Welcome to the second issue of HELLERSTEIN REGULATORY REVIEW, a monthly free newsletter covering significant regulatory developments in the telecommunications and technology industries. The newsletter is published by Hellerstein & Associates, a telecommunications and technology research group that provides its clients with a competitive edge through market research, regulatory analysis and competitive intelligence.

As I did in the first issue, I again would like to ask my readers for topic suggestions. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com .

The subject for this issue is the en-banc forum held by the Federal Communications Commission on July 9, 1998 which focused on regulatory issues raised in the recent Section 706 petitions by the RBOCs. Chairman Kennard and the other Commissioners held the forum to learn more about the problems facing all providers in their efforts to provide high-speed broadband services to all.

The FCC Commissioners are interesting in developing some alternative measure to open up competition in the local loop market. One such measure is the creation of separate data and voice subsidiaries with different regulatory restrictions and rules. Chairman Kennard's belief is that all providers should be able to compete fairly and on equal grounds without being hampered by unnecessary regulatory restraints. Hellerstein And Associates believes that only competition, not regulation, is the most effective means of bringing consumers more services, better quality, and the lowest prices. The total control over the local loop that is currently held by the incumbents has proven to be a difficult stumbling block in the development of competition in the local services market.

The goal of this forum was to explore how these issues impact the deployment of advanced telecom capabilities, such as broadband services, in the last mile. Panelists from Wireless, Satellite, Competitive LEC and Incumbent LECs, and cable operators debated these issues during this lively forum. The hottest issue was on how "separate" a subsidiary needs to be to ensure that the incumbent operator cannot use its market power to prevent or stymie competition.

Steven Chrust of Winstar Communications and Charles McMinn of Covad Communications argued strongly in favor of an independent subsidiary, rather than a separate subsidiary. Separate subsidiaries, by nature, are extremely difficult to monitor to ensure total compliance. Also what looks to be a successful monitoring system on paper, often does not work in actuality. Winstar and Covad both expressed their hesitation on relying on promises by the incumbent LECs to regulators that the loops and other items critical to their operations will be provided in a non discriminate manner. James Crowe of Level 3, although not as vociferous as Chrust and McMinn in insisting on an independent subsidiary, felt strongly that the RBOCs control over the local loop was a major problem. However, he thought that creating a subsidiary that was structurally separated with carefully defined rules and regulation would be sufficient.

Many of the panelists concurred with these arguments. They stated that unless the ILEC separate subsidiary had to go through the same bureaucratic and complex process of ordering loops, obtaining collocation space in a central office, signing interconnection agreements, and other items as they and other CLECs did, they felt that provider would have an unfair advantage. Exposing the ILEC to the same hurdles and stumbling blocks they themselves had faced and the expense that overcoming these issues had entailed would translate directly into a revised ordering and operating system as the ILEC would seek to provide a more cost-efficient system for their own subsidiary. Hellerstein & Associates believes that any improvements in the ordering process would benefit all players as well as the entire system.

Sprint was the only non-incumbent that argued against the creation of a separate subsidiary to handle data traffic. It stated that its work on its new Integrated On-demand Network showed that it is a fallacy to think that data and voice can be separated and treated differently by regulators. One only needs to look at the popularity and tremendous growth of Internet telephony to realize that data and voice cannot be separated out with each being treated differently. This disparity will only increase if regulations on ILEC data networks are decreased or even eliminated.

Most of the incumbents argued that they would be able to speed up deployment of advanced broadband networks if the FCC granted their 706 petitions and decreased or eliminated regulation on data networks. Specifically they argued that regulations against inter-LATA service are the single largest barrier to the rapid deployment of a broadband network. The current regulations, they argued limit pricing options for consumers, delay the outgrowth of broadband services, retard innovation, and prevent them from effectively optimizing their networks. Additionally, the other competing providers--unlike themselves--do not have the capability or desire to provide broadband services to all residential consumers.

However, the competitive providers all were vociferous in their arguments that the FCC should not reduce the amount of regulations on data traffic since it is these same data restrictions that are bringing about competition in broadband technologies and easing these regulations would harm this nascent competition. The competing providers pointed to the growth in xDSL deployment as evidence. They cited the competition of xDSL and other high-speed data services (cable modems) in the marketplace is what compelled the ILECs into offering xDSL services to consumers.

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Topics covered in the HELLERSTEIN REGULATORY REVIEW were chosen because of their interest to the work of Hellerstein & Associates. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com .