On February 4, 2005, the FCC released its Order on Remand ("Order") in its review of the network equipment and facilities ("unbundled network elements" or "UNEs") that incumbent local telephone companies ("ILECs") must provide at "cost-based" rates to other carriers ("CLECs") for the provision of competing telephone services. The Order responds to the remand by the D.C. Circuit ("USTA II") of certain rulings by the FCC in a prior order known as the "Triennial Review Order" ("TRO"). The new rules adopted in the Order take effect on March 11, 2005.

In determining which UNEs should be subject to unbundling obligations, the FCC generally considers whether requesting carriers would be "impaired" without access to the requested UNE. This inquiry, in turn, considers whether requesting carriers can profitably provide competing local service by constructing their own facilities, or obtaining them from third parties other than the ILEC. The FCC also considers whether impairment, if any, is outweighed by the costs of unbundling, including costs of providing and administering shared facilities, and the impact on investment incentives.

The Order reaffirms the FCC's prior commitments, when making unbundling determinations, to encourage facilities-based competition and to consider the potential impact on the incentives of ILECs and CLECs to invest in new facilities. Applying these standards, the FCC found that the availability of the "UNE-Platform," the combination of UNEs comprising most of an ILEC's local network, has substantially diminished investment by CLECs in their own network equipment and facilities.

The Order concludes that ILECs need not provide access to any UNE that is used solely to provide either "mobile wireless service" (defined as "all mobile wireless telecommunications services, including but not limited to CMRS") or "long distance" service. In reaching this result, the FCC reasons that in light of the robust competition that has developed for these services, the cost of unbundling outweighs its benefits. However, if a UNE is used to provide local service, it may also be used to provide "any telecommunications service including" mobile wireless or long distance service. As a result of this ruling, CLECs may convert a higher-priced "special access" circuit offered under tariff to a lower-priced UNE if the carrier-customer also uses the circuit to provide local service in addition to long distance service.

On another vigorously contested issue, the FCC ruled that it would continue not to consider the availability from the ILECs of "special access" or other tariffed services in determining whether CLECs are impaired without access to UNEs. The FCC reasoned that relying on the availability of a tariffed service would give ILECs too much unilateral control over the scope of their unbundling obligations. The FCC also stated that it lacks the resources to evaluate the numerous and diverse services and facilities available under ILEC tariffs.

With respect to the particular UNEs that the FCC was required to consider by the D.C. Circuit's remand, the FCC ruled as follows:

• Dedicated Interoffice Transport (transmission links connecting telephone company offices or wire centers)
  • CLECs are impaired without, and thus may access, dedicated interoffice transport facilities connecting a pair of ILEC wire centers, except in the following circumstances:
    • DS1 transport. Both wire centers contain at least four fiber-based collocators or at least 38,000 business lines.
    • DS3 or dark fiber transport. Each wire center contains at least three fiber-based collocators or at least 24,000 business lines.
  • On routes with no unbundling obligation for DS3 transport, but an unbundling obligation for DS1 transport, each carrier may obtain no more than 10 DS1 circuits; in addition, even on routes that do not meet the above criteria, a CLEC cannot have more than 12 DS3s per route.
  • Competing carriers are not impaired without, and may not access, facilities ("entrance facilities") connecting an ILEC's network with a CLEC's network.

• High-Capacity Loops (transmission links connecting large or medium-sized customer premises to the telephone network)
  • Competing carriers are impaired without, and thus may access, high-capacity loops, except in the following circumstances:
    • DS3-capacity loops. Any building within the service area of a wire center containing four or more fiber-based collocators and 38,000 or more business lines.
    • DS1-capacity loops. Any building within the service area of a wire center containing four or more fiber-based collocators and 60,000 or more business lines.
  • To encourage the building of alternative facilities, the FCC limits each CLEC's access to one DS3 loop and 10 DS1 loops per building.
  • Competing carriers are not impaired without access to "dark fiber loops" (transmission links without electrical or other equipment required to operate them).

The FCC established transition periods of between 12 and 18 months for dedicated transport and high-capacity loops that, as a result of the Order, are no longer subject to unbundling requirements. The rates that ILECs may charge during these transition periods are generally about 115% of current rates.

• Mass Market Local Circuit Switching
  • ILECs need not provide CLECs with unbundled access to mass market local circuit switching. The FCC reasons that CLECs can profitably provide service using their own switches, and that ILECs have developed "batch hot cut" processes that will permit the disconnection of loops from ILEC switches and their connection to CLEC switches, without noticeable service interruptions to end user customers.
  • The FCC adopted a 12-month plan for competing carriers to transition from use of unbundled mass market local circuit switching. During this time, competing carriers will retain access to the UNE-Platform generally at current rates, plus $1.00. CLECs may not serve new customers through ILEC switching during the transition period.

The FCC generally expects CLECs and ILECs to implement the changes required by its rules, and complete any necessary amendments to their interconnection agreements, by the end of the transition periods specified in the Order.

As FCC Chairman Powell said in his separate statement, "For eight years, the effort to establish viable local unbundling rules has been a litigation roller coaster." In spite of Chairman Powell's hope that this fourth set of rules will terminate litigation over UNEs, it may not do so. In the immediate term, ILECs and CLECs will carefully scrutinize the Order to identify issues for appeal, most likely to the D.C. Circuit, and other issues that would more appropriately be the subject of petitions to the FCC seeking reconsideration or clarification. Appellate issues may include the FCC's refusal to consider in the impairment analysis the ability of CLECs to compete using tariffed services in lieu of UNEs (an issue that would be raised by CLECs), and the nationwide finding of nonimpairment without access to UNE switching (an issue that would be raised by ILECs). Possible subjects for reconsideration or clarification include the method and timing of verifying that dedicated facilities ordered as UNEs will not be used solely to provide long distance or mobile wireless services.