The Telecommunications Act of 1996 (the “1996 Act”) was designed to facilitate local telephone competition by eliminating state-imposed barriers to competition, and by forcing the incumbent local exchange carriers (generally the incumbent former Bell operating companies such as Verizon, SBC and Qwest) to cooperate and lease their network elements to competitive companies. Thus, the new entrants – the competitive local exchange carriers (the “CLECs”) – were allowed to build their own competing networks and to interconnect that infrastructure with the existing telephone networks of the incumbents.

Competitors who chose to build their own infrastructure were know as “facilities-based” carriers since their aim was to provide local service either exclusively or predominately with their own facilities. The Act provided that the ILECs had to make their services and infrastructure available for these new carriers to tie-into the ILECs’ networks at regulated, wholesale rates.

The various elements of the ILECs’ systems that were to be provided to the CLECs were referred to as being “unbundled” such that any or all of them were made available at competitive rates. These unbundled network elements are referred to in the industry as “UNEs”, and include such things as actual copper wire to customer’s homes, fiber strands, and local switches.

Typically a facilities-based CLEC will colocate its switch at the ILEC’s local exchange, then lease the unbundled local loop to make connections to its customers. Alternatively, a CLEC might lease both an unbundled local loop and an unbundled switch, and make a connection to the network at the ILEC’s switch. When combined into a complete set in order to provide an end-to-end circuit, the unbundled network elements constitute a UNE-P (UNE-Platform) system.

These two systems were believed to be imperative in creating competition in the industry, and during the late 1990’s hundreds of new telecom companies, employing both UNE-P and facilities-based business models, entered the industry, investing billions of dollars in creating networks with thousands of customers. Into the early years of the new century, the FCC tried unsuccessfully to set standards requiring the ILECs to unbundle their networks. Its rules were continually questioned in the federal courts, which often found the FCC rules and regulations contrary to the Act, and therefore null and void. During this time, with the stock market implosion, many of the competitive start-up companies failed, or were forced to restructure.

More recently, the FCC has started the wholesale rollback of rules otherwise designed to promote competition. At the end of last year it announced that starting in March of 2006 the ILECs would no longer have to provide UNE-P services at competitive rates. (See, FCC, In re Unbundled Access to Network Elements, Docket No. 04-313, Order on Remand (Dec. 15, 2004). That is, the incumbents no longer will be forced to lease their switches to non-facilities based carriers. The result for those CLECs whose business models are based on a UNE-P basis: either turn to other means of accessing the local exchange (for instance, by investing in their own switches or using new technologies such as VoIP) or discontinue business altogether.