A Case for Structural Separation

Current rule changes being considered by the FCC—and favored by its chariman—may threaten the very existence of many CLECs. Members of ISP CLEC offer a novel twist on the concept of separate versus shared infrastructure.

[January 24, 2003]

On the ISP-CLEC list in January, EL posted—without comment—the following clip from the Wall Street Journal:

"FCC RULE CHANGE WOULD AFFECT PHONE COMPANY COMPETITION The Telecommunications Act of 1996 forced the regional Bells, which had monopolies on local phone service, to open their networks to other companies, fostering competition in the otherwise closed markets. A proposal to the Federal Communications Commission (FCC) would change that rule, forcing every phone service provider to have its own network or to negotiate deals with the Bells. Supporters of the change, including FCC Chairman Michael Powell, argue that competition should be predicated on separate companies' owning separate networks and that competition will increase as new networks are built and as cable companies increase their share of the market. Long-distance carriers that depend on access to the networks of the regional Bells contend that the proposed rule change would reward the regional Bells without encouraging competition." Wall Street Journal, 6 January 2003

CF jumped in with the following modest proposal:

"Powell isn't all wrong. There should be seperate networks. So lets try to separate the Bells from their networks. It is called 'structural separation.' Make them give up their networks to a third party which would treat all 'phone companies' equally."

FG picked up the ball and ran with it—and ran, and ran:

"I agree; the trick is to do it in the right place. The big resellers of the world—and some ILECs, perhaps, who see this for the charade it is—want the entire network left intact and sold 'wholesale,' while ILEC marketeers and back offices compete with CLEC marketeers and back offices for subscriber services (I'm not sure the word 'customer' applies in the ILEC case). That's how 'resale' began; I think the first such 'structural separation' was cooked up by Rochester Telephone some years ago.

I prefer an alternative, wherein the split is 'outside plant and buildings' vs. 'inside plant.' There's a genuine 'natural monopoly' in the outside plant space. Eexcept for special cases, such as very-high-density industrial and office sites, there's no way to competitively overbuild the loop plant. There's also a natural monopoly in interoffice facilities, again except perhaps in some metropolitan cores. These are both accessed in wire center buildings. On the other hand it's much easier to have competitive facilities for switching and other higher-level services. These are dependent on the outside plant.

So the OSP (which has a lot of debt associated with it, as well as a fat cash flow to cover it) should be moved to a separate regulated entity. The ILECs then become collocators equivalent to CLECs, with equal access to the OSP. The OSP company also operates DLCs and remote-terminal DSLAMs on a competitively neutral basis, wherever (but only where) a service-LEC (the old ILEC or a CLEC) requests it."

[WK commented more seriously:] "I agree. I personally think that most cities should have ownership of the cable networks (telco and CATV) and hire people to maintain the lines instead of having an individual Regional Bell Operating Company (RBOC) handling the wire. Almost seems that people would have less problems with the RBOC playing with jumpers, etc., when they've been tagged as a CLEC to get their own customer back online first. I also, however, think that there needs to be a neutral point where any 'service provider' can interconnect to a piece of equipment or directly to the cable to provide a service to an end-user without being charged excessively for the facilities. Overall, I think this would help increase competition as well as establish the seperation of networks."

[RB had the last sober word:] "The WSJ article was highly misleading.

Negotiating deals violates the 1996 Telecom Act. It clearly specifies non-discriminatory access.

The FCC will be bogged in legal battles for years to come."

— End