United States: Communications Law Bulletin -- October 2005

October brought several important developments in the telecommunications world, including final approval by the Department of Justice and Federal Trade Commission ("FTC" or "Commission") of mergers involving the four largest local and long-distance telephone companies in the United States. The FCC also responded to the aftermath of Hurricane Katrina, and fallout continued from the Commission’s Triennial Review Remand Order. These and other events are covered here, along with our usual list of deadlines for your calendar.

After many months of proceedings before the Department of Justice, FTC and various state commissions, the mega-mergers of SBC Communications Inc. ("SBC") with AT&T Corp. ("AT&T") and Verizon Communications Inc. ("Verizon") with MCI, Inc. ("MCI") appear to have cleared the most important regulatory hurdles imposed by federal law.

Department of Justice approval of the mergers was announced on October 27, 2005, and was conditioned upon divestment of the merged companies’ fiber optic lines to competitors in 19 metropolitan areas.

The FCC’s approval of the mergers was announced at the Commission’s open meeting on October 31, 2005. In its press release announcing its decision, the Commission stated that the mergers will benefit the public by giving the merged companies "increased economies of scale and scope, which should increase their incentives to engage in basic research and development." The Commission also concluded that the mergers "should result in substantial cost savings, which should benefit consumers throughout the country."

The FCC also chose to adopt, as mandatory conditions, a number of commitments that the parties had offered to make. Specifically, the FCC press release lists the following merger conditions:

• The applicants committed not to seek an increase in state-approved rates for unbundled network elements (UNEs) for two years (except for rates that are subject to current appeals in specific states).

• The applicants committed to a one-time recalculation to exclude fiber-based collocation arrangements established by AT&T in SBC’s region and MCI in Verizon’s region in identifying wire centers in which SBC or Verizon claims there is no impairment pursuant to the UNE triggers in the Triennial Review Remand Order so that dedicated transport and/or high capacity loops need not be unbundled.

• The applicants committed to implement a "Service Quality Measurement Plan," which will provide the Commission with quarterly performance results for interstate special access services. This commitment will terminate the earlier of 30 months and 45 days after the beginning of the first full quarter following the closing of the mergers, or the effective date of a Commission order adopting general special access performance measurement requirements.

• The applicants committed, for 30 months, not to increase the rates paid by existing in-region customers of AT&T in SBC’s region or MCI in Verizon’s region for wholesale DS-1 and DS-3 private line services.

• SBC/AT&T and Verizon/MCI committed, for a period of 30 months, not to provide special access services to themselves, their interexchange affiliates, or each other or their affiliates, that are not generally available to other similarly situated customers.

• The applicants committed that for a period of 30 months, they will certify to the Commission, before they provide new or modified contract tariffed service to their own section 272(a) affiliate(s), that they provide service pursuant to those contract tariffs to unaffiliated customers other than each other or their wireline affiliates.

• The applicants committed for a period of 30 months not to increase rates set forth in SBC’s and Verizon’s interstate tariffs for special access services, including contract tariffs, that they provide in their in-region territory that are on file with the Commission on the Merger Closing Dates.

• The applicants committed, for a period of three years, to maintain settlement-free peering arrangements with at least as many providers of Internet backbone services as they did in combination on the Merger Closing Dates.

• The applicants committed for a period of two years to post their peering policies on publicly accessible websites. During this two-year period, the applicants will post any revisions to their peering policies on a timely basis as they occur.

• SBC/AT&T acknowledged: (1) that the merger does not change carrier of last resort obligations imposed by the State of Alaska on interexchange services provided by Alascom; (2) that the merger will not affect statutory and regulatory geographic rate averaging and rate integration rules that apply on the merger closing date to Alascom; and (3) after the merger closing date, they will operate Alascom as a distinct, though not structurally separate, corporate entity.

• The applicants committed to provide, within 12 months of the Merger Closing Dates, DSL service to in-region customers without requiring them also to purchase circuit-switched voice telephone service. The companies will make the offering for two years from the time it is made available in a particular state.

• The applicants committed for a period of two years to conduct business in a way that comports with the Commission’s Internet policy statement issued in September.

• Finally, the applicants committed to file annual certifications that they are complying with these enforceable commitments.

In separate statements, the merging companies disclosed the names under which they will continue to do business. The Verizon-MCI entity will use the Verizon name, and the SBC AT&T entity will be known as AT&T.

DTV Bill Passes Senate Commerce Committee; House Version Attacked at Mark-Up. On October 20, the Senate Commerce Committee passed, by a 19-3 vote, a Digital Television ("DTV") bill that includes $3 billion in converter box subsidies, $1.2 billion for an emergency communications program and an April 7, 2009, deadline for the DTV transition. Next, the bill moved to the Senate Budget Committee, where it was included in a budget reconciliation bill scheduled for markup October 26. The emergency communications program would set aside $1 billion for an interoperability fund and $250 million to implement a national emergency alert system. Fierce debate and several proposed amendments followed the release of the draft bill. Compromises forged by bill sponsor Senator Stevens will result in amendments, including potentially a multicasting measure by Senators Hutchison and Lott, to be introduced when the bill reaches the Senate floor.

The House version of the DTV bill proposes a $990 million program that would provide each household two $40 coupons to buy converter boxes and a December 31, 2008 transition deadline, but does not earmark money for first responders. Under the proposal, NTIA would run the converter box program, while consumer electronics retailers would have to undergo formal certification to participate in the program and be responsible for seeking coupon reimbursements. At the House Commerce Committee mark-up on October 25, Democrats derided the subsidy as "woefully inadequate" and as a tax on consumers imposed to protect tax cuts, as the bill is now tied to Congress’s budget reconciliation package. Committee members from both sides of the aisle critiqued the lack of funding for first responders. Rep. Upton plans to offer an amendment to use some of the proceeds from the DTV spectrum auction to pay for a grant program for public safety interoperability.

Commissioners Support Indecency Review by Full FCC. FCC Chairman Martin and Commissioners Abernathy and Copps have made comments in support of the full Commission resolving groups of indecency complaints, instead of the current practice of having the Enforcement Bureau handle individual complaints. Packaging the complaints would help eliminate the backlog of complaints at the Commission and provide clarity regarding the application of the FCC’s indecency rules. After issuing a record number of fines last year, the FCC has not issued any notices of apparent liability for indecency in 2005.

New FCC Website on Indecency Rules. On October 7, the FCC launched a new website, www.fcc.gov/eb/oip/Welcome.html, that describes the rules on broadcast obscenity, indecency and profanity. In addition to summarizing the rules, the information on the site describes the complaint process, addresses and Commission actions and enforcement statistics and explains TV ratings and channel blocking. Visitors to the site can learn how to file a complaint, how to track a filed complaint and how the FCC reviews and makes determinations once a complaint is filed.

DC Circuit Orders FCC to Address Children’s TV Rules. The U.S. Court of Appeals for the D.C. Circuit granted the Walt Disney Co.’s petition for a writ of mandamus, ordering the FCC to respond to the petition challenging the new children’s TV programming rules, by October 25. Disney’s petition was filed less than a week after Viacom asked the D.C. Circuit to find that the regulations violate the First Amendment. The new rules require broadcasters to air three hours of children’s educational programming per week on each digital channel they multicast, impose curbs on ads for websites and other programs that air during children’s programs, and limit to ten percent the amount of permitted preemptions of regularly scheduled children’s programs. Industry executives predict that the FCC will fight the networks’ efforts to block the children’s TV rules, which were adopted by a unanimous vote of the Commission last year.

FCC Fines Stations for Children’s TV Violations. The FCC issued fines and reprimands against several stations with licenses up for renewal for violations of the children’s TV programming rules. Stations WVAG (TV), Valdosta, Georgia, and WUPL (TV), Slidell, Louisiana, drew $10,000 and $4,000 fines, respectively, for failing to keep in their public inspection files reports and records regarding commercial limits, TV issues/programs lists, and Children’s Television Programming Reports. Seven stations owned by Libco Inc. were reprimanded for failing to publicize the existence of children’s programming reports or in "isolated instances" exceeding commercial limits. Despite these violations, the renewal applications of all nine stations were granted.

FCC Approves Phoenix Channel Exchange. The FCC granted the petition of NBC Universal’s Telemundo station KPHZ, Holbrook, Arizona, to relocate to Phoenix, the only top-ten Hispanic television market that lacks a full-service Spanish-language competitor to Univision. The Commission order will remove the noncommercial reservation of analog Channel *39 in Phoenix (currently licensed to Community Television Educators ("CTE")), reserve analog Channel 11 for noncommercial education use at Holbrook and permit NBC Telemundo and CTE to swap channels without opening the channels to competing applications. The FCC found the proposal to be "the rare situation in which a waiver of our dereservation policy is warranted" because the public interest benefits from creating "a more competitive environment for the continuing growth and development of Spanish language network programming in the Phoenix market."

Corporate Developments

French satellite operator EutelSat SA plans to launch an initial public offering with plans to raise up to €1.8 billion. Eutelsat, the world’s third largest satellite operator, plans to offer 77.9 million shares between €15.25 and €17.75. An additional 25.1 million shares have been set aside as an overallotment option. Proceeds from the IPO are expected to be used for debt reduction, and to finance new satellite construction and corporate expansion. Eutelsat has been slower than its U.S. competitors to provide high definition transmission services, and Eutelsat has publicly stated its desire to provide Internet services via satellite.

On October 11, Carl Icahn announced that Icahn Partners LP and its like-minded co-investors in Time Warner (Icahn Partners Master Fund LP, Franklin Mutual Advisers, LLC, JANA Partners LLC, JANA Master Fund, Ltd., S.A.C. Capital Advisors, LLC and S.A.C. Capital Associates, LLC) filed with the Securities and Exchange Commission an open letter to Time Warner shareholders. The letter accused Time Warner Management of the twin sins of "act[ing] precipitously without thought" in connection with Time Warner’s "disastrous" merger with AOL, and "not act[ing] at all" in response to Icahn’s perceived inaction and management missteps on the part of Time Warner’s current leadership to resuscitate the stagnant stock price.

In particular, Icahn’s letter questioned why a majority of the Board members that approved the AOL merger were still leading Time Warner, given (in the Icahn’s group’s estimation) such members’ clear lack of foresight and good judgment. The letter also took the Time Warner board to task for failing to foresee and staunch the hemorrhage of dial-up subscribers from AOL. Finally, the letter criticized Time Warner’s "bloated" cost structure and misspending on non-bottom line projects such as upgrading Time Warner’s lavish New York headquarters.

The Icahn group also increased its holdings in Time Warner stock to 2.8% from 2.6%.

Time Warner’s brief response defended the current management’s commitment to achieving "sustainable long-term value" and reiterated Time Warner’s priorities of (i) accelerating the transition of AOL’s business model; (ii) refining Time Warner’s capital allocation to drive increased returns through dividend increases and share buyback programs, and (iii) realizing increased corporate value with Time Warner’s planned Adelphia and Comcast transactions.

British cable television giant NTL Inc. announced that it will acquire Britain’s second largest cable television provider, Telewest Communications, in a merger that will create that country’s second largest communications company. Telewest shareholders will receive $16.25 per share in cash and 0.115 NTL shares for each Telewest share, for an aggregate sales price of about $6 billion. The transaction is subject to the approval of the shareholders of each company and of applicable regulatory authorities. The merger is not expected to close for several months.

Telewest provides cable television, telephone and Internet services to 1.8 million customers. NTL has over 3.3 million telephone, cable television and Internet customers. The combined companies will have nearly 5 million residential subscribers and annual revenue of 3.4 billion pounds ($6 billion).

The D.C. Circuit has vacated and remanded an FCC decision approving the transfer of control of a radio station license, directing the FCC to better explain why it did not apply its policies prohibiting a reversionary interest or a security interest in an FCC license.

In this case, Party A sold a radio broadcast station to Party B. Party B, in turn, signed a promissory note to Party A and pledged all station assets, except for the FCC licenses, as collateral for the note. Party B later defaulted on the note, Party A filed a lawsuit, and ultimately the parties settled by executing a new (superseding) promissory note that pledged, in the event of default, that both parties would act reasonably and in good faith to effectuate the turnover of "the station" to Party A. Party B defaulted again and further litigation ensued.

A state court ordered Party B to sign an application for transfer of the license to Party A, concluding that "the station" includes the FCC license. Party B refused, so the court appointed a trustee to execute the application on Party B’s behalf.

Party B opposed the application, arguing that it constituted an impermissible reversionary interest in the license. The Mass Media Bureau rejected this argument and granted the application, noting (in part) that the reversionary interest was not automatic or irrevocable. Party B then sought full FCC review, objecting to this interpretation distinguishing an automatic reversion from one requiring further action (such as a signature on the application).

The FCC denied the petition for review, but based upon different reasoning. It stated that the prohibition on reversionary interests in licenses applies only to contracts executed in connection with the transfer of a station, not to contracts settling litigation two years after such a transfer. The FCC also stated that the transfer of the station to Party A was consistent with the FCC’s policy of accommodating state court decisions regarding contract law issues.

Party B appealed this decision to the D.C. Circuit on the ground that it violated FCC prohibitions on reversionary and security interests in a license. The court vacated and remanded the decision, holding that the FCC had failed to explain adequately why these prohibitions did not apply in this case and how it had reconciled state contract law with the FCC’s policies. The court expressly noted that the FCC did not dispute that the second promissory note created a security interest in the license, and that FCC precedent has consistently prohibited any security interest in a broadcast license. The court also noted that the FCC is not obligated to accommodate a state court decision that is contrary to FCC policy.

Accordingly, this case is now back at the FCC, awaiting a more complete explanation of the Commission’s decision. Although this case raises more questions than answers at this point, it bears further watching to see if the FCC will either backtrack and follow its traditional and more absolute prohibitions on the conveyance of such interests, or will attempt to articulate a more nuanced view of the nature of interests in licenses that may or may not be conveyed in the context of a transaction.

A number of telecommunications reform bills are pending before both houses of Congress, but it is not clear whether Congress will ultimately take action on a comprehensive revision of the Telecommunications Act of 1996 ("1996 Act") or on separate bills limited to more narrow measures. It is also not clear whether any consensus can be reached on the need to revise the 1996 Act. Issues addressed by pending bills include broadband regulation, broadcast indecency and Internet pornography, DTV (see the related article in this issue), FCC restructuring, intercarrier compensation, media ownership rules, municipal deployment of broadband, public safety communications, the "savings clause" in Section 601(b)(1) of the 1996 Act (47 U.S.C. § 152, note), and universal service funding reform.

One of the more comprehensive reform bills is Senator Ensign’s (R. Nev.) proposed revision of the Communications Act, S. 1504, introduced on July 27 and referred to the Senate Commerce, Science and Transportation Committee (discussed in the July/August issue of the Bulletin). Senator Ensign’s bill would subject any telecommunications conduct, service or service provider previously governed by Titles I, II or VI or Section 332 of the Communications Act only to the requirements of the bill and not to any other federal, state or local common carrier law or regulation. It thus would have the effect of removing most interstate and intrastate rate and entry regulation from telecommunications services, including mobile services and information services, and replacing such regulation with basic service, access and consumer protection requirements.

A similarly comprehensive reform proposal is House Energy and Commerce Committee Chairman Barton’s (R. Tex.) draft broadband bill (discussed in the September issue of the Bulletin), which would establish a new regulatory framework for broadband Internet transmission, Voice over Internet Protocol ("VoIP") and broadband video services. The draft bill generally would bar all regulation of rates, terms and market entry for such services. It would also streamline the local franchise process for broadband video services and require the FCC to establish national consumer protection standards for such services.

An example of a pending single-issue bill is H.R. 2726, introduced by Rep. Sessions (R. Tex.) on May 26 and referred to the Subcommittee on Telecommunications and the Internet (discussed in the July/August issue of the Bulletin). This bill would prohibit any state or local government from providing any telecommunications, information or cable service in any geographic area in which a private entity is offering a substantially similar service, other than such government services already provided on the date of enactment . Other single-issue bills include safety-related measures, such as S. 1753, the Warning, Alert, and Response Network Act, introduced by Senator DeMint (R. S.C.), which would establish a network for warning the public about emergencies across a variety of devices, including mobile phones and Blackberries, analog communications, cable and satellite TV and radio, and S. 1063, the IP-Enabled Voice Communications and Public Safety Act of 2005, introduced by Senators Nelson (D. Fla.), Burns (R. Mont.) and Clinton (D. N.Y.), which would mandate basic 911/E911 for all VoIP services and ensure that VoIP providers have access to the network elements needed to provide E911 service. Both bills have been referred to the Commerce Committee.

It is not clear whether any of these or other pending telecommunications-related bills will remain in their present form or be consolidated with other proposals as they move forward. Observers have stated that the Barton draft broadband bill is at least a year from passage because it raises so many contentious issues, and it seems unlikely that the Ensign bill, S. 1504, or other broadly-based proposals could move any faster. Senator Ensign commented on October 18 that his bill "[is] not going to pass in [its current] form," and passage in any form is "not going to happen" this year. He stated that other senators would have significant input in shaping the legislation, noting that he expects that Senators Stevens (R. Alaska.) and Inouye (D. Haw.) will want to write the universal service portion of the bill. It may be that, in an election year, only non-controversial, single-issue bills will have much chance of passage.

One of the single-issue bills mentioned above that may move fairly quickly is S. 1063. It had been scheduled for a vote on October 20, but Senate Commerce Committee Chairman Stevens introduced a draft bill revising S. 1063 to relieve "nomadic" VoIP providers from the location-based 911/E911 requirements imposed by the FCC (discussed in the May and September issues of the Bulletin). Under the Stevens draft, which was circulated the evening of October 26, VoIP providers would not have to meet the FCC’s current November 28 deadline for providing 911/E911 services if: (1) they demonstrate that it is not technically or operationally feasible to comply with the FCC rules; (2) they notify customers of the unavailability of 911/E911 services; and (3) the customers acknowledge the notice. The bill is expected to be considered the week of October 31. Senator Nelson, who originally introduced S. 1063, continues to work with Commerce Committee leaders to put together a consensus amendment to the bill.

The staff of the New York Department of Public Service has released a policy whitepaper, "Telecommunications in New York: Competition and Consumer Protection." The whitepaper is part of the proceeding initiated in June 2005 to examine intermodal competition for telecommunications services and regulatory policies that better reflect the changing market for telecommunications services. The whitepaper bases its conclusions on comments received from interested parties and meetings with industry representatives and provides a general overview of the current market for telecommunications services. Based on this information, the staff has proposed a number of regulatory changes to better reflect the evolving market conditions. Additional public information sessions and roundtables across the state to further describe the whitepaper’s conclusions are scheduled for this fall.
The whitepaper concludes that New York’s two major incumbent local exchange carriers, Verizon and Frontier Telephone of Rochester, face potential competition, as evidenced by the presence of facilities-based competitors, and actual competition, as evidenced by real losses in both market share and revenues. This growing intermodal competition requires that the Commission revise its regulatory approach to provide these two incumbents with greater latitude to offer and price services free from regulatory constraint.

The whitepaper notes that subjecting providers of competing services to different regulations may produce unfair competitive advantages or uneven consumer protections. Therefore, an important goal for the proceeding is to eliminate these "regulatory asymmetries." To achieve this in the context of the current market, the whitepaper recommends that the PSC consider lifting all remaining limits on Verizon’s and Frontier’s pricing of non-basic retail services. To ensure that basic service customers remain protected, the two companies must offer a "no-frills" basic service subject to a price cap equal to $24.95. Non-economic regulations, such as those intended for public safety, network reliability, and core consumer protections, shall remain although the whitepaper proposes that these be streamlined over time to achieve greater regulatory symmetry. Staff does not recommend any changes to a variety of existing processes for dealing with intercarrier relationships, dispute resolution, or universal service policies and regulations. To the extent that the DPS does not have regulatory authority over some providers, such as VoIP providers, the whitepaper suggests that those entities should be willing to provide any information necessary so that the DPS can ensure that the citizens of New York are adequately protected.

Finally, the whitepaper anticipates additional regulatory changes as the telecommunications market becomes more competitive. To this end, staff indicates that it intends to review the extent of competition in the state on a wire-center by wire-center basis and permit further regulatory streamlining based on the results of the review. The whitepaper’s recommendations only apply to Verizon and Frontier. Although is not clear that other incumbents face the same level of intermodal competition to justify granting those carriers further pricing flexibility at this time, the whitepaper acknowledges that they are facing some competition. The staff indicates, however, that it is willing to consider granting pricing flexibility to individual companies that can demonstrate that they face sufficient competition.

The Virginia Corporation Commission has revised its service quality rules and will apply them to all local exchange carriers, both incumbent and competitive. Effective November 1, 2005, the new rules, codified at 20 VAC 5-427-10, will replace the service quality rules that had been in place since 1993. The new rules are the result of a stipulation between the Commission staff, consumer groups including representatives of the Virginia Attorney General, and carriers operating within Virginia, and are intended to assure a minimum service quality for all consumers. Although they will be the floor below which service quality cannot fall, it is hoped that in a competitive environment, service levels will be well above the floor.

At the same time, the Virginia Commission endorsed a "Telecommunications Bill of Rights" to assist Virginians as competition takes the place of local service regulation. The Bill of Rights is a "consumer friendly" summary of existing law and does not impose any new requirements on carriers. The Commission is encouraging all local exchange carriers to include the Bill of Rights in their published telephone directories.

The Michigan legislature continues its progress towards replacing its current telecommunications statute, which expires at the end of December. Both the Senate and the House have passed bills that are significantly less deregulatory that the original versions passed out of committee by the respective chambers.

The original Senate bill, as passed by the Energy and Technology Committee, would have eliminated price regulation for all telecommunications retail service bundles and for those individual retail services that were available from more than one provider (a "provider" being any type of competitor, regardless of whether it was subject to the state’s regulatory jurisdiction). The only service subject to continuing price regulation would have been single-line residential basic exchange service with a 200 calls per month allowance, but the rates for even that service would have been deregulated if it was included as part of a bundled service package. The only price control on competitive services would have been a prohibition on pricing below a service’s total service long run incremental cost.

The bill ultimately passed by the full Senate reflected the substantial opposition by consumer groups, seniors, and small businesses to the committee version. As amended, the Senate bill includes both business and residential "essential" business services in those services subject to ongoing pricing regulations, even when included as part of a service bundle, and retains the Public Service Commission’s consumer protection powers. The remaining rate regulated services would be subject to an inflation-indexed price cap. The Senate bill also includes a number of provisions relating to wireless services, consumer protection, and a prohibition on wholesale rates in excess of retail rates. The Senate Bill retains the provision from the committee version that allows telecommunications providers to satisfy their basic service obligations using any technology.

On October 20, the House passed its own substantially more deregulatory bill, which now must be reconciled with the Senate’s. Under the House version, only residential dial-tone service with a 100 call limit is subject to continuing price regulation. In addition, the House bill limits the ban on wholesale prices in excess of retail to two years, does not impose any new regulations on wireless services, and requires municipalities to solicit bids before proceeding with broadband, wireless, and narrowband projects after November 1 and to abandon a project if it receives three or more bids, and would immediately change how calls to ISPs are rated (so that such calls would be local only if the ISP has a data center in the calling party’s local calling area). SBC supports the House version of the bill.

The CPUC recently allowed Verizon to replace certain circuit switches with packet switches without an obligation to provide competitors with certain unbundled network elements ("UNEs"). The decision finally resolves complaints filed by a number of competitive local exchange carriers, including AT&T, during the summer of 2004. At that time Verizon had announced that it would cease providing UNE Platform ("UNE-P") from the new packet switches on the ground that the Telecommunications Act did not require that it do so. Verizon planned to migrate the existing UNE-P customers to a resale platform. Based on its review of the recent TRO and TRRO decisions, the CPUC concluded that Verizon may decline to sell the unbundled Local Circuit Switching and Common Transport network elements from the packet switches.

This decision terminates an earlier Order Maintaining Status Quo issued as a result of a motion by AT&T and reverses the Presiding Officer’s Decision ("POD"), which was a draft order, finding in favor of the complainants. The Order Maintaining Status Quo did not preclude Verizon from deploying the packet switches but required Verizon to continue to provide AT&T access to unbundled Local Circuit Switching and Common Transport network elements under the terms of AT&T’s interconnection agreement, until the FCC’s UNE-P sunset date. The POD would have granted complainants’ request to require Verizon to continue to provide Unbundled Local Circuit Switching and Common Transport network elements under the terms of their interconnection agreements, even if Verizon had replaced its circuit switches with packet switches.

The Commission disagreed with and refused to adopt the POD, stating that "[t]he only circumstance in which the FCC has indicated that such packet switches might be subject to unbundling is if the local market for voice communications is impaired. In the case before us, no finding of impairment has been made. Accordingly, even if we accept that in some limited circumstances earlier FCC orders might require unbundling, such circumstances are not present in this case." The Commission also relied on earlier statements by the FCC emphasizing its "overriding objective, consistent with the congressional directive in section 706 (of the Telecommunications Act), to ensure that advanced services are deployed on a timely basis to all Americans so that consumers across America have the full benefits of the ‘Information Age.’"

On October 19, the California Public Utility Commission ("CPUC") released the draft decision of the Administrative Law Judge overseeing the SBC/AT&T merger and an alternative draft prepared by President Peevey and Commissioner Kennedy. Also on the 19th, President Peevey and Commissioner Kennedy issued a draft decision approving the MCI/Verizon merger. All of the draft decisions recommend approval of the mergers. The Peevey/Kennedy drafts for both mergers are very similar – both conclude that the mergers should be evaluated using the less rigorous standard of review of whether they will "adversely affect competition" rather than stricter standard of review that would require a finding that the mergers provide short-term and long-term benefits to ratepayers and sharing of those benefits between ratepayers and stockholders. In addition, the Peevey/Kennedy draft decisions closely follow the analyses of the California Attorney General and, to the extent that the Attorney General recommended any mitigation measures, they are included as conditions of the mergers. Both drafts require the merged companies to offer "stand-alone" or "naked" Digital Subscriber Line ("DSL") no later than February 28, 2006. In addition, approval is conditioned on the merged companies' committing to increase their corporate philanthropy to benefit underserved communities and a newly created infrastructure fund for emerging broadband technologies. Approval of the SBC/AT&T merger includes one additional condition, that the merged company’s DS 1 and DS 3 rates for existing AT&T special access circuit customers shall be frozen for one year, commencing on the closing date.

The Administrative Law Judge’s draft decision also recommends approval of the SBC/AT&T merger, but with significantly more conditions. The ALJ draft analyzes the transaction according to the stricter standards of Cal. Pub. Util. Code Section 854(b) and finds that substantial mitigation measures are required in order to satisfy those standards. The ALJ draft also finds the Attorney General’s analysis to be incomplete, as it focuses only on facilities-based competition and ignores the complete range of markets implicated by the transaction. As a result, and in addition to the conditions recommended by the Peevey/Kennedy draft, the ALJ draft requires rate freezes for a number of mass market and special access services, sharing of the quantified benefits of the merger with ratepayers, imputation requirements, service quality standards, and on-going monitoring obligations.

After receiving comments on the drafts and alternative draft decisions, the full Commission could issue a final decision as early as its November 18, 2005, regularly scheduled agenda meeting.

On October 7, both the incumbent local exchange carriers ("ILECs") and competitive local exchange carriers ("CLECs") filed reply briefs at the U.S. Court of Appeals for the D.C. Circuit in support of their respective appeals of the Triennial Review Remand Order ("TRRO"). The United States Telecom Association and Bell companies argued that the court should vacate the FCC’s unbundling requirements for high-capacity facilities as contrary to the court’s previous instructions in its order reversing the Triennial Review Order ("TRO"). They asserted that the FCC disregarded CLECs’ successful use of special access services in its impairment analysis, improperly allowed CLECs to demand that ILECs convert special access facilities to UNEs and improperly required unbundling in wire centers with substantial competition. The CLECs argued in their reply brief that the FCC should have required the nationwide unbundling of DS-1 loops, rather than establishing wire-center-by-wire-center criteria, because such facilities cannot be duplicated anywhere and that local variations in competition precluded the FCC’s nationwide finding of nonimpairment for mass market local switching.

On October 4, Qwest asked the FCC to forbear from enforcing the challenged TRRO requirement that ILECs convert special access circuits to UNEs if the request to convert comes from the merged Verizon/ MCI or SBC/AT&T entities. Qwest argued that it "would subvert Congressional intent underlying the Telecommunications Act of 1996" to allow "megaBOCs" with nationwide networks and enormous resources to demand that other ILECs provide them lower priced UNEs in place of special access circuits. ILECs and CLECs also sparred over two petitions for forbearance from FCC decisions in the TRRO not to require unbundling. On October 12, parties submitted reply comments on the petition filed by eight CLECs requesting forbearance from various limitations placed on ILEC high-capacity facility unbundling obligations (see article discussing TRRO-related developments in the September Bulletin). On October 14, ILECs opposed a petition filed by Fones4All requesting that, whenever a CLEC elects to provide Lifeline service using unbundled ILEC local switching facilities, the FCC forbear from its decision not to require the unbundling of mass-market local switching. In both cases, ILECs argued that the petitions actually request the imposition of unbundling obligations, not forbearance from regulation, and are simply untimely petitions for reconsideration of the TRRO.

On October 15, it was reported that ACS of Anchorage, Inc., has requested the FCC to forbear from imposing unbundling obligations on its operations in Anchorage because it is "among the most competitive telecommunications markets in the country." ACS argued that its competitor, General Communication, Inc., has about 49 percent of the market and recently announced that it plans to switch its entire customer base over to its own facilities. The FCC approved a similar Qwest forbearance petition in the Omaha, Nebraska – Council Bluffs, Iowa, area.

On September 28, it was reported that a federal district court in Madison, Wisconsin, upheld a Wisconsin PSC decision imposing modest rate increases on some SBC UNEs, including a 20 percent increase for unbundled loops, while reducing other SBC UNE rates. TDS Metrocom challenged the PSC decision, arguing that it conflicted with federal law and policy and was arbitrary and capricious because it failed to address CLEC price-squeeze concerns. The court found that the decision seemed consistent with federal law and declined to review the price-squeeze claim, finding that such a claim would require a review of SBC retail rates, which would be inappropriate in a wholesale UNE rate proceeding.

It was reported on October 4 that the Pennsylvania PUC suspended a Verizon tariff that would have ended the unbundling of entrance facilities. Verizon had cited the TRO and TRRO as bases for the tariff, but the PUC stated that, because the tariff’s definition of entrance facilities is in dispute in a pending interconnection arbitration case, it would be premature to rule on the tariff and suspended the tariff until March 2006. On October 14, it was reported that three Michigan CLECs asked the Michigan PSC to review SBC’s list of wire centers where it claims there is sufficient competition to exempt it from high-capacity facilities unbundling obligations. The CLECs cited a September PSC order finding that SBC had misapplied the nonimpairment criteria in a particular wire center and questioned whether SBC’s exemption list contains other wire centers "based on the same faulty methodology." It was reported on October 19 that the South Carolina PSC denied summary judgment to both BellSouth and the CLEC trade association CompSouth in a pending docket addressing generic changes to interconnection agreements to implement law changes from the TRO and TRRO. The PSC noted that issues of material fact precluded summary judgment for both sides.

Participants at a CompTel conference held October 9 to 12 agreed that the competitive landscape presents serious challenges to CLECs. Chris McKee, Vice President and Assistant General Counsel at Covad Communications Group, Inc., said that he does not expect CLECs to win their appeal over high-capacity loop and transport unbundling at the D.C. Circuit. Moreover, any reversal in their favor on the issue of local switching is likely to result in another remand to the FCC, which would not issue a further remand order for 18 to 24 months. McKee told attendees that "Switching will not be saved by the court before March 12 [the date that unbundling obligations cease under the TRRO]." CLECs’ best hope remains in the states, where some, including Illinois, have entered their own impairment orders against ILECs, and other states are considering legislation giving CLECs more access to UNEs. Other participants stated that VoIP service, including wireless VoIP, may provide the best opportunity for CLECs to free themselves from dependence on ILEC facilities.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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