ClientAlert - Latham & Watkins · availability of the network element outside of the ILECs’...

Last Thursday, August 21, the FederalCommunications Commission (FCC)released the text of its “UNE TriennialReview” order, a decision the Commissionannounced by 3-2 vote on February 20.1

The order, produced by a fiercelycontested rulemaking begun 20 monthsago, is long, complex and at timesinternally inconsistent. In some instancesit departs from the initial statementsthat were made by FCC personnelwhen the order was adopted. There areextensive separate statements from allfive of the commissioners, four of whomdissented to some parts of the order.

Put simply, this order grants limitedrelief to the incumbent local exchangecarriers (ILECs) from unbundlingrequirements, in such areas as switching(but only for large customers) andbroadband facilities, and delegates tothe states the task of determining whenILECs may be relieved of the remainingobligations. Most significantly, this orderdoes not eliminate the unbundlednetwork element (UNE) platform or“UNE-P” requirement; ILECs alreadyhave commenced new proceedings atthe FCC to obtain relief from that pricingrule for the full network elementsplatform. While the ILECs’ UNEobligations did not expand in anysignificant way, they now will have totake their arguments for relief frommany of the UNE obligations to eachstate in which they operate.

What follows is a brief summary of theFCC’s unbundling standards and themost significant rule changes adoptedby the FCC. In many cases, the orderlacks clarity, and the FCC and thecourts no doubt will have to sort out itsmeaning in further legal proceedings.The order will take effect 30 daysfollowing its publication in the FederalRegister. Appeals may also be takenwithin that time.

Scope of the FCC’s Authorityto Mandate Unbundling

The authority of regulators to orderILECs to provide their competitorsaccess to UNEs is not unlimited. TheFCC may not mandate access to UNEsunless the competitor seeking accesswould be “impaired” in its ability toprovide the services that it seeks tooffer.2 In the past, the FCC also haspermitted state regulators to mandateaccess to a network element even if theFCC had not mandated unbundling ofthat element. In this order, the FCCclarified the relative roles of the federaland state regulators and explainedunder what circumstances UNEs wouldhave to be made available.

The “Impairment” Standard

The FCC made an effort to justify all itsnew unbundling rules in terms

Number 323 August 25, 2003

Client AlertLatham & Watkins Corporate Department

”The order, producedby a fiercely contested rulemakingbegun 20 months ago,is long, complex, andat times internallyinconsistent. In someinstances it departsfrom the initialstatements thatwere made by FCCpersonnel when the order wasadopted.“

FCC Releases Order in UNE Triennial Review—New Procedures Announced forSeeking Relief from Unbundling Requirements

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consistent with a sharply wordeddecision last year from the U.S. Court ofAppeals for the District of Columbia.3

The court had been critical that the FCChad not adequately considered the“impairment” standard describedabove, but instead had adopted rulesthat promoted the broadest possibleunbundling. The court was especiallycritical of the FCC for adopting nationalUNE rules that failed to take intoaccount local differences in marketconditions. Therefore, the new orderrepeatedly cites a much more “granular”analysis of the geographic and productmarkets—for example, dividing the localexchange market between enterpriseand mass market services, examiningthe availability of both wholesale andretail alternatives to the ILEC, anddelegating to the states a significant roleto determine whether “impairment”exists in particular locales.

The FCC also states that it nowrecognizes “the difficulties andlimitations” in UNE-based competition4

and attempts to demonstrate that it hasadopted an “impairment” analysis thatwill limit the amount of unbundlingILECs must do in the future. The FCCthen states its defining principle inexceedingly broad terms, as follows:

“We find a requesting carrier to beimpaired when lack of access to anincumbent LEC network elementposes a barrier or barriers to entry,including operational and economicbarriers, that are likely to make entryinto a market uneconomic.”

This principle appears to impose scantrestraint on regulatory discretion. In fact,the Commission goes on to describe avery broad body of the “barriers toentry” and other market-based evidencethat it considers relevant to theimpairment analysis. In doing so, itrelies heavily on many of the samefactors that it used to justify its priorrules. For example, among the evidencethe FCC says is “most persuasive” inevaluating impairment, it lists theavailability of the network elementoutside of the ILECs’ network—that is, if a new entrant has deployed anelement (e.g., a switch, or transmission

facilities) in a market, then the FCC willconsider this as evidence that barriers toentry in that market are surmountableas to that element. The FCC says thatthis test is not dispositive. TheCommission also says it will notpresume that an absence of competitiveentry means unbundling should berequired (for example, in a nascentmarket).

Role of the States

Under the prior rules the FCC hadpermitted the states to add to the list of required UNEs, without a finding bythe FCC that an element met the“impairment” standard. In this order,the FCC curtails at least to some degreethe ability of the states to adoptunbundling obligations outside theframework created by the FCC; thescope of their discretion remainsunclear. Where the FCC has adopted anational unbundling requirement, itseems the states are forbidden frommodifying or eliminating it, except asexpressly provided by the FCC, andwhere the FCC has not required accessto a particular UNE, the states’ ability torequire access also appears to be limitedto the specific circumstances enunciatedby the FCC (as discussed below).5

However, the FCC does not clearlyprohibit the states from adding to thelist of required UNEs. Rather, stateunbundling decisions may not“‘substantially prevent’ theimplementation of the federal regulatoryregime.”6 States are to bring existingrules into conformity with the FCC’srules.7

As to any of the network elements thatthe FCC has specified the states shouldevaluate, if a state “fails to perform thegranular inquiry” prescribed by theFCC, any party may petition the FCC tostep in and perform the analysis in thestate’s place. The Commission willplace such a request on public noticeand decide within 90 days whether ornot to exercise jurisdiction over thematter. If the FCC does take the case, itwill make a decision within 90 daysfrom the date it assumes jurisdiction inthe case of petitions concerning

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Latham & Watkins | Client Alert

switching used in the enterprise marketat DS1 or greater capacity, and withinnine months in all other cases.8

Eligibility to Purchase UNEs

The FCC clarified that requesting carriersmay only purchase UNEs in order tooffer a qualifying telecommunicationsservice. Qualifying telecommunicationsservices include those offered bycompetitors that “have been traditionallywithin the exclusive or primary domainof incumbent LECs,” specificallyincluding local exchange services suchas POTS and local data services, accessservices such as xDSL and high-capacitycircuits. The FCC clarified that CMRSproviders are entitled to purchase UNEsto provide CMRS, because that serviceis used to compete againsttelecommunications services that havebeen traditionally within the exclusiveor primary domain of the ILEC.9

Once a requesting carrier obtains theUNE to provide a qualifyingtelecommunications service, it may usethat UNE to provide any otheradditional services it chooses.10

Specific Unbundling Rulesfor Network Elements:Unbundled Loops

For purposes of the loop unbundlingrequirements, the FCC distinguishesbetween the use of UNEs to serve themass market (residential and smallbusiness users of analog loops, DS-0loops, or DSL-capable loops) and toserve enterprise users (medium andlarge businesses using sophisticatedtelecommunications services, such asloops of DS-1 or greater capacity).

For service to enterprise customers,ILECs no longer must provide UNEaccess to any lit, optical capacity-level(OC-n) loops.11 In general, however,ILECs must continue to provide accessto unbundled DS-1 loops, DS-3 loops(up to two loops per customer) and darkfiber loops unless the state finds that acompetitor will not suffer impairmentfrom the lack of such access. A state’sfinding of “no impairment” must be

based on FCC-defined triggersmeasuring the availability ofalternatives to the ILEC’s loops at thecustomer location in question.

DS-1 Loops.12

To determine that an ILEC no longermust provide DS-1 UNE loops to aparticular location, the state must findthat the location meets both prongs of anew competitive wholesale facilitiestrigger.13 This test is met when each oftwo or more competing providers notaffiliated with each other or the ILEC:(a) has deployed it own facilities andoffers a DS-1 loop over those facilitieson a “widely-available wholesale basisto other carriers desiring to servecustomers at that location”;14 and (b) hasaccess to the entire customer location,including each individual unit withinthat location. In applying this test, thestate may count intermodal providers ofservices comparable in quality to theILEC’s.

DS-3 Loops.15

To determine that an ILEC no longermust provide DS-3 UNE loops to aparticular location, the state must findthat the location satisfies thecompetitive wholesale facilities trigger(identical to the above, except therelevant facilities are DS-3s), the self-provisioning trigger or the potentialdeployment analysis.

The self-provisioning trigger requiresthe state to find that each of at least twocompeting providers not affiliated witheach other or the ILEC is servingcustomers at a location using: (a) its ownDS-3 facilities it has deployed at thatlocation; or (b) dark fiber it has acquiredunder a long-term IRU and to which ithas attached its own optronics.16

The potential deployment analysisrequires the state to consider whetherother evidence shows that a CLECwould not suffer impairment from thelack of access to DS-3 UNE loops at aparticular location, considering“evidence of alternative loopdeployment at that location; localengineering costs of building andutilizing transmission facilities; the cost





of underground or aerial laying of fiberor copper; the cost of equipment neededfor transmission; installation and othernecessary costs involved in setting upservice; local topography such as hillsand rivers; availability of reasonableaccess to rights-of-way; building accessrestrictions/costs; and availability/feasibility of similar quality/reliabilityalternative transmission technologies atthat particular location.”17

Dark fiber loops.18

To determine that an ILEC no longermust provide DS-3 UNE loops to aparticular location, the state must findthat the location meets the self-provisioning trigger or the potentialdeployment analysis. These two testsare identical to the analogous testsdescribed for DS-3 facilities, above,except that the relevant facility is darkfiber. In applying these tests, states mustcount competitors that use dark fiberacquired under a long-term IRU, but maynot count competitors that acquired darkfiber on a UNE basis from the ILEC.

Deadline for State Action:19

The FCC mandated that statecommissions complete their initialreviews applying the triggers outlinedabove within nine months of theeffective date of the Order. UnbundledDS-1s, DS-3s, and dark fiber loops mustremain available during this initialreview period, and the state maymandate an appropriate transitionperiod where it finds that one or more ofthe triggers are met. If the state fails tocomplete its review within the nine-month period prescribed, any aggrievedILEC may petition the FCCdemonstrating this failure. After thestate completes this initial review, itmust conduct further reviews, actingwithin six months of the filing of apetition or similar pleading under state-prescribed procedures.

For service to mass market customers (DS-0 and smallercapacity loops): The FCC requires continued unbundlingfor copper loops and sub-loops and, to

a limited degree (for a voice-gradecircuit), in fiber or hybrid facilities. No unbundling is required of packet-switched broadband facilities.

Copper Pairs and AssociatedElectronics.20

The ILEC must provide UNE access toall types of two-wire and four-wirecopper loops, including any associatedtime-division multiplexing technology.

The FCC eliminated line sharing as aUNE, but indefinitely preserves all linesharing arrangements existing beforethe effective date of the Order, at theexisting rates, subject to review in the2004 Biennial Review under Section 11of the Communications Act. CLECs maycontinue to purchase additional linesharing arrangements to serve newcustomers for one year after the Order’seffective date. ILECs are only requiredto keep these new line sharingarrangements in effect for three yearsafter the effective date of the Order andthe rate (for line sharing used to servethese new customers only) ramps up inequal steps over the next three years, sothat in Year 1, the rate is 25 percent ofthe UNE loop rate; in Year 2, it is 50percent of UNE loop rate; and in Year 3,it is 75 percent of UNE loop rate. Afterthree years, market pricing will prevailas ILECs will no longer be required tooffer line sharing UNEs that CLECsrequested after the effective date of theOrder.21

The ILEC must provide CLECs with theability to engage in line splitting withanother CLEC, an arrangement underwhich one CLEC provides the voiceservice and the other CLEC providesxDSL using the upper frequency portionof the same loop. The ILEC’s obligationto provide line splitting applies withoutregard for whether the voice CLECpurchases UNE switching, and the ILECmust ensure that its OSS can handlepre-ordering, ordering, provisioning,maintenance, repair and billing of linesplitting arrangements.22

With respect to line conditioning, theILEC must, at the CLEC’s request,condition the loop for DSL. ILEC maycharge for this service based on

forward-looking pricing principles. ILECmust test and report troubles for allfeatures, functionalities, and capabilitiesof the conditioned loop, not just voicefrequencies.23

For maintenance and testing, the ILECmust provide physical loop test accesspoints at the splitter, through a cross-connect to the CLEC’s collocation space,or through a standardized interface.24

Hybrid Loops.25

For hybrid copper-fiber loops, the ILECdoes not need to provide unbundledaccess to any packet-switched featuresor functionalities of the loop, includingaccess to features and functionalities ofa DSLAM, xDSL-capable line cardsinstalled in a digital loop carrier systemor passive optical networkingequipment.

The ILEC, however, must provide, on an UNE basis: (a) access to the coppersubloop between the customer’spremises and a remote terminal; (b) access to the TDM features andfunctionalities of the loop necessary toestablish a complete transmission pathto the ILEC CO, including DS-1 or DS-3capacity, unless the state has found thatone of the no-impairment tests describedbelow has been met; and (c) Fornarrowband services, either a DS-0-equivalent transmission path using TDMtechnology between the customer’spremises and the ILEC CO, a sparecopper loop serving the customer’spremises or, if neither of these options isavailable, some other technically-feasible method of obtaining unbundledaccess.

Fiber-to-the-Home Loops.26

ILECs are not required to provide UNEaccess to newly-constructed 100 percentfiber loops serving residential end userpremises. If the ILEC deploys the FTTHloop to replace an existing loop, theILEC must provide UNE access to a 64kbps channel on the fiber loop if itretires the copper loop. Upon request, ifit leaves the copper in the ground, itmust provide UNE access to the copperloop and return it to serviceablecondition. Before the ILEC retires the

copper loop, it must provide notificationto competitors of the network change,allowing competitors an opportunity toobject. In addition, the ILEC mustcomply with any approval or notificationprocedures states impose for loop plantretirements.

Access to Inside Wiring inMulti-Unit Premises

The FCC’s Order requires ILECs tounbundle subloops, including insidewire subloops, and NIDs. Specifically,ILECs must provide their competitorsunbundled access to subloops so thatthe competitors are able to access allcustomers residing in multiunit premises,regardless of the type or capacity of theloop the competitor will provide.27

Recognizing that the FCC’s prior orderscould be interpreted as requiring acompetitor to choose collocation as itsmethod of interconnection in order toobtain a subloop, the FCC’s Order nowmakes clear that ILECs are required toprovide subloops to access multiunitpremises without collocation.28

Network Interface Devices(NIDs)

The FCC’s Order imposes three specificunbundling obligations regarding accessto NID functionality:

First, ILECs must provide competitorswith access to the NID on the ILEC’sside of the network on a stand-alonebasis, thereby allowing competitors toconnect their own loop facilities to thepremises wiring at any customerlocation.29

Second, ILECs are prohibited fromimposing a separate charge for NIDfunctionality in those cases where theNID is a component of an unbundledend-to-end loop or a subloop. Rather,such charge should be included in theoverall unbundled loop or subloopcharge.30

Third, the FCC’s rules prohibit an ILECfrom imposing a charge on a competitorin those instances where the competitorhas constructed its own NID at thepremises and only needs to make



contact with the ILEC to disconnect thecustomer’s wiring on the customer’s sideof the NID and to reconnect the insidewiring to the competitor’s NID.31 TheFCC concluded that, under thesespecific circumstances, the competitor isnot accessing the ILEC’s NID as a UNE;thus, it would violate the FCC’s rules torequire that the ILEC’s technician bepresent during the disconnect and toimpose a charge on the competitor tomake contact on the “non-network sideof the NID.”32

UNE Combinations(Including EELs)

The FCC will continue to require theILEC: (1) to provide UNEs in a mannerthat allows the CLEC to combine themto provide a telecommunications service;(2) not to separate network elementsthat it currently combines; (3) to combineelements at the request of a CLEC,provided that the combination istechnically feasible and will not impairthe ability of other CLECs to obtainaccess to UNEs or interconnect with theILEC’s network; and (4) to combineUNEs with the elements the CLECalready possesses, unless the combinationis not technically feasible.

The Order modifies the obligation tooffer access to a particular UNEcombination known as the enhancedextended link (EEL), which is acombination of an unbundled loop andunbundled transport, with or withoutmultiplexing capability. The FCCpreviously prohibited the comminglingof EELs with other facilities that therequesting carrier obtained at wholesalefrom an ILEC other than throughunbundling; the Order now lifts thatprohibition and requires ILECs to allowCLECs to engage in suchcommingling.33

Before purchasing DS-1 or DS-3 EELs,the requesting carrier must now certifythat a series of conditions, designed toprevent “gaming” and ensure the EELis used at least in part for local voiceservice, are met.34 Among other things,these conditions require the CLEC to

obtain a state certification to providelocal voice service, assign local numbersto the EEL circuits, pass ANI information,and terminate EELs to local collocationarrangements.

The FCC previously had limited theILECs’ obligation in order to prevent theuse of EELs for unintended bypass ofaccess charges by inter-exchangecarriers; thus, ILECs only had to makeEELs available to those carriers thatprovide “a significant amount of localexchange service” to the customer. Thenew rules appear to retain the policyunderlying the former restriction whileclarifying the eligibility standard.

Unbundled Local CircuitSwitching

In the Order, the FCC adopted separatestandards for access to unbundled ILEClocal circuit switching for (i) enterprisecustomers (customers using DS-1 capacityand higher) and (ii) mass marketcustomers (customers using DS0, voice-grade circuits or DSL).

Enterprise Customers: The FCC makes a national finding thatthe ability of competitors to serveenterprise customers is not impairedwithout circuit switching.35 However, theFCC recognizes that competitors couldbe impaired without switching withrespect to enterprise customers incertain markets.36 Therefore, statecommissions have 90 days from theeffective date of the Order to petitionthe FCC to rebut the national finding inindividual markets based on specificoperation and economic evidence.37

Mass-Market Customers: The FCC finds that competitive carriersare impaired without access to circuitswitching due to operational andeconomic barriers caused by the “hotcut” processes currently implementedby ILECs.38 Recognizing hot cutprocesses as a substantial cause ofimpairment, the FCC implementsprocedures to mitigate the causes ofswitching impairment.



Within 9 months of the effective date ofthe Order, states must approve andimplement a “batch cut” migrationprocess to transfer large volumes ofmass-market customers in a cost-effectiveand seamless manner.39 Alternatively,states may issue detailed findings that abatch cut process is unnecessary in aparticular market because the ILEC’shot cut processes do not give rise toimpairment. For instance, this may bethe case in small, rural markets wherethe number of requests is low.40

In addition, the Order directs statecommissions to apply specific triggers toevaluate whether impairment existswith respect to switching in specificmarkets.

Under the new rules, state commissionsmust find “no impairment” wherethere are 3 or more competingcarriers each serving mass marketcustomers in a particular market withthe use of their own switches.41 Evenif this trigger is satisfied, the statecommission still may find competitorsto be impaired where it findsexceptional circumstances that causea significant barrier to entry even tocarriers that self-provision switches.42

The state commission must also find“no impairment” where there are 2 ormore competitive wholesale providersthat are unaffiliated with the ILECand each other in the market, eachoffering wholesale local circuitswitching using their own switches to mass market customers.43

If neither of the above triggers issatisfied, the state commission mustconduct further analysis to determinewhether the market is suitable forcompetitive deployment even though nothree carriers have in fact provisionedtheir own switches.44 As part of thisanalysis, the FCC requires states toevaluate evidence of actual competitivedeployment of switches and operationaland economic barriers to entry.45 TheOrder sets forth criteria for states todefine specific markets and to evaluateoperational and economic factors. If thestate commission finds impairment, theOrder requires consideration of whether

such impairment can be remedied by anarrower rule that makes unbundledswitching temporarily available for aminimum of 90 days for customeracquisition purposes, rather than for anindefinite period.46

The Order requires states to makeperiodic reviews of impairment forunbundled local switching.47 The Orderindicates that the FCC will provideguidance to and exercise oversight ofstates as they make impairmentdeterminations with respect to switching.If a state commission fails to completethis granular inquiry, an aggrieved partymay file a petition with the FCCdemonstrating the failure.48

Packet Switching

The FCC entirely removed packetswitching as a stand-alone UNE on anational level. The limited availability ofpacket switching under the existingrules will no longer be required.49

Dedicated Tranport

The Commission limited its definition ofthe dedicated transport networkelement to those transmission facilitiesconnecting ILEC switches or wirecenters.50 This limitation represents anarrowing of the previous definition toreflect the distinction between theeconomics of dedicated facilities usedfor backhaul between networks andtransport within an ILEC’s network.

Impairment: The Commission conducted itsimpairment analysis of dedicatedtransport on a capacity basis. Thus theCommission made different findings ofimpairment or non-impairment basedupon the following capacity levels: OC-n, DS-3, DS-1 and dark fiber transport.51

OC-n Transport. The Commission found on a nationallevel that requesting carriers are notimpaired without access to unbundledOC-n transport facilities. Thus, nounbundling of OC-n is required.52



DS-3 Transport. The Commission finds that requestingcarriers nationally are impaired withoutaccess to unbundled DS-3 transport.53

This determination is subject to statereview to determine where competitivecarriers are not impaired without accessto ILEC unbundled DS-3 transport on aroute-specific basis.54 States may find noimpairment, as described below, undereither of two triggers. A requestingcarrier may not obtain more than 12unbundled DS-3 circuits along a singleroute.55

DS-1 Transport. The Commission found on a nationallevel that requesting carriers areimpaired without access to unbundledDS-1 transport facilities.56 Thisdetermination is subject to a statereview as described below.

Dark Fiber Transport. The Commission found on a nationallevel that requesting carriers areimpaired without access to unbundleddark fiber transport facilities.57 Thisfinding also is subject to the two-triggerstate review described below.58

Two-Trigger Review: This order creates two triggers by whichan ILEC can show in a route-specificstate review proceeding that a requestingcarrier is not impaired without unbundledDS-3, DS-1 or dark fiber transport. Astate must find non-impairment as toany particular point-to-point route if thestate finds either that a newly-definedtranport self-provisioning trigger or thetransport third party alternative triggerhave been met.

The transport self-provisioning triggerrequires the state to find that it iseconomical for the requesting carrier toself-provision transport facilities, asevidenced by three carriers, in additionto the ILEC, each having made sunkinvestments in transport facilities on theroute.59 Because the FCC concluded thatcompetitors generally cannot self-provision capacity at the DS-1 level, itheld that the transport self-provisioning

trigger should not apply at the DS-1level.60

The transport third party alternativetrigger requires the state to find thatcarriers have the ability to use two ormore carriers, in addition to the ILEC, as wholesale alternatives to the ILEC’snetwork on the route.61

Deadline for state action: States are expected to complete theirinitial reviews applying the triggerswithin nine months of the Order’seffective date.62 States may set an“appropriate” period for competitiveLECs to transition off UNE transportafter a finding of no impairment.63 To theextent that a state does not complete itsreview as required, a party may file apetition with the FCC demonstrating thestate’s failure to comply with theseprocedures.64 After the completion of theinitial reviews, states must conductfurther reviews to identify additionaltransport routes where no impairmentexists, and these must be completedwithin six months.65

Shared Transport

The FCC found that requesting carriersare impaired without access to unbundledshared transport only to the extent thatthe Commission finds that the carriersare impaired without access to unbundledswitching. Thus, carriers must unbundleshared transport only to the extent thatthey continue to be required tounbundled local circuit switching.66

Signaling and Back-OfficeOperations

Signaling Networks: In circumstances where an ILEC isrequired to provide access to switchingas a UNE, carriers purchasing theswitching UNE must also have access toILEC signaling. In all other instances,the FCC found that competitive LECs,on a national level, are no longerimpaired without access to signalingnetworks.67 The FCC found that there



are multiple alternative providers ofsignaling services; the Order reiterates,however, that ILECs are obligated underthe statute and the rules to provideinterconnection between signalingnetworks and the signaling networks ofalternative providers.68

Call-Related Databases: The FCC concluded that, on a nationalbasis, competitive carriers that deploytheir own switches are not impaired inany market without access to the ILEC’scall-related databases used in signalingnetworks for billing and collection or forthe provision of telecommunicationsservices. The FCC found that carriersdeploying their own switches have asubstantial number of reliable,competitive alternatives to the ILECs’call-related databases, except withrespect to 911 and E911 databases.69

Competitive carriers continue to beimpaired on a national basis withoutaccess to the 911 and E911 databases;thus, access to these databases mustcontinue to be unbundled.70 As withsignaling networks, carriers thatpurchase switching as a UNE will alsoobtain unbundled access the ILEC’s call-related databases.

OSS Functions: The Order maintains the availability ofoperations support systems (OSS)functions to competitive carriers asUNEs.71 The FCC reasons that OSSfunctions represent an extensiveinfrastructure that would be nearlyimpossible for competitors to duplicate,and there is no evidence of anyavailable alternatives.72

Rules Related to Negotiationof UNE Agreements

Duty to Negotiate in Good Faith: TheFCC rules are amended to provide thata new entrant may withhold informationabout its own costs when negotiationsconcern unbundling or leasing of theILEC’s network rather than the newentrant’s network.73

Transition periods: Other than the transition period adoptedfor line sharing, discussed above, theFCC declined to establish a formaltransition period to implement theprovisions of the Order. Rather, it statedthat individual carriers should be allowedthe opportunity to negotiate specificterms and conditions to implement theOrder’s rules.74 However, the FCC appliedsection 252(b) as a default timetable formodification of interconnectionagreements and called upon carriers tocomplete these negotiations in goodfaith. Thus, the effective date of therules adopted in the Order is deemedthe “notification” or “request” date forcontract amendment notifications.75

Where a negotiated agreement cannotbe reached, parties may submit requestsfor state arbitration between 135 and160 days after the Order becomeseffective.76 The states are required tocomplete their consideration of suchdisputes within nine months of theeffective date of the Order.77

Modification of ExistingNetworks

Existing FCC rules require ILECs tomake routine network modifications tounbundled transmission facilities used byrequesting carriers where the requestedtransmission facility has already beenconstructed. “Routine networkmodifications” are defined as activitiesthat the ILEC regularly undertakes forits own customers, including rearrangingor splicing cable, and adding orreconfiguring multiplexers.78 The rulesalso require line and loop conditioning(as necessary) to make unbundled loopsxDSL-capable, and this Order finds thatcompetitors continue to be impairedwithout access to such conditioning.79

This order clarifies that an ILEC’s UNE obligation to perform routinemodifications to network facilities doesnot include construction of new lines fora requesting carrier.80 Rather, the FCCclarified, ILECs are not required toconstruct new loop or transmissionfacilities at the behest of a requestingcarrier so that the requesting carriers



can access them as UNEs. Requestingcarriers may, however, purchase suchfacilities in accordance with ILECspecial construction tariffs, includingany tariffed termination liabilities thatapply. The Commission explicitly rejectsthe requests of competitors for relieffrom termination liabilities for specialconstruction.81

UNE Pricing Rules

While this order addresses only theobligation to unbundle, and not theprice at which UNEs must be madeavailable, the FCC did use thisopportunity to clarify two aspects of its“total element long-run incrementalcost” (TELRIC) pricing standard forUNEs.

Cost of Capital: The Order clarifies that the “cost ofcapital” component of TELRIC pricingshould reflect (i) the risks that exist in amarket in which there is facilities-basedcompetition, not the actual competitiverisk the ILEC currently faces in providingUNEs;82 and (ii) any unique risksassociated with new facilities thatemploy new technology and offer newservices.83 This second clarificationallows states to consider the use ofdifferent costs of capital for differentelements, but does not foreclose a partyfrom proposing a single cost of capitalfor all UNEs that appropriately reflectsthe risks associated with competitivemarkets for the services provided overILEC networks.84

Depreciation: The FCC clarified that the rate at whichassets can be depreciated over theiruseful life, a factor in TELRIC pricing,should reflect the competitive nature ofthe market in which the assets are used.The Commission rejected requests bythe large ILECs to mandate the use ofthe same depreciation lives reflected intheir financial reporting. However, theCommission recognized that states areusing straight-line depreciation, ratherthan accelerated depreciation thatreflects the anticipated decline in the

value of assets in a competitive market.The FCC held that the depreciation rateunder TELRIC should reflect the actualdecline in value that would be anticipatedin the competitive market TELRICassumes. The goal is to replicate theresults that would be anticipated in acompetitive market, according to theFCC. Under this “economicdepreciation” requirement, a carriermay accelerate recovery of the initialcapital outlay for an asset over its life toreflect any anticipated decline in itsvalue.85

“Pick and Choose” To BeRevisited

The FCC requested further comment onwhether it should reconsider its rulesimplementing section 252(i) of theCommunications Act, which permitscompetitive carriers to opt into individualportions of interconnection agreements.86

The Commission tentatively concludedthat a modified approach would betterpromote the goals of section 252(i), andproposed changing the rule to permitthird parties to opt into negotiatedinterconnection agreements only in theirentirety. Under the FCC’s proposal, oncean ILEC has in place a statement ofgenerally available terms (SGAT) whichfunctions as a substitute for aninterconnection agreement, the ILECwould be free to negotiate alternativearrangements with competitive carrierswithout being subject to the old “pickand choose” rule.87

Effective Dates

The FCC’s rules will be effective 30days following publication in the FederalRegister of this order, unless the FCC ora court issues a “stay” prohibitingenforcement of the rules while they arebeing reviewed.

Comments on the FCC’s Further Noticeof Proposed Rulemaking on the “pickand choose” rule will be due 30 daysfollowing publication in the FederalRegister as well.

The FCC declined to adopt a “sunset”date for these rules.88 Rather, the

10 Number 323 | August 25, 2003


Commission is scheduled to reexaminethese rules in 2004, as part of its biennialreview of all regulations, to determine if“documented changes” in the marketmerit modifications to the rules.89

Endnotes1 See Review of the Section 251 Unbundling

Obligations of Incumbent Local ExchangeCarriers, CC Docket No. 01-338, Report andOrder on Remand and Further Notice ofProposed Rulemaking, FCC 03-36 (rel. Aug. 21, 2003); “FCC Decision in the UNETriennial Review,” Client Alert, Latham &Watkins LLP, March 10, 2003 (available at:www.lw.com).

2 47 U.S.C. §251(d)(2)(B).3 USTA v. FCC, 290 F. 3d 415 (D.C. Cir. 2002);

reh’g denied, (D.C. Cir. 2002), 2002 U.S. App.Lexis 18832 (D.C. Cir. Sept. 4, 2002). cert.denied sub nom.WorldCom, Inc. v. USTA, 123 S.Ct. 1571 (2003).

4 Order ¶ 3 (“We are very aware that excessivenetwork unbundling requirements tend toundermine the incentives of both incumbentLECs and new entrants to invest in new facilities and deploy new technology.”).

5 Order ¶¶ 187-89.6 Order ¶ 193.7 Order ¶ 195.8 Order ¶ 190.9 Order ¶ 135-140.10 Order ¶ 143.11 Order ¶¶ 315-319.12 Order ¶¶ 325-327.13 Order ¶¶ 337-338.14 47 C.F.R. § 51.319(a)(4)(ii)(A).15 Order ¶¶ 320-324.16 Order ¶¶ 332-334.17 47 C.F.R. § 51.319(a)(5)(ii); Order ¶ 335.18 Order ¶¶ 311-314. 19 Order ¶¶ 339-340.20 Order ¶¶ 248-250.21 Order ¶¶ 255, 264-265.22 Order ¶¶ 251-252.23 Order ¶ 268; 47 C.F.R. § 51.319(a)(1)(iii).24 Order ¶ 268; 47 C.F.R. § 51.319(a)(1)(iv).25 Order ¶¶ 288, 296-297.26 Order ¶ 273, 281-284.27 Order ¶ 347.28 Order ¶350.29 Order ¶ 353.30 Id.

31 Id.32 Id.33 Order ¶¶ 579-582.34 Order ¶¶ 597-611; 47 C.F.R. § 51.318(b-d).35 Order ¶ 451.36 Order ¶ 454.37 See Order ¶¶ 456, 457.38 Order ¶ 459.39 Order ¶ 460.40 Order ¶ 490.41 Order ¶ 501.42 Order ¶ 503.43 Order ¶¶ 504-505.44 Order ¶506.45 Order ¶¶508-520.46 Order ¶ 524.47 Order ¶ 526.48 Order ¶ 527.49 Order ¶ 537.50 Order ¶ 365.51 Order ¶ 380.52 Order ¶ 359.53 Order ¶ 386.54 Order ¶ 389.55 Order ¶ 388.56 Order ¶390.57 Dark fiber is defined as fiber optic cable

transport facilities without any activated electronics that would render them capable of carrying communications. Order ¶381.

58 Order ¶384.59 Order ¶¶ 399-400.60 Order ¶ 409.61 See id.62 Order ¶ 417.63 Order ¶ 417.64 Id.65 Order ¶ 418.66 Order ¶ 534.67 Order ¶ 544.68 Order ¶ 548, citing 47 U.S.C. §§ 251(a),

251(c)(2).69 Order ¶ 551.70 Order ¶ 557.71 Order ¶ 562. The Commission did not modify

the definition of OSS.72 Order ¶ 564.73 See 47 C.F.R. §51.01(c)(8)(ii). 74 Order ¶ 700.

11 Number 323 | August 25, 2003


75 Id.76 See id.77 See id.78 Order ¶¶ 632, 634. 79 Order ¶ 642. 80 Order ¶ 632.81 Order ¶¶645-648.82 Order ¶¶ 680, 681.

83 Order ¶ 683.84 Order ¶ 684.85 Order ¶¶ 685-691. 86 Order ¶¶713, 720, 725.87 Id.88 Order ¶711.89 Order ¶710.

12 Number 323 | August 25, 2003


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