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telecom: Whose line is it, anyway?

the issue has a lot of names - mandated access, open access, forced access. The name you use depends on where you stand and what you are selling. Whatever you call it, the issue is drawing an awful lot of attention from property owners, telecom companies and the FCC.

The FCC and the federal legislators are currently in the process of deciding whether to regulate the real estate industry in the name of promoting local telecommunication competition.

Telecommunications companies that need to rewire buildings to provide their service (facilities-based companies) claim they are being unfairly discriminated against by building owners. They argue that they are not being offered the same terms of access to buildings as their competition, the incumbent local exchange carriers (ILECs). Regulation, either on the state or federal levels, would require owners of multitenant properties to provide access to their premises on a non-discriminatory basis to any telecommunications service provider (TSP) that seeks access.

And therein lies the rub. These are inflammatory words for the real estate industry. The mention of "their premises, their investments," in connection with regulation is not taken lightly by property owners. To those owners "non-discriminatory basis" is an innocuous way of saying rent control. "Any TSP" would mean that the property owner would surrender control over who lays wire and has a presence in its building.

Competitive local exchange carriers (CLECs) are the telecoms that are battling the monopolistic ILECs. The CLECs gain access to a building through negotiation. The CLEC approaches a property owner, usually when it has acquired a customer in the building, to gain approval from the owner to wire the building. The two parties sit down and negotiate the terms and conditions of the lease or license agreement much like any other tenant. These agreements can vary greatly depending on the building, the market, the TSP and the services provided. More often than not, terms and a price are agreed upon and the TSP is allowed access.

An age-old debate The debate over building access is not new. Since there were alternatives to the Bell companies, the competitive telecom industry and real estate industry have butted heads on the price of access and whether building owners should give up a certain measure of control of their property for the sake of competition.

The building access issue heated up when the FCC auctioned licenses for radio spectrum and telecom companies turned to regulatory bodies to gain access to rooftops. The telecom companies' horror stories of extortion and unfairness on the part of landlords did not do much good, however. No regulations were approved to mandate access.

Now, TSPs are scrambling for new clients, and the building access issue is heating up again. More than three years following the Telecom Act of 1996, local telecom markets are still dominated by the ILECs - they control 95% of the market. Many CLECs are pushing for regulatory pressure to help loosen the ILECs' grip on the market. Legislators may be listening this time. The persistence of the ILEC monopoly has introduced a sense of urgency to the debate, and the FCC and legislators have shown signs of impatience wi th the rate of deregulation.

One does not have to agree with the supporters of mandated access to understand their motivation. The race is on for the telecom industry, and the amount of money at stake is staggering. Deregulation of local telecom markets and the increasing importance of high quality telecommunications services are creating a wide open market for CLECs. Only around 5% of the multitenant office space in the United States is wired for high-speed Internet access and the deregulated local telecom markets are theoretically up for grabs. The CLECs are brawling for this market share as well as Wall Streets investment dollars, and access to buildings and new customers is central to winning both.

Real estate finds itself in the precarious position of fighting regulators for the control of their properties while trying to sort out the confusing, rapidly changing telecom service market. A recent BOMA/ULI survey revealed that playing the telecom card wisely is an important factor in drawing and maintaining tenants. The survey asked tenants to rank the top intelligent building features. Number one on the list was built-in wiring for Internet access followed closely by wiring for high-speed networks. More than 70% of the tenants surveyed said that they would be willing to pay extra for state-of-the-art telecom technology.

The FCC has not ruled on the access issue yet, but its objectives are clear: Promote competition. The Telecommunications Act of 1996 was, in part, intended to disassemble the ILEC monopoly. The FCC expects many CLECs to gain a foothold in the market by providing service over existing unbundled ILEC lines in the short term, but they believe the best way to break the ILEC bottleneck is facility-based competition. Facility-based competitors are CLECs that wire the buildings they serve.

Furthermore, Thomas Sugure, chief of the FCC Wireless Telecommunications Bureau said that, "In order for facilities-based competition to be fully available for all customers, reasonable and nondiscriminatory access to competing providers must be provided by whomever controls these facilities."

The FCC is also showing some impatience with the rate of growth of competition. In FCC documents published last year, the FCC states that, "initial steps thus far had little impact on terms of providing most customers with choices of service providers or reducing the ILECs' market power. We are also concerned that the growth of competition has been uneven and appears to be directly benefiting only certain classes of telecommunications service users, for example, business customers in more urbanized areas."

It stands to reason, then, that the FCC will do what it can to support the CLECs.

TSPs - the case for regulation According to some CLECs in the market, they are increasingly being denied access to buildings where they have customers waiting for service. "When we identify a customer in a building, we need approval to gain access to the infrastructure," says LaCharles Keesee, director of government affairs for ICG Communications in Englewood, Colo. "Responses vary. We often get access. Many times we are excluded, either outright with a flat no, or indirectly through economics. It is hard to quantify how widespread the issue is, but it is a growing, rather than a shrinking, problem."

Firms favoring regulation break down their arguments into two basic lines of reasoning. One is economic. The other is a matter of public policy and customer choice.

The first economic argument is that the imbalance between the terms of access for ILECs and CLECs is hampering a competitive local market for local service.

Even for a company like New York-based OnSite Access, which tries to cooperate with building owners, the imbalance between ILECs and CLECs is an issue. "There is a tremendous imbalance in the terms of access that for ILECs and the terms for CLECs," explains Daren Hornig, co-founder and executive vice-president of OnSite Access. "ILECs have access to every single building, with infrastructure that has been put in place with the help of taxpayers. We have to negotiate to gain access and that costs money for lawyers, then we pay fees on top of that. ILECs have free access forever."

"We are willing to pay fair market value for access, but if the ILECs are paying nothing for the access, then that is a significant issue," says Keesee. "We believe that CLECs should have fair and non-discriminatory access." "Non discriminatory" for CLECs means terms equal to ILECs.

For many, the obligation for ILECs to serve all of the customers in their service area is the hole in this argument. "There are problems with that argument," responds Jerry Marmelstein, president of Riser Management Systems in Burlington, Vt. "Their argument is that ILECs don't pay anything for this space, and that they should be working from the same position. But ILECs serve everyone; CLECs are serving only a part of the universe."

Many telecom companies admit they are targeting the most lucrative customers and markets. One can argue that they must do so, given the dominance of the ILECs and the high costs of wiring buildings. Some industry observers contend that cherry-picking customers and markets does not help the CLECs with their effort to obtain ILEC rates for access. It creates an apples-and-oranges comparison between the ILECs and CLECs, and apples and oranges are priced differently.

Some CLECs still believe that there needs to be some leveling of the playing field. "Our competition - the ILECs - have unfettered, no-cost access to customers," notes Robert Stewart, vice president of communications at Teligent, a Vienna, Va.-based telecom company. "All CLECs have to negotiate and pay, and that is fine, but we have less than 5% of the market share and we shoulder all of the costs. There should be a way to even this out some."

The market can shift in two directions to tip the balance. Keesee of ICG hints that, perhaps the ILECs should be paying for access too. "Building owners are saying that their space is worth money and that they should be compensated for access to it," he says. "If there is such value there, then why not charge the same price for everyone?"

There are some who see this idea taking hold in the market. Instead of the CLECs getting free access to riser space, the real estate industry is coming around to the idea of charging ILECs for access. "What is happening is that the ILECs are slowly evolving into more competitive players, more like the CLECs," notes David Lawrence, senior vice president and general counsel for Burlington, Vt.-based Riser Management Systems. "That is a long road to travel for true competition, but it is happening."

"The Bell companies are coming around to the competitive pressures," says Marmelstein. "Southwestern Bell now negotiates with customers and follows procedures as any other telecom company. So the landscape is changing."

"I think that as ILECs upgrade their infrastructure or provide enhanced services, there will be more opportunity for owners to negotiate with them," according to David Crawford, CEO of Allied Riser Communications in Dallas.

Freedom of choice Telecom companies are also concerned with the tenant's freedom to choose TSPs. They argue that by denying access to buildings, for any reason, building owners are interfering with the tenant's freedom of choice.

"We believe that the customer ought to have a choice," says Stewart of Teligent. "Tenants should be able to choose between service providers. That is where we put a stake in the ground"

"One of the major concerns of the telecoms is that they do not want building owners cutting deals without giving tenants the opportunity to choose the service they want," says Evan Michaels, president of New York-based Trucom. "What you have in some cases are some real estate companies coming in and pushing tenants into bed with TSPs of the building owner's choice."

Here is the scenario: is expanding and relocates to a four-story box in the suburbs from its cramped CBD office space. They have a great relationship with XYZ Telecom and have no desire to change. In fact, feels strongly about keeping XYZ Telecom. XYZ has free broadband, alert technical assistance and great prices. What happens if the new building owner denies XYZ access to its building? Doesn't the TSP have a right to keep that tenant as a customer?

This argument assumes that unlimited choice of TSPs is possible. "The reality of the situation is that you can't have unlimited choice," says Lawrence of Riser Management Systems. "As far as facilities-based companies in buildings go, there are infrastructure issues that limit the number of providers a building can hold. The tenant can have a choice, but still not be able to get whichever TSP it wants."

Many CLECs also point out the negative effect that exclusionary agreements have on the tenant's freedom to choose. Signing an exclusionary contract where just one TSP provides service for an entire multitenant building, in their view, also stifles competition.

"We don't agree with exclusionary contracts," says Keesee of ICG. "The building owner is making the choice of service providers in place of the customers, and it bumps up against the intention of the Telecom Act and many state antitrust policies."

Citing exclusive contracts as a reason for regulation has been more effective in the past. The market, especially the office market, is frowning upon exclusives in favor of multiple TSPs. Exclusionary contracts are not considered common.

"Exclusive agreements create a contractual monopoly, and there is a trend away from them," says Lawrence. "That idea is really out of favor. Building owners are now much more careful with exclusivity. They realize that tenants would rather have a choice of multiple providers."

It's about time Telecom services are becoming more important, and there is little argument that CLECs are providing valuable technology for the building owner. Still, there are signs that CLECs are not wielding the power around the negotiation table that they might like to. In the eyes of many CLECs, the negotiation process is not entirely effective in gaining access.

Time is a thorn in the CLECs' side. "While we have been successful at gaining access to buildings, the negotiation process just takes too long," says Richard Uhl, CFO of Winstar. "On average it takes three to six months to negotiate access and even longer to negotiate a hub site," says Uhl. "That is a long time and costs a fair amount of money. The real estate [industry] is accustomed to taking a lot of time. The whole industry marches to a different drum beat."

For some, the negotiation process itself - fast or slow - is not producing acceptable results. "Most landlords are reasonable, and the negotiation process works," states Stewart of Teligent. "The problem is that there is no mechanism in place for when the negotiation process fails and the tenants do not have a choice."

Negotiations can be difficult from the CLEC perspective due to the ILECs' low cost access to buildings. "Often, by the time we show up, negotiations are shut down on fees since ILECs have free access. Building owners already have a benchmark in mind and there is really no room for negotiation. It is an economic pressure point, " says Keesee of ICG. "It is kind of like negotiating a traffic ticket - once the ticket is written, for the most part, it is over."

The negotiation process will likely get more difficult for the CLECs as the rush for access continues. Once a certain number of CLECs have access to a building, the value of adding additional CLECs shrinks.

"If a building has four or five TSPs providing services to a building, the sixth CLEC looking for access is not in a good position," says Andy Monroll, assistant general counsel at Riser Management Systems. "Tenants are already being served, and chances are they are happy with that service."

A building with more than the optimal number of TSPs running wires may be closed for competition. Mandatory access regulation would eliminate that scenario.

Despite the frustrations and hair pulling brought on by the building access issue, some in the telecom industry are optimistic about finding an acceptable solution to all parties.

"Is there a legislative solution?" says Keesee of ICG Communications. "Maybe. There may be a need for reasonable provisions for building owners to equally assess fees for access. There is law that can be passed to mandate equal, non-discriminatory access without intruding on the rights of the building owner. From our perspective, we believe there is a reasonable agreement that can be made by all of the parties involved."

Stewart of Teligent is also optimistic. "There has been so much talk of mutually exclusive goals with regard to this issue," says Stewart. "But we think property rights can be recognized in the solution."

Forced access: unnecessary, unmanageable and unconstitutional To the real estate industry the issue is not open access, or mandated access - it is forced access. "Forced access is unnecessary, unmanageable and unconstitutional," says Gerry Lederer, vice president of BOMA International.

The arguments posed by the real estate industry against forced access regulation can be broken down into three main categories: constitutional and legal issues, building owners' control of their buildings, and competition without regulation.

According the anti-regulation crowd, forced access regulation is unconstitutional. This assumes that any regulation would entail the fixing of prices or giving access away. Any taking of private property without just compensation raises issues related to the Takings Clause of the Fifth Amendment. The Takings Clause provides: "nor shall private property be taken for public use, without just compensation.

The "just compensation" clause really throws a wrench into the effort to regulate. Quantifying "just compensation" creates a sticky logistical challenge in passing constitutional tests. There are a million buildings of different sizes, locations, and uses in the United States. There are hundreds of CLECs that offer different types of service at different levels of quality. "Trying to create generic rules that apply to all CLECs and all buildings is a nightmare," says Lawrence of Riser Management Systems.

Lawyers point to the Supreme Court's decision in Loretto v. Teleprompter CATV Corp. for precedent. The case establishes a law that states that the permanent physical occupation of a private property, regardless of size, constituted a per se taking of private property.

Furthermore, according to a constitutional analysis of the FCC's proposed rulemaking done by Cooper, Carvin & Rosenthal, the Loretto case "plainly dictates that such a non-discriminatory access provision would constitute a per se taking of property."

There are also constitutional issues raised related to the regulatory taking that may take place by interfering with the property owner's right to deliver services to tenants. That line of agrument is related to the ability of the building owner to control the premises in order to improve the value of their investment.

There is also question as to whether the FCC even has the authority to regulate the real estate industry. The FCC itself recognizes this issue. In a statement following the NPRM adopted by the FCC last year, FCC Commissioner Michael Powell states, "We have no specific statutory provision that directs, or 'empowers,' us to assert regulatory authority over owners of private property."

There is a way around the jurisdiction challenge, however. Congress has the power to grant the FCC "ancillary jurisdiction"in order to regulate building access. While the power to regulate is theoretically within the power of the FCC, granting this jurisdiction seems like dubious policy to some. Powell says, in part, "We may eventually win an 'ancillary jurisdiction'... but it does not seem like good policy to propose a new regulatory dictate on these entities before other measures...prove inadequate."

Legal arguments may prove to be an effective means to strike down regulatory proposals, but the most passionate arguments from the realestate community are related to the building owners' control over their investments. They believe that they are in the best position to manage the process for the benefit of consumers. "We have to fight this on principle," says Gerry Lederer. "The real estate industry cannot give up the right to manage their property."

"What is at stake is the fundamental right for real estate owners to manage their assets to optimize value for tenants and shareholders," adds Roger Platt, spokesperson for the Real Access Alliance and vice president of the Real Estate Roundtable.

According to building owners, they have every economic motivation to manage access to their buildings in a way that is in the best interests of the public. "What is good for the tenant is good for owners," says Platt, "Real estate owners understand the importance of telecom services. They have to or they are not going to be around in the future."

Competitive pressures between buildings create an environment where control over TSP's access to buildings becomes critical. Tenants will "vote with their feet." "I don't see building owners totally controlling the access of the telecom companies," says Marmelstein of Riser Management Systems, "But building owners have to be responsible for what goes on in their own buildings. Their buildings have to be competitive."

Some in the telecom industry agree. "Building owners' first priority is always going to be the tenant," says Jason Epstein, co-founder and principal, at eLink a Washington, D.C.-based provider of telecom services. "Our experience shows that offering a variety of services is the best way to ensure tenant satisfaction. To suggest that an outside group, such as the FCC, can better determine what is best for a tenant is ridiculous."

Often the best decision for tenants is denying access to certain providers. Some TSPs lack a credible track record, they may not meet relevant building codes, or they would not assume liability for the safety and security of the infrastructure.

The real estate community believes competition in the market place is working and regulation is unnecessary. CLECs are gaining access everyday and there are more than 100 competitive service providers are competing for clients.

A study conducted by the Charlton Research Company for the Real Access Alliance concluded that the competitive nature of the market is providing building owners with a rush of TSPs and they are, for the most part, gaining approvals to access buildings. Tenants responded that they had been solicited by an average of 2.5 TSPs each last year. The respondents also cited a broad variety of solicitors - more than 130 different companies. Most importantly to the access argument is that almost two-thirds of those solicitations last year either led to contract negotiations or approval for building access.

There is also the fact that the beneficiaries of deregulation (consumers) do not appear to have a problem with the current state of choice and service in the telecom market. The FCC requested tenants' comments regarding their experience in obtaining telecom service under the current arrangement, and unlike the recent proceedings related to the use of TV satellite dishes, there was a "noticeable lack of participation." This indicates that the current level and pace of telecom competition, at least in multitenant buildings, is acceptable.

Where from here? The access issue is now working its way through the long, drawn-out regulatory process. Comments from all of the interested parties are used to formulating the rules, not the other way around, so the details of any regulations are conjecture. The process originates with the FCC with a Notice of Proposed Rulemaking (NPRM) which initiates proceedings to consider regulatory action. (Editor's note: For those who like brain-bruising reading, the primary document numbers related to the forced access issue are WT Docket No. 99-217 and CC Docket N0. 96-98. You can find them at the FCC Website.) Interested parties then submit comments stating positions on the proposed rules. Comments on this issue have already been submitted.

Next comes a lobbying phase followed by a preliminary FCC ruling. The FCC is expected to come out with their first cut at a ruling on the access issue in April. Interested parties will then have 45 days to respond. This process continues until the FCC makes a final ruling.

So how does everyone involved think it will turn out? One thing is for sure, the politics involved are sure to affect the outcome of this debate, and the politics surrounding the issue do not necessarily favor the real estate industry.

The White House and many in Congress believe it is important to expedite the development of the technological infrastructure as a matter of public policy. According to those close to Washington, D.C., the real estate industry is considered a fairly passive industry while the technology and telecom sectors are responsible for up to 40% of the country's economic growth. In order to speed the deregulatory process, some surgical regulatory strikes may be necessary and many think this may be one of those strikes.

There is some evidence that the relationship between the CLECs and the real estate owners is improving because of this debate. Many CLECs make cooperation and a respect for the rights of building owners part of the business plan. Cooperation has given many CLECs a kind of comparative advantage. Those who do not want to see legislation are hoping that the cooperative approach will catch on with the telecom industry and make the access legislation a non-issue.

But speed is important to the FCC and the telecom industry, and they seem unwilling to wait forever for the market to right itself. "There will most likely be some legislation passed," says David Swartz, associate general counsel with Los Angeles-based Arden Realty. "There is too much money and lobbying being thrown at the issue. But any legislation will likely be locked up and put on hold in litigation and, hopefully, by then competition in the market will have worked and the whole issue will be moot."

David Crawford of Allied Riser believes there is a connection between how the real estate industry proceeds in providing telecom services to tenants and the intensity of regulatory pressure. "As long as the real estate industry doesn't fall into the use of preferred providers - and as long as they provide a truly open platform for access - I think the regulation issue will go away," says Crawford. "If the real estate industry gets greedy and crosses the line to enter the telecom business or grants exclusive contracts, then we might see more regulatory pressure."

One thing is certain. The real estate industry is not interested in prolonging this issue. It wants to be part of a solution, but fighting the issue is clearly not part of the strategy. "We are very proud of the process we have in choosing telecom services," says Andrew Sobel, executive vice president of Arden Realty. "We are proactive in providing technology to our tenants, but this whole issue just diverts our focus."

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