Editor’s note: Richard Deason is a consultant with Lightwave Consulting Group based in Charlotte.
_______________________________________________________________________________________Who says government regulations have limited impact on business?

Ask any CEO of a Competitive Local Exchange Carrier (CLEC) and they will likely and emphatically inform you that recent Federal Communications Commission (FCC) rulings have had a dramatic impact on their business plans. The FCC’s Triennial Review Remand Order (TRRO) issued in December 2004 and the E-911 ruling in May 2005 are both destined to have an adverse cost effect on CLECs.

Here’s how–.

The End of Wholesale Pricing

The FCC’s TRRO overturned the pricing policies resulting from the Telecom Act of 1996 by effectively eliminated wholesale pricing for Unbundled Network Elements (UNEs) purchased by CLECs from the local telephone companies such as BellSouth and Verizon. While some wholesale elements (e.g. local loops) are still partially available to CLECs, this ruling squashed the UNE-Platform from which CLECs were able to buy wholesale switching and access from the local telephone companies. The FCC compromised to some extent by raising these wholesale UNE-P rates by only $1 for a 12-month period ending March 2006.

With this deadline looming, CLECs are now faced with decisions. Do they spend precious capital on the deployment of softswitches, other devices, and new back-office systems to migrate hard-won UNE-P customers to Voice-over-IP (VoIP) or UNE-L services? How many of these customers qualify for a level of Digital Subscriber Line (DSL) or cable modem service that will allow for VoIP? Or, should the CLECs sign a resale agreement with the incumbent local telephone companies and watch their line costs creep up over the next few years to a point where profitability is unlikely? They also might consider trading or selling UNE-P customers to other CLECs, or “returning” some of their customers to the incumbent local telephone companies.

To Make Matters Worse

If the TRRO was not bleak enough news for CLECs, the FCC’s more recent ruling requiring VoIP providers to implement E9-1-1 access within the next few months throws more fuel on the fire of mounting financial losses for CLECs. Now, CLECs are forced to spend even more to deploy a rather complex solution so that fixed and nomadic VoIP subscribers can contact law enforcement agencies during an emergency. Granted, this action is required for VoIP to become a truly viable replacement for traditional local telephone service but it could not have come at a worse time for CLECs looking to utilize VoIP as a replacement for UNE-P.

On an editorial note, it is interesting that the FCC required VoIP providers to connect their networks to the E9-1-1 system for roaming VoIP users while the cellular industry remains immune from this requirement.

Give Us Your Huddled Masses

So, with all of this less-than-positive news, what is a CLEC to do? Almost ten years after the enactment of the Telecom Act of 1996 and despite numerous debt restructurings by CLECs through bankruptcies or other methods, this fact remains- no CLEC has proven its variation of the CLEC business model to a degree of sustainability. And I am talking about The Big E here- Earnings After Taxes, Interest, and Depreciation- not the popular financial metrics of the “roaring 90’s”- EBITDA or even EBIT.

Not the “big boys” who attempted it like AT&T and MCI.

Not the regional players such as US LEC, ITC DeltaCom, or McLeod.

Not the fiber-based CLECs, Time Warner Telecom or ICG.

Not the ILECs who edged out into the CLEC business- FairPoint Communications, Madison River, or CT Communications.

In summary, the problems plaguing the CLEC industry (too much supply, not enough demand, lack of scale, cost barriers of entry) can be solved through one strategy alone–create enough critical mass of customers through consolidation. In other words, merge or perish. Draconian cost cutting measures, “buying” market share with predatory pricing practices, or even debt reduction through bankruptcy have yet to lead to the path of profitability for CLECs.

With the pending marriages of AT&T/SBC and Verizon/MCI, this trend has begun. Who’s next?

Richard Deason can be contacted at rd@lightwavegroup.com

LightWave Group: www.lightwavegroup.com