Ostrander NASUCA 2006

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NASUCA MID-YEAR MEETING - 2006 Memphis, TN: 

NASUCA MID-YEAR MEETING - 2006 Memphis, TN DEREGULATION ISSUES – CONSULTANT PANEL June 14, 2006 Presentation by: Bion C. Ostrander, CPA * OSTRANDER CONSULTING * 1121 SW Chetopa Trail, Topeka, KS. 66615 (785) 478-9099 bionostrander@cox.net

FCC’s June 30, 2005 Local Competition Report Important Changes & Issues to Consider : 

FCC’s June 30, 2005 Local Competition Report Important Changes & Issues to Consider * First time that CLECs and ILECs with fewer than 10,000 switched access lines in a state are “required” to file. - This includes about 2.3 m new CLEC lines and 1.9 m new ILEC lines, other than those voluntarily reported in the past. - The Dec. 2004 data included about .4 m CLEC lines and .2 m ILEC lines that were “voluntarily” included by filers with < 10,000 lines. * First time that negotiated “commercial arrangements” (to replace UNEs) between CLECs and ILECs are included in the “Resale” category instead of the “UNEs” category (Tables 3 & 4). - FCC does not separately identify the number of lines served by “commercial arrangements” in its data. - Potential misreported data by ILECs and CLECs in this area. * First time that “small business” lines have been included in the “business” category of lines instead of the “residential” category of lines (Table 2). - ILECs experienced a 33% increase in business access lines from Dec. 2004 to June 2005, but it is not clear how much of this increase is attributed to the shift of lines between categories (critical data is missing). * AT&T and MCI UNE/Resale/Facility lines are still included in CLEC data.

UNE Decline – Competition “All Shook Up” : 

UNE Decline – Competition “All Shook Up”

UNE Decline – Competition “All Shook Up” : 

UNE Decline – Competition “All Shook Up”

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up”

UNE Decline – Competition “All Shook Up” : 

UNE Decline – Competition “All Shook Up”

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up” Note: Qwest wholesale lines are not shown above. The three RBOCs above provide about 80% of CLEC UNE/Resale lines at June 2005.

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up”

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up” Table 1 through 6 Summary Points: For the year June 2004 to June 2005, CLEC UNE/Resale lines declined 1.6 million, or 6%, and UNE-P declined by 2.5 million lines, or 15%. UNE-P had previously increased by 4.1 million lines (to a peak level of 17.1 million lines), or a 31% increase, for the year June 2003 to June 2004, and UNE-P was 77% of total CLEC line growth from June 2003 to June 2004. UNE line losses for CLECs will accelerate in 2006 due to accelerated impact of Court/FCC decisions regarding elimination of UNE-P. For example, from June 2004 to June 2005, CLEC UNE/Resale lines declined 6% (per FCC data), but recent RBOC data (AT&T, Verizon, and BellSouth) shows UNE/Resale lines provided to CLECs declined 14% (2 million lines) in just the first quarter of 2006. Source: Tables 1, 2, 3 and 6 of prior slides are from FCC Local Competition Report (Form 477). Table 1, 2 and 3 slides used UNE’s reported by ILECs at FCC Table 4, because this includes UNE-P information, and CLECs do not separately report UNE-P data at FCC Table 3. Tables 1, 2 and 3 of prior slides used Resale lines reported by CLECs at FCC Table 3, because this includes Resale lines from other CLECs (and not just ILECs). Tables 1, 2 and 3 used CLEC reported Facility lines at FCC Table 3. Table 6 is from FCC Table 1. Tables 4 and 5 of prior slides are from RBOC web-site financial data.

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up” Table 1 through 6 Summary Points: The PACE Coalition cautions that those smaller or more rural states where CLECs are more dependent on UNE-P could be hurt the most. This includes the states of Mississippi and N. Dakota (both at close to 100%) and Arkansas at about 76%. Also, states like Louisiana and Kentucky (both at 80 to 90%) could be hurt. It remains to be seen how more urban/densely populated states with high UNE-P dependency could be affected, such as New Jersey, Michigan and Maine (all in the upper 70% range). At June 2005, the FCC information shows mixed results regarding this assumption by PACE. The June 2005 FCC data does not show any negative CLEC market share impacts for Mississippi, N. Dakota (N. Dakota CLEC share increased by 13% from December 2004, the largest growth among all states where information is publicly available), Louisiana, Kentucky, Arkansas, and Maine. However, New Jersey’s CLEC market share remains at 22% for Dec. 2004 and June 2005 and Michigan’s CLEC market share decreased from 26% to 25% (even after including the < 10,000 filers). (Note: The reader is cautioned regarding “PACE” data, because this is a coalition of smaller competitors that use UNE-P for some or all of their local service). Analysis of FCC data does not appear to show that UNE-P is being replaced by “negotiated commercial agreements”, because UNE-P shows a 2 million line decline and Resale (the category where FCC is now including negotiated commercial agreements) only increased by 437,000 lines. Under a best case scenario (assuming all of Resale gain is attributed to negotiated commercial agreements), the UNE-P loss is 1.6 million more than the gain in negotiated commercial agreements.

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up” Table 1 through 6 Summary Points: CLEC Facility-Owned lines were 22% of total CLEC lines for the 18 month period December 2002 to June 2004, and now have increased to 27% of total CLEC lines at June 2005 (as UNE-P declined 5% for this same period). From June 2003 to June 2004 Facility-Owned lines increased 1.3 million (17%) and from June 2004 to June 2004 Facility-Owned lines increased 1.6 million lines, or 21%. Has elimination of UNE-P caused this moderate increase in CLEC facility lines? How will removal of AT&T/MCI lines from the CLEC category affect this information? CLEC market share nationwide was 18% at both June and December 2004, and it increased slightly to 19% at June 2005. However, the 19% market share includes CLECs with fewer than 10,000 lines for the first time, and the 18% market share does not include this information. After adjusting the 2004 data for the impact of the < 10,000 line filers, the market share for 2004 would also be 19%. This means that CLEC market share has not increased from June 2004 to June 2005, and it will very likely decrease in the future due to: - Continued loss of UNE-P lines for CLECs - Removing AT&T’s CLEC lines (after SBC acquisition and name change to AT&T at November 2005) - Removing MCI’s CLEC lines (after Verizon acquisition at January 2006) - Possible fallout from AT&T acquisition of BellSouth to be completed by year-end 2006

UNE Decline – Competition “All Shook Up”: 

UNE Decline – Competition “All Shook Up” Table 1 through 6 Summary Points: CLEC line loss is more damaging than reported RBOC line losses, because RBOCs are losing some lines to affiliated Cellular and DSL companies and keeping revenues/lines in the consolidated family. For example, AT&T’s 1st quarter 2006 Investor Briefing states that 40% of its retail access line decline for the first quarter (267,000 decline) is due to migration of lines to its DSL service. Also, some part of the remaining retail line losses are to AT&T’s cellular affiliate Cingular, but these numbers are not reported or know (although Cingular added 1.7 million customers in the first quarter of 2006, and 5.5 million in the past year, while reporting its lowest subscriber churn ever). Furthermore, the acquisition of BellSouth (which means 100% ownership of Cingular), will further offset AT&T’s retail access line loss on a consolidated basis. Conclusion – It will be extremely difficult to continue to show increased CLEC market share and increasing UNE/Resale lines, and a general positive spin on CLEC/Local Competition.

FCC Reports Refined: 

FCC Reports Refined The FCC invites users of the Local Competition Report to provide suggestions for improved data collection. Here are some necessary refinements: Current information is no longer on an apples to apples comparative basis, this needs to be resolved as much as possible. Information regarding competition between RBOCs/ILECs needs to be reported, especially with additional mergers/acquisitions among these entities. Identify impact of removing AT&T/MCI CLEC lines due to acquisitions when this is applicable. Reconcile and explain various inconsistent data. For example, FCC indicates that it does not fully know why the ILECs and CLECs report different UNE/Resale volumes. Also, FCC does not know if ILECs and CLECs are consistently reporting negotiated commercial agreements in the “Resold Lines” category. Separately report “negotiated commercial agreements” in a separate category outside of “Resold Lines”.

Be Aware - Anti-Consumer Outcomes: 

Be Aware - Anti-Consumer Outcomes RBOC/ILECs further consolidation and not competing with each other. ILECs/RLECs get “ETC” status for cellular/cable affiliate for additional federal/state support, then they push (by increasing local rates of ILEC or having the affiliate offer better bundled service) “access lines” from the ILEC/RLEC to the ETC affiliate which has numerous potential negative customer outcomes: - Decreases revenues/access lines of the ROR-regulated RLEC (most often this is a rural LEC that remains under ROR regulation), which decreases earnings and helps justify local rate increases. - The loss of lines by the ILEC/RLEC could increase the state support per line paid to the ILEC/RLEC. - Removes jurisdiction from the state regulatory agency, so additional rate increases by the ETC affiliate are possible without regulatory scrutiny and service quality is not monitored or subject to regulatory oversight.

Be Aware - Anti-Consumer Outcomes: 

Be Aware - Anti-Consumer Outcomes CLECs loading unwarranted recurring miscellaneous charges on customer bills, identifying the amounts as PICC/EUCL, to recover additional charges passed on to CLECs by ILECs, miscellaneous billing costs, carrier cost recovery fee, etc. - In Kansas, Sage charges an FCC Subscriber Line Charge of $9.50/line, whereas AT&T/Southwestern Bell (the ILEC) charges $6.50 as do other CLECs. Sage recovers an additional $3.00/line per month with this unjustified and significant charge. The Kansas Corporation Commission (KCC) has allowed this charge to date, despite objection by CURB. - Also in Kansas, Sage implemented another miscellaneous charge, the “switched network recovery charge” of about $1.33 per line/per month. The KCC has allowed these charges to date despite objections by CURB. In Missouri (reportedly due to pressure from the Office of Public Counsel), Sage withdrew its proposal to implement this same switched network recovery charge. RLECs acquiring ILEC exchanges, implementing substantial modernization, and then recovering these costs from all customers throughout the state via the state universal service charge mechanism - - while avoiding regulatory scrutiny in part.

Conclusion: 

Conclusion With the loss of UNE-P lines, will CLECs be “Crying in the Chapel”? Will those CLECs that are charging excessive miscellaneous fees tell regulators to keep their hands off and “Don’t Be Cruel”? Will the former AT&T and MCI be telling their new owners SBC (now AT&T) and Verizon, “Love Me Tender”? Will regulators be viewing RBOC consolidation and deregulation measures with “Suspicious Minds” Thank you, thank you very much!

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