FCC line-sharing order locks in loop infrastructure for decades to come

March 1, 2000

By Stephen N. Brown

One picture truly is worth a thousand words. Anyone recently browsing the Federal Communications Commission's (FCC's) Website can find a picture of its chairman, William Kennard, taking part in a ceremony where a digital-subscriber-line (DSL) facility is installed. In regulatory parlance the chairman's presence at the installation is considered a "consecration" of DSL technology. The picture is also symbolic of the FCC's policy of promoting new wired technology only if it rides on the back of the existing wired infrastructure.

The policy stems from the agency's longstanding and unyielding position that a new wired loop is too expensive for the country (see Lightwave, December 1998, page 14), an opinion that reappears in the order for FCC Docket 99-355, the so-called "line-sharing" decision issued last December. The agency ruled that competitors offering DSL services must provide their own switches, but incumbents must open the so-called high-frequency portion of the local loop to competitors.

"[S]elf-provisioning entire loops [by competitors] is not a viable alternative to the incumbent's unbundled loop because replicating an incumbent's vast and ubiquitous network would be prohibitively expensive," ruled the FCC. "[One company] argues that the same reasons which led the [FCC] to decline to unbundle packet switching should lead to a...decision to refrain from [requiring loop unbundling]....We disagree. Self-provisioning switches is vastly easier, less expensive, less time-consuming, less complicated, and less risky than self-provisioning the outside plant that constitutes the ubiquitous loop network."

This reasoning has no empirical basis because the commission has never had an official, detailed, and painstaking inquiry into the costs of maintaining the current loop versus rebuilding it. The FCC's fear of new loops assures the old ones will never be replaced.

But the old ones are being illegally seized, according to US West's comments. The company claimed that line-sharing amounts to a permanent physical occupation of real property and a per se taking of private property, which violates the Fifth Amendment of the U.S. Constitution. The FCC dismissed the claim: "[D]edicating a particular element [of the loop] does not effect a physical occupation of any...property because the incumbent...retains physical dominion over their network elements." But incumbents have an incentive to appeal the order and delay it if the DSL market is as big as the FCC's order suggests.

According to the order, "SBC Communications Inc. has announced plans...to provide DSL service to 10 million customers by the end of 1999 and 50 million customers by the end of its four-year plan. Bell Atlantic is accelerating its DSL rollout to deploy advanced services to 21 million customers by early 2000." If these predictions are true, then by 2004, DSL service will be provisioned for over 70 million customers. The agency's quick decision in this docket was obviously influenced by a perception that mass provisioning of DSL is imminent, thus justifying an urgent need for rules governing the parceling out of DSL technology between incumbents and competitors. However, there is no logical reason the incumbents would want to share this huge market, so a court battle is likely.

The battle may not be worthwhile because the prediction of 70 million customers in 2004 does not fit the predictions for DSL lines in service in the same years. According to the order, "Current projections indicate the following expected total xDSL line deployment levels: 575,000 by the end of 1999, 2,107,000 by the end of 2000, 5,103,000 lines by the end of 2001, and 7,655,000 lines by the end of 2002. Note that these numbers combine incumbent and competitive LEC-deployed lines but excludes HDSL lines."

Put the two forecasts together and the odd result is eight to nine customers per DSL line. An exact 1-to-1 ratio of customers to lines is not required to make massive DSL provisioning plausible, but the DSL customers-to-lines ratio is inconsistent with the national customers-to-lines ratio for local loops and with the number of people per account. Also, the number of DSL-compatible loops is just a tiny fraction of the total number of loops in the country. Therefore, the discrepancy between the two forecasts is one more indication that actual DSL provisioning will fall far short of universal coverage.

The FCC's order and legal challenges to it are impelled by a DSL provisioning rate that is unlikely, as Commissioner Harold Furchtgott-Roth implied in his dissenting opinion. "[An] unbundling requirement that is based on the needs of a narrow class of customers means that the network element will [be] available, without limit, to all classes of customers," the commissioner wrote. "Data carriers certainly do not need unbundled spectrum to provide service to all customers. Indeed, today they are offering profitable services to thousands of customers without this benefit." In 2005, DSL provisioning and performance must reasonably match predictions, or hindsight will show line-sharing to be a bad bargain.

Gambling is another way to characterize the commission's decision because it is predicated on future product development to make DSL work, as indicated at certain points in the order: "Telcordia has commenced development of...solutions for providing access to the high-frequency portion of the loop, including central office and DSLAM [digital-subscriber-line access multiplexer] support...the solutions developed by Telcordia for xDSL involve numerous... products already used by the incumbents, but line-sharing will require significant additional functionality." DSL is still very much a work in progress and a shaky foundation for telecommunications' future.

DSL vendors are already pointing out weaknesses in their competitors' products, where voice and data occasionally interfere with each other. According to Paradyne's announcement of its new DSLAM: "Most people do not realize that competing voice-compatible DSL solutions reliably reach [customers] only to about 13,000 feet from the central office" but the company's product "can reach up to 25,000 feet, effectively doubling the market coverage area around a central office...[which will] dramatically reduce the recurring monthly costs for copper lines." Paradyne also says it "has shipped more than 3,900 DSLAMs, for a total capacity of more than one million lines," apparently capturing nearly 50% of over two million DSL lines that are supposed to be deployed by the beginning of 2001. If true, this claim makes the company the dominant DSLAM supplier and potentially raises the issue of whether back-end DSL products are competitively priced.

Paradyne's announcement highlights the central-office-based nature of DSL technology, where most customers are expected to be 2 to 5 mi from the nearest fiber, which is in marked contrast to new loop systems being built by risk-taking companies rejecting the FCC's notion that loop replacement is "prohibitively expensive." RCN, for example, uses a fiber-optic platform to provide voice, video, and high-speed Internet connections to residential customers and brings its fiber connection within 900 ft of the customer. RCN is concentrating its effort in selected urban areas-such as Los Angeles and Chicago-but this does not diminish its innovation. The incumbents and those companies relying on the existing loop could, if they were risk takers, rebuild networks and loops in metropolitan areas.

RCN is a risky venture even though it received a $1.65-billion capital infusion last fall from Paul Allen, cofounder of Microsoft. In December, RCN floated $375 million in bonds, but they were classified as "junk," meaning that investors wanted a premium interest rate from the company, despite Allen's investment. They got a sky-high rate of 10.12%, well above the prevailing average rate of 7.9% for corporate bonds offered in December. On the other hand, the company's stock price has more than doubled in the past year, a growth rate far higher than those of the incumbents. RCN made no comment whatsoever in the FCC's line-sharing docket.

DSL is a tremendous effort to make limited improvements to the existing telephone infrastructure at a time when the United States has a strong economy with low interest rates and low unemployment. If ever there was an optimal time to build a new local loop, that time is now, but federal policy and industry dictate otherwise.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.

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