Backgrounder
2004: The Year of Telecommunications

By Seema M. Singh, Esq.
Director, The New Jersey Division of the Ratepayer Advocate

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        The Federal Telecommunications Act of 1996 was intended to open all telecommunications markets to competition so that consumers could enjoy the benefits of increased choices, reduced prices, expanded services, and enhanced technology and innovation.  The Federal Act significantly altered the legal and regulatory framework governing the marketplace for local exchange telecommunications services. 

        Throughout the country, prior to the implementation of the Federal Act, each local market was served by one local exchange carrier, or LEC.  In most areas of New Jersey, the LEC provider was and remains Verizon-New Jersey.  But today, large and small businesses as well as residential customers have many choices for telecommunication services from multiple providers.  As you can see from the price wars in the media, competition has lowered prices for consumers for telephone and broadband services. 

        The Federal Act, and its corresponding regulations implemented in New Jersey by the Board of Public Utilities, were intended to eliminate prior statutory, regulatory, and economic barriers to competition which resulted in a virtual monopoly for Local Exchange Carriers. 

        As expressed throughout the Federal Act, Congress envisioned competition in the local telephone market developing in three ways through:

(1)                           facilities-based competition—construction of new networks by competing carriers;

(2)                           unbundled network elements, or commonly referred to as UNEs—the ability of competitors to purchase elements of the incumbent local telephone carrier’s network and combine them with their own facilities;

(3)                           resale of existing Local Exchange Carrier services. 

        While some of the above terms may seem confusing, they all serve to achieve a specific goal: the seamless opening of the market to competition.  UNEs, for example, include all the parts of the telephone network that are used for the transmission of a phone call. 

        By permitting competitors access to all or parts of the incumbent carrier’s network for a fee so that competitors can rent the existing network, Congress sought to open the local markets to competition.  Congress did not want each competitor to build its own networks from scratch, as this would be prohibitively expensive and time-consuming. Congress wanted numerous options available to Competitive carriers to jump start competition in the local markets. 

        As a result, some competitors have chosen to build all or certain parts of the network themselves and want access to only portions of the incumbent’s network.  While other competitors have chosen to buy all of an incumbent’s network at a discount, and then resell the service.

        The Federal Act also established the pricing standards, which states are to consider when setting the rates at which the incumbent must offer access to its network through UNEs.  The state must base the rate on a forward-looking cost, or, the cost, which would be required to build an efficient network today.  The UNE rates that competitors pay affect whether consumers have a choice of providers.  Consequently, the New Jersey Board of Public Utilities took a gigantic step in fostering local competition through its revisiting of UNE rates in New Jersey in 2002.  In 1997, the Board had initially set the statewide average loop rate at $16.21 per month.  By setting this charge at almost twice Verizon-New Jersey’s price of local service, which is $8.19 per month, local competition could not develop. 

        In 2002, the Board substantially reduced UNE rates in New Jersey including the rates for lines used by large and small businesses.  The statewide average was reduced from $16.21 to $9.52 for a typical unbundled loop.  The Board also made other price reductions for crucial UNEs, including local switching and transport.  The Ratepayer Advocate actively participated in these proceeding and the Board adopted many of our recommendations.  Now, residential customers and large and small businesses have numerous carriers marketing to them.  Consistent with these increased options, the Board reclassified multiple business lines as a competitive service as part of the Alternative Form of Regulation Plan approved in 2002.

There are three major issues that will be addressed in 2004, which are important for the continued growth of competition and the prospects of more choice, technological innovations, and lower prices for consumers.  These are (1) the implementation of the Triennial Review Order (TRO) by the Board, (2) the FCC’s decisions as to whether revisions to the UNE pricing methodology are necessary or warranted, and (3) the regulatory classification of Voice over the Internet (VOI) Protocol .

 1.         Triennial Review Order (TR0)

        Regarding the TRO, the FCC formulated revised policies, which reflect a principled, balanced approach that promotes competition and deregulation.  The FCC deregulated broadband, making it easier for companies to invest in new equipment and deploy the high-speed services that businesses need and want in order to more effectively compete in the market place.   The FCC continued with its policy that states have a significant and strong role in promoting local competition for all consumers, including residential customers and large and small businesses.

For broadband and advance services, which are important for large and small businesses and residential customers, specifically, the FCC focused on deregulating broadband and attracting new investment by making broadband a top priority and creating proper incentives for new investment in advanced services.  The FCC removed unbundling requirements on all newly deployed fiber, implemented regulatory relief for new hybrid fiber-copper facilities and packet technology, while ensuring continued access to existing copper.   These changes will jump start investment in next-generation networks and facilitate the continued deployment of advanced services to business leading to a new period of growth in telecommunications and most importantly manufacturing. 

In order to promote and preserve local competition, and maintain the role of state commissions, the FCC found that switching - a key UNE-P element - for business customers served by high-capacity loops such as DS-1 will no longer be unbundled based on a presumptive finding of no impairment.  Under this framework, states will have 90 days to rebut the national finding.  However, other changes ensure that large capacity circuits and dark fiber are available to competitors who in turn compete for the telecommunications needs of large and small businesses.

The FCC found that requesting carriers are impaired without access to dark fiber, and high capacity transport, each subject to a review by states to identify whether competing carriers are able to provide their own facilities.  These are the facilities most often used by small and large businesses. However, the FCC found that residential competition requires that the UNE-P, including local switching continue to be available unless certain tests are met.

 2.         Pricing of UNE Elements

            The FCC initiated a proceeding to review and obtain recommendations on whether changes are needed to assist state commissions to set pricing for UNEs and resale discounts.  UNE pricing affects the prices that competitive local exchange carriers purchase network elements from the incumbent local exchange carrier.  UNE pricing has played a crucial role in fostering competition for telecommunication services.  The Ratepayer Advocate is recommending that the FCC establish and designate  for each input used to derive prices what is the floor and what is the ceiling for each input.  This will streamline future proceedings and permit state commissions to balance the need to promote more competition and the need to foster more facilities-based competition.  Without properly set UNE pricing, competition in the residential, small and large business markets cannot flourish and the goals of the Federal Telecommunications Act will not be achieved.

 3.         Voice Over Internet (VOI) Protocol

            Regarding Voice Over Internet protocol, the FCC held a public forum on December 1, 2003 in Washington, D.C. with representatives from Government and industry.  Technical and market issues surrounding VOI were addressed.  There was general consensus that VOI can be used to offer customers lower-cost, innovative services with capabilities previously unavailable in voice communications.  VOI has the potential to offer all consumers the prospect of lower cost alternatives for local, long distance and international services while promoting increased efficiency. 

            VOI essentially turns voice into digitized data and then transmits it over the internet.  The technology to transmit voice is less expensive than traditional telephone technology and also makes it possible to provide a wide range of features, including videophones and being able to monitor phone activity and listen to voice mail from over the internet.

            Public policy questions were also addressed such as if and how VOI should be regulated and what affect VOI may have on social policy such as access by persons with disabilities, universal service, and Enhanced 911. As a matter of fact, in December of 2003, AT&T announced its plans to roll out consumer VOI service over high-speed connections, potentially providing a boost in demand for broadband service.  AT&T is conducting a trial run of this service, with plans for a more substantial rollout early in 2004.  AT&T claims that VOI technology will allow integration of various advanced capabilities and services in addition to standard voice capability. 

            The cable TV industry sees an opportunity here as well.  Time Warner also announced in December of 2003 that it signed a deal with Sprint and MCI to provide this service.  Time Warner said it expected to offer this service by the end of 2004.  In addition to Time Warner, cable giants Comcast and Cablevision have begun deployment of internet phone services.  All of this activity demonstrates just how competitive the telecommunications market has become.

            Many states are now actively involved in determining whether VOI should be regulated at the state level as another form of telecommunications service.  Unless the proper regulatory approach is adopted, a level playing field cannot exist between the telephone networks and the VOI networks.

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 The Division of the Ratepayer Advocate is an independent state agency that represents the interests of utility consumers and serves as an active participant in every case where New Jersey utilities seek changes in their rates or services.  The Ratepayer Advocate also gives consumers a voice in setting long-range energy, water, and telecommunications policy that will affect the delivery of utility services well into the future.

Additional information on this and other matters can be found at the Division of Ratepayer Advocate’s website at http://www.rpa.state.nj.us