virginia. Verizon’s
ratio of un-depreciated plant to total plant
investment was approximately 46 percent.
Therefore, Verizon’s 2002 investors
faced the risk that more than $1.8 billion of
COE and COT investments in Virginia
alone might not be recovered because of
competition or technical obsolescence.
A similar level of risk exists today.
Verizon,
which is clearly one of the best managed
communications companies in the U.S., needs to
keep customers using its COE and COT
investments because it is unlikely that either
the FCC or the State Corporation Commission
would require consumers to pay the costs of
Verizon’s stranded switching investments.
Therefore, it would be in Verizon’s
financial best interests to delay consumer
movement to VoIP or any other technology that
avoids the use of Verizon’s existing
network.
Having
won their point in court, the BOCs would be
better off financially to continue leasing
their networks to competitors at a substantial
discount than to see their switching
investments become worthless.
Otherwise, the BOCs’ big court
victory could prove their ultimate undoing.
The big question is:
Do the BOCs understand the importance
of the wholesale market to their financial
viability?
--
March
15,
2004
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