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1 Number 448 April 12, 2005 Client Alert Latham & Watkins Corporate Department Unbundling obligations will be lifted over time as competitive carriers deploy their own networks, but the most significant relief is provided in those geographic markets with a high concentration of business lines. UNE Remand Order: The FCC Significantly Modifies the Unbundling Obligations in Largest Markets; Smaller Markets Get Limited Relief; UNE-P Phased Out New rules by the Federal Communications Commission (the FCC, or the Commission) governing the provision of unbundled network elements (UNEs) by incumbent local exchange carriers (ILECs) became effective on March 11, The FCC s previous UNE rules had been reversed in large part by the U.S. Court of Appeals for the D.C. Circuit, and remanded to the FCC for further consideration. In its Remand Order, the FCC modified its interpretation of the market-opening provisions of Section 251(c)(3) of the Communications Act, 1 which require that ILECs make elements of their networks available on an unbundled basis to new entrants at cost-based rates, as long as the FCC finds competitors would be impaired without access to the UNEs. 2 According to the FCC, the new rules are intended to require unbundling only in situations where competitive LECs (CLECs) genuinely are impaired without access to particular network elements and where unbundling does not frustrate sustainable, facilities-based competition. The FCC notes that the new unbundling rules target relief to markets where requesting carriers have undertaken their own facilities-based investments and will be using UNEs in conjunction with self-provisioned facilities. As before, the FCC has different criteria for determining whether unbundling is required for loops, dedicated interoffice transport, and switching. Unbundling obligations will be lifted over time as competitive carriers deploy their own networks, but the most significant relief is provided in those geographic markets with a high concentration of business lines. The FCC refused to conduct any market-specific analysis, but instead adopted generic tests for impairment based on the number of competitors and the number of business lines in a market. The rules provide only limited relief from unbundling in smaller markets. The most significant change is the phasing out of UNE switching and the UNE Platform (UNE-P) over the next 12 months in all markets. The FCC also eliminates dark fiber loop unbundling over 18 months in all markets. The Commission will phase-in limited relief from unbundling of DS-1 and DS-3 loops and dedicated interoffice transport in the densest, most competitive markets. Mass market loops remain a required UNE in all markets. For UNEs being phased out, limited price increases are permitted during the transition period. 3 Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership. Copyright 2005 Latham & Watkins. All Rights Reserved.

2 Unbundling of Mass Market Local Circuit Switching Eliminated After more than eight years of unbundling, the Commission finally is eliminating the unbundling requirement for mass market local circuit switching nationwide. This means that CLECs no longer will be able to purchase UNE-P in any market following a 12-month transition. In its Triennial Review Order, the FCC had eliminated the switching UNE for service to enterprise customers, but found that CLEC impairment required that switching continue to be made available as a UNE for service to mass market (i.e. residential and small business) customers. In the Remand Order, the Commission acknowledged that today CLECs not only have deployed a significant, growing number of their own switches often using new, more efficient technologies than the ILECs, such as packet switches but they also are able to use those switches to serve the mass market in many areas, and similar deployment is possible in other geographic markets. In light of the UNE loop provisioning improvements by many ILECs, such as through the development of batch hot cut procedures, the Commission found no impairment arising from the hot cut process for the majority of mass market lines, necessitating the continuation of the UNE-P requirement. UNE-P Transition Plan CLECs must submit orders to convert their UNE-P customers to alternative arrangements within 12 months following the effective date of the Remand Order (i.e., through March 11, 2006). The transition applies only to the embedded customer base and does not permit CLECs to add new customers using unbundled access to circuit switching or UNE-P. During the transition period, CLECs will continue to have access to mass market local circuit switching priced at the higher of (1) the rate at which the requesting carrier leased UNE-P on June 15, 2004, plus one dollar, or (2) the rate the state public utility commission established for UNE-P, if any, between June 16, 2004 and the effective date of the Remand Order, plus one dollar. Unbundling of Dedicated Interoffice Transport Dedicated interoffice transport facilities are facilities dedicated to a particular competitive carrier used for transmission between or among ILEC central offices and tandem offices, and to connect a CLEC s local network to the ILEC s network. Impairment Narrowed The Commission s new rules rely on two variables to determine non-impairment: the number of unaffiliated fiber-based collocators in a wire center, and business line density. Either of these measures can constitute a proxy for where sufficient revenue opportunities exist to justify the high fixed costs of competitive transport deployment. The Commission identified three tiers of wire centers and gave different levels of unbundling relief based on the number of business lines served or the presence of unaffiliated fiber-based collocations in the wire center. The FCC s rules produce a finding of non-impairment on specific transport routes connecting wire centers according to those tiers. The test for wire centers relies on whether each of the wire centers defining a route s end-points have a particular number of ILEC business lines or a particular number of fiber-based collocators. The FCC created different wire center tests for when unbundling obligations cease for DS1, DS3, and dark fiber transport. Definitions Fiber-based collocation is defined as a competitive carrier collocation arrangement, with active power supply, that has a non-ilec fiber optic cable that both terminates at the collocation 2 Number 448 April 12, 2005

3 facility and leaves the wire center. A wire center is any ILEC switching office that terminates and aggregates loop facilities. Business line counts are defined as ARMIS business lines, plus business UNE-P lines and enterprise UNE loops. Wire Center Tiers All ILEC wire centers are classified into three tiers based on indicia of the potential revenues and suitability for competitive transport deployment. For purposes of transport unbundling, Tier 1 Wire Centers are those wire centers with four or more fiber-based collocations or with 38,000 or more business lines; this tier includes all ILEC switching locations that have no line-side facilities but are nevertheless points of traffic aggregation in the ILEC s network (e.g., tandem switches). Tier 2 Wire Centers are those wire centers with three or more fiber-based collocations or with 24,000 or more business lines. Tier 3 Wire Centers are those that are not Tier 1 or Tier 2 wire centers. These offices are characterized by the FCC as having very low potential revenues, as indicated by two or fewer fiber-based collocators and a low number of business lines. See Table 1. The Commission applies its wire center test according to capacity level and type of transport: DS1 Transport ILECs are obligated to provide unbundled DS1 transport that originates or terminates in any Tier 2 or Tier 3 wire center, but are not obligated to provide unbundled DS1 transport on routes connecting two Tier 1 wire centers. Where unbundling is required, the Commission established a limit of 10 unbundled DS1 transport circuits that any carrier may obtain at regulated rates on any single route. See Table 2. Table 1. Classification of Wire Center by Tier for Transport Unbundling Either/Or: Unaffiliated Fiber-Based Collocations (minimum) Business Lines (minimum) Tier ,000 Tier ,000 Tier 3 All others All others Table 2. ILEC Obligation to Unbundle DS1 Transport on Any Particular Route Originating Wire Center Terminating Wire Center Must the ILEC Unbundle DS1? Tier 1 Tier 1 No Tier 1 Tier 2, or Tier 3 Yes Tier 2, or Tier 3 Tier 1, Tier 2, or Tier 3 Yes 3 Number 448 April 12, 2005

4 DS3 Transport ILECs are obligated to provide unbundled DS3 transport that originates or terminates in any Tier 3 wire center, but are not obligated to provide unbundled DS3 transport on routes connecting any combination of Tier 1 and Tier 2 wire centers. Where unbundling is required, the Commission limited to 12 the number of DS3s that any carrier may purchase at regulated rates on any route. See Table 3. Dark Fiber Transport Dark fiber is fiber optic cable that has been deployed by a carrier but has not yet been activated. ILECs are not required to unbundle dark fiber transport on routes connecting wire centers where both of the wire centers are classified as either a Tier 1 or Tier 2 wire center. See Table 4. Entrance Facilities ILECs are not obligated to unbundle access to entrance facilities. Transition Plans Where DS1 and DS3 dedicated transport is no longer required to be unbundled, competing carriers have 12 months to transition to alternative facilities or arrangements. Competing carriers have 18 months to transition for dark fiber transport. These transition plans apply only to the embedded customer base. Any dedicated transport UNEs that a CLEC leases as of the effective date of the Remand Order, but for which the Commission determines that no section 251(c) unbundling requirement exists, may be sold by the ILEC at a rate equal to the higher of (1) 115 percent of the rate the requesting carrier paid for the transport element on June 15, 2004, or (2) 115 percent of the rate the state commission established, if any, between June 16, 2004 and the effective date of the Remand Order. Table 3. ILEC Obligation to Unbundle DS3 Transport on Any Particular Route Originating Wire Center Terminating Wire Center Must the ILEC Unbundle DS3? Tier 1 or Tier 2 Tier 1 or Tier 2 No Tier 1 or Tier 2 Tier 3 Yes Tier 3 Tier 1, Tier 2, or Tier 3 Yes Table 4. ILEC Obligation to Unbundle Dark Fiber Transport on Any Particular Route Originating Wire Center Terminating Wire Center Must the ILEC Unbundle Dark Fiber? Tier 1 or Tier 2 Tier 1 or Tier 2 No Tier 1 or Tier 2 Tier 3 Yes Tier 3 Tier 1, Tier 2, or Tier 3 Yes 4 Number 448 April 12, 2005

5 Unbundling of High-Capacity Loops Loops are the transmission facilities between a central office and the customer s premises. The FCC s prior rule requiring unbundled access to mass market loops in all markets was not disturbed by the D.C. Circuit. The Remand Order addresses only relief from unbundling of high-capacity loops. The Commission has defined highcapacity loops as those of DS1 or higher capacity. The Commission found that, in addition to the substantial fixed costs involved in deploying competitive facilities, CLECs also face substantial operational barriers to constructing their own facilities. Impairment Narrowed For purposes of UNE loop unbundling, the FCC found that requesting carriers are not impaired within the service area of wire centers that contain significant competitive fiber deployment and serve a large number of business lines. The Commission found that a combination of both high business line counts and the presence of fiber-based collocators will likely correspond with actual selfdeployment of CLEC loop facilities or indicate where deployment would be economic and potential deployment likely. 4 As with transport, the FCC adopted a separate test for when unbundling requirements cease for DS3-capacity loops, DS1-capacity loops and dark fiber loops. DS3-Capacity Loops ILECs are no longer required to unbundle DS3 loops in any building served by a wire center with at least 38,000 business lines and at least four fiber-based collocators. The Commission established a cap of one DS3 loop per carrier per building, where unbundling is required. DS1-Capacity Loops ILECs are no longer required to unbundle DS1 loops in any building served by a wire center with at least 60,000 business lines and at least four fiber-based collocators. The Commission established a cap of ten DS1 loops per carrier per building, where unbundling is required. Dark Fiber Loops The Commission found that requesting carriers are not impaired on a nationwide basis without access to unbundled dark fiber loops because the barriers to entry relating to the deployment of dark fiber loops can be overcome through selfdeployment of lit facilities. Thus, effective immediately, ILECs are no longer required to offer unbundled access to dark fiber loops, subject to a transition plan for existing customers. DS-0 Loops The Commission found impairment in all markets for DS-0 loops. The Remand Order does not specify a test for a finding of non-impairment, nor suggest how carriers with actual loop-based competition might get relief from mass market loop unbundling obligations. The FCC rejected a market share loss test for loop unbundling relief. Transition Plan The Commission adopted a 12-month plan for lit fiber UNE loop-based CLECs to transition to alternative facilities or arrangements. In addition, the Commission adopted an 18-month transition plan for dark fiber loops. These transition plans apply only to the embedded customer base. Any highcapacity UNE loop that a CLEC leases as of the effective date of the Order, but for which the Commission determined that no section 251(c) unbundling requirement exists, shall be available for lease from the ILEC during the transition period at a rate equal to the higher of (1) 115 percent of the rate the requesting carrier paid for the loop element on June 15, 2004, or (2) 115 percent of the rate the state commission established, if any, between June 16, 2004 and the effective date of the Remand Order. 5 Number 448 April 12, 2005

6 EELS The Commission determined that it would not disturb the eligibility criteria for enhanced extended links (EELs) established in the Triennial Review Order and upheld by the Court of Appeals. 5 Unbundling Framework Clarified In addition to the Commission s specific unbundling rules, the Remand Order articulates several new principles underlying the new rules on impairment and non-impairment. The Commission retained the previous unbundling framework, including the distinction between mass market and enterprise customers. 6 In its Order, the FCC clarified its impairment standard in response to specific questions raised by the Court of Appeals: Reasonably Efficient Competitor The Commission clarified that in assessing impairment pursuant to the standard set forth in the Triennial Review Order, it will presume a reasonably efficient competitor. Specifically, when evaluating whether lack of access to an ILEC network element poses a barrier or barriers to entry that are likely to make entry into a market uneconomic, the Commission considers whether entry is economic by a hypothetical competitor acting reasonably efficiently, using reasonably efficient technology. Service Eligibility Considerations In response to the Court of Appeals, the Commission abandoned the concept of a qualifying service, which previously placed limits on the extent of ILEC services subject to unbundling obligations. Section 251(c)(3) of the Communications Act confers on ILECs [t]he duty to provide [UNEs] to any requesting carrier for the provision of a telecommunications service. In deciding which elements should be unbundled, Section 251(d)(2) of the Act directs the Commission to consider whether the failure to provide access to such network element would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer. In the Triennial Review Order, the Commission adopted a qualifying service interpretation of Section 251(d)(2) to limit access to UNEs by long-distance carriers not competing in the local exchange market. In the Remand Order, the FCC subjected all telecommunications services offered by ILECs to its unbundling framework. The Commission concluded that whether a requesting carrier seeking to provide telecommunications service is eligible to purchase UNEs under Section 251(d)(2) depends solely on its impairment analysis and other factors it considers under section 251(d)(2). Under this analysis, the Commission still will foreclose access to UNEs exclusively to provide long-distance services, but on the basis that the market for such services is already sufficiently competitive, citing mobile wireless and long distance competition. The Commission observed that the telephone exchange service and exchange access service markets do not share the same competitive conditions that would support a finding that the costs of unbundling outweigh the benefits. Relevance of Tariffed Alternatives The Commission also determined that in the local exchange market, the availability of a tariffed alternative should not foreclose unbundled access to a corresponding network element. A CLEC may request access to an UNE even where a carrier could, in theory, use a tariffed offering to enter a market instead of UNEs. Reasonable Inferences Rather Than Market-Specific Evidence It is significant that the Commission declined to make market-specific impairment evaluations, but instead 6 Number 448 April 12, 2005

7 relied heavily on generalized tests, based on inferences that could be drawn with regard to market evidence of competitive deployment in similar markets. Specifically, the Commission found correlations between the number of business lines and/or fiber collocations in a particular wire center and a revenue opportunity sufficient to lead to facilities duplication in the geographic area served via that wire center. Where the Commission made a finding of non-impairment, it was based on generic market characteristics and not limited to a particular geographic location nor to a particular CLEC. The Commission did not comment on pending requests for non-impairment findings in specific markets where real facilities-based competition exists despite smaller-sized wire centers. Thus, it is still not clear whether the FCC will ever grant relief from loop or transport unbundling obligations to an ILEC that shows actual facilities-based competition in a market that fails to meet the wire center tests described above. The next opportunity for the FCC to decide such a question would be consideration of Qwest s petition for forbearance from unbundling obligations in Omaha, which is likely to occur before September 21, Implementation of the Order without Undue Delay: Self-Impairment Analysis Required of CLECs The FCC ordered both ILECs and CLECs to implement the Order immediately, renegotiating their interconnection agreements where necessary. The burden is on the CLEC to certify that it is entitled to a UNE under the new rules, and upon receipt of such certification the ILEC must provision the requested UNE, and may challenge it only after the fact. To submit an order to obtain a highcapacity loop or transport UNE, a requesting carrier must undertake a reasonably diligent inquiry and selfcertify that, to the best of its knowledge, its request is consistent with the Commission s requirements and it is therefore entitled to unbundled access to the particular network elements sought. Upon receiving a request for access to dedicated transport or highcapacity UNE loops, the ILEC must immediately process the request. To the extent that an ILEC seeks to challenge such unbundling requests, it can use the dispute resolution procedures provided for in its interconnection agreement, and otherwise seek a ruling from the state pursuant to Section 252 of the Communications Act. In markets where the non-impairment criteria were met as of March 11, 2005, the transitional rates adopted by the FCC are available (summarized below). However, in markets where impairment existed as of March 11, 2005 and non-impairment conditions are met at some later date, carriers are expected to negotiate reasonable transition plans. Questions concerning the FCC s unbundling regime or other aspects of federal communications policy should be addressed to Karen Brinkmann at (202) or Nia Mathis at (202) , or by to karen.brinkmann@lw.com or nia.mathis@lw.com. 7 Number 448 April 12, 2005

8 Summary of Interim Price Increases Table 5. Transition Rates 7 UNE Interim Rate is the Higher of: Or: Duration Switching and UNE-P Rate at which the requesting carrier purchased UNE-P or switching as of 6/15/04 plus $1 Rate set by state commission between 6/15/04 and 3/11/05, plus $1 3/11/05 to 3/11/06 Dedicated Interoffice Transport (DS1 or DS3) 115% of the rate at which the requesting carrier purchased transport on 6/15/04 115% of the rate set by state commission between 6/15/04 and 3/11/05 3/11/05 to 3/11/06 Dedicated Transport (dark fiber) 115% of the rate at which the requesting carrier purchased transport on 6/15/04 115% of the rate set by state commission between 6/15/04 and 3/11/05 3/11/05 to 9/11/06 DS1 and DS3 Loops 115% of the rate at which the requesting carrier purchased transport on 6/15/04 115% of the rate set by state commission between 6/15/04 and 3/11/05 3/11/05 to 3/11/06 Dark Fiber Loops 115% of the rate at which the requesting carrier purchased transport on 6/15/04 115% of the rate set by state commission between 6/15/04 and 3/11/05 3/11/05 to 9/11/06 8 Number 448 April 12, 2005

9 Endnotes 1 47 U.S.C. 151 et. seq. (the Communications Act or the Act.) 2 In the Matter of Unbundled Access to Network Elements; Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers; CC Docket No , FCC (rel. Feb. 4, 2005) (Remand Order). 3 For background on the FCC s earlier UNE rules and the court s decision, see Latham & Watkins Client Alert No. 323 (FCC Releases Order in UNE Triennial Review New Procedures Announced for Seeking Relief from Unbundling Requirements, August 25, 2004) and No. 270 (FCC Decision in the UNE Triennial Review, March 10, 2003), available at 4 In contrast to the test for dedicated transport, the test for high-capacity loops requires both a minimum number of business lines served by a wire center and the presence of a minimum number of fiber-based collocators to show that requesting carriers are not impaired. 5 See Remand Order at footnote Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, Report and Order and Order and Remand and Further Notice of Proposed Rulemaking, 18 FCC Rcd (2003) (Triennial Review Order). 7 These transition periods apply to UNEs that meet the non-impairment thresholds as of March 11, In the future, the FCC expects LECs to negotiate transition plans. See Remand Order, footnotes 399 and See FCC Public Notice DA (Pleading Cycle Established for Comments on Qwest s Petition for Forbearance in the Omaha, Metropolitan Statistical Area, UC Docket ), released June 25, Number 448 April 12, 2005

10 Office locations: Boston Brussels Chicago Frankfurt Hamburg Hong Kong London Los Angeles Milan Moscow New Jersey New York Northern Virginia Orange County Paris San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed below or the attorney whom you normally consult. A complete list of our Client Alerts can be found on our Web site at If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit to subscribe to our global client mailings program. If you have any questions about this Client Alert, please contact Karen Brinkmann or Nia C. Mathis in our Washington, D.C. office or any of the following attorneys. Boston David A. Gordon Brussels Andreas Weitbrecht +32 (0) Chicago Mark D. Gerstein Christopher D. Lueking Frankfurt Hans-Jürgen Lütt John D. Watson, Jr Hamburg Joachim von Falkenhausen Hong Kong John A. Otoshi David T. Zhang London Bryant Edwards Los Angeles Thomas W. Dobson Milan Michael S. Immordino Moscow Anya Goldin New Jersey David J. McLean New York Kirk A. Davenport II Marc D. Jaffe Eric J. Schwartzman Northern Virginia Eric L. Bernthal Orange County Patrick T. Seaver Paris Christophe Clarenc John D. Watson, Jr. +33 (0) San Diego Scott N. Wolfe San Francisco Tracy K. Edmonson Shanghai Rowland Cheng Silicon Valley Peter F. Kerman Robert A. Koenig Singapore Michael W. Sturrock Tokyo Michael J. Yoshii Washington, D.C. Gary M. Epstein William P. O Neill Number 448 April 12, 2005