Verizon’s Forbearance Petition Fails Evidence Test

The FCC in early December dealt Verizon Communications Inc. a bruising forbearance blow when it denied, unanimously, the company’s request for UNE deregulation in six northeastern markets. The move didn’t bode well for Qwest Communications International Inc., which has a similar petition pending.

The decision came a day earlier than expected, on Dec. 4, after weeks of rumors that all five commissioners were ready to vote against Verizon. Up until Dec. 3, companies including One Communications Corp. and Time Warner Telecom Inc. filed letters with the FCC refuting Verizon’s evidence for regulatory relief. Those kinds of efforts (which also flowed from the likes of Covad Communications Group, Sprint Nextel and XO Communications Inc.), coupled with Congressional pressure, resulted in a 5-0 vote to deny Verizon’s request.

Despite the outcome, Verizon stuck to its contention that it faces heavy CLEC, cable, VoIP and wireless competition in the Boston, New York, Philadelphia, Pittsburgh, Providence, R.I., and Virginia Beach, Va., metropolitan statistical areas (MSAs), which it says was enough competition to merit freedom from government-mandated UNE pricing. “If the FCC had approved these petitions, it would have permitted Verizon to provide network facilities at commercial rates,” said Tom Tauke, Verizon’s executive vice president for public affairs, policy and communications, in a prepared statement.

Of course, that’s exactly what competitors, politicians and consumer activists wanted to avoid. If Verizon were allowed to use commercial pricing for its UNEs, CLECs would have paid more for access, and then they would have had to pass down those costs to users. Overall, annual retail wireline expenditures in the six northeastern markets would have skyrocketed by $2.4 billion, according to QSI Consulting Inc. in its Oct. 2007 report, “An Analysis of Verizon’s Petition for Forbearance: A Quantification of the Impact of Forbearance.”

What If Petition Had Been Granted? A breakdown of the likely increase in annual wireline expenditure by MSA

FCC commissioners at press time had not released their statements explaining why they vetoed Verizon’s requested, but they did say in the Dec. 4 notice that they disagreed with Verizon’s assessment of competition in the six markets.

Congressman Ed Markey, D-Mass., who announced the forbearance news to reporters, concurred. His constituency includes Boston, and he opposed Verizon’s plea all along, granting it “would have led to a dramatic reduction in innovation and a hike in the prices consumers pay for both traditional telecommunications and broadband services,” he says.

Massachusetts Congressman Ed Markey

Now the question is whether Verizon will try again for the six-market forbearance. The company won’t offer the answer yet. “The order isn’t out yet, but we’ll study it and weigh our options,” says David Fish, a Verizon spokesman.

There also is the chance that Verizon will challenge the rejection in court, say analysts for investment bank Stifel, Nicolaus & Co. Inc.

Meanwhile, Qwest, like Verizon, is waiting for an FCC order on a similar request. The Denver-based carrier in April 2007 filed for UNE forbearance in Denver, Phoenix, Minneapolis/St. Paul and Seattle. It wants the same leniency it got in Omaha, Neb., in 2005.

Analysts say the Verizon ruling isn’t a good sign for Qwest. “When a market for communications services becomes fully competitive, as the four cities in our pending filing are, continuing government regulation is counter-productive and should be ended, as it was in Omaha,” says Shirley Bloomfield, senior vice president of federal relations for Qwest.

Fallout from the Omaha vote is ongoing. McLeodUSA Inc., now owned by PAETEC, has appealed the decision; if federal judges don’t side with McLeodUSA, the company repeatedly has said it will have to exit the Omaha market because the commercial prices are just too high.

The FCC’s rejection happened in a year that’s seen a lot of controversy over forbearance in general. AT&T Inc., EMBARQ and Frontier/Citizens all received partial relief from government rules, even as lawmakers and competitors protested that incumbents were using the forbearance clause in the 1996 Telecom Act to rewrite the law in their favor. Verizon’s six-MSA forbearance petition was a particularly bitter pill for the competitive industry because of how Verizon got its way through the “deemed granted” provision in March 2006. That was when the FCC, unable to reach a consensus, failed to vote on Verizon’s request for broadband deregulation and the company got its relief automatically once the deadline passed. The uproar over the inaction sparked government inquiries and court challenges and to this day, only Verizon knows how much latitude it secured — the FCC doesn’t publish an order when commissioners don’t vote on a matter.

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