Last week, a majority of the California Public Utilities Commission approved an ALJ decision that awarded a temporary restraining order against Verizon. In so doing, the PUC essentially told Verizon that it would have to unbundle the packet switches it was planning on deploying within the state. Verizon, in turn, announced that the PUC decision has put these plans on ice.

Packet switching is advantageous over traditional switching technology because it can jam oodles of data into a loop. Unlike traditional circuit-switch technology, which the FCC has included on its list of UNEs, the FCC has repeatedly denied CLEC requests to require unbundled packet switching. The FCC has not unbundled new technologies like packet switches because it wants to create incentives for carriers -- incumbents and competitors -- to deploy advanced services and to do that it believes that those who deploy new technology should get the economic advantage from that deployment.

Of course, after failing in the cable biz, facilities-based competition never really was part of AT&T's "strategery." So, when Verizon decided it was going to deploy packet switching in areas of California, it notified AT&T and other UNE-P based providers that circuit-switching would no longer be available in these areas (resale over the new packet-switched product, however, would have been made available). This loss of switching meant lower profit margins for these facilities-less carriers and prompted their request for regulators to preserve their margins and business model with a temporary restraining order.

Sidestepping the unambiguous rule of federal law, the ALJ's decision rested on an interpretion of interconnection agreements between Verizon and the aggrieved parties (not being in a masochistic mood today, I have not explored these ICAs, but Commissioner Susan Kennedy's dissent explores the issue of whether these agreements even apply). Verizon argued that the "switching" provisions of these contracts should be read in the context of the law at the time these agreements were formed, and the contract language mirrored the definition of switching from the FCC's Local Competition Order. The ALJ based its decision upon the following rationale:

In 1996, because of an insufficient record, the FCC did not finally decide the issue of whether to unbundle packet switches in the Local Competition Order, and stated it would continue to review and revise the rules. Paragraph 427 of the Local Competition Order provides:

"At this time, we decline to find, as requested by AT&T and MCI, that incumbent LECs' packet switches should be identified as network elements. Because so few parties commented on the packet switches in connection with section 251(c)(3), the record is insufficient for us to decide whether packet switches should be defined as a separate network element. We will continue to review and revise our rules, but at present, we do not adopt a national rule for the unbundling of packet switches."

Therefore, the law at the time the interconnection agreements at issue in this proceeding were entered into was unsettled as to whether packet switches were to be unbundled.

Unsettled?

First, let's ignore the fact that the entire corpus of unbundling obligations has been . . . "unsettled" since the '96 Act. But the notion that the law surrounding the unbundling of packet switches was unsettled because, as far as one can tell, the evidentiary standard before the FCC was not met, is sophistry. Rather than elevating what equates to dicta above the FCC's actual conclusion, a truly fair interpretation of the Local Competition Order would compel a statement like: the law at the time the interconnection agreements at issue in this proceeding were entered into did not require packet switches to be unbundled as a network element. And the story would end there. But instead, this rationale is the launching pad for a thoroughly tortured analysis, part of which is available here.

As for the result, Commissioner Kennedy's dissent has it exactly right:

The irony of this situation should not be lost on anyone. California is the world leader in the development and manufacturing of new communications technology. While our dynamic innovators in Silicon Valley and elsewhere are creating the means to revolutionize telephony, this Commission is halting the dissemination of the very same technology. Ignoring clear legal precedent while doing so, this Commission is apparently acting out of a mistaken belief that it is somehow pro-consumer to hold back progress.

The CA PUC decision fails not only Schumpeter 101, but also rudimentary contract law analysis. All in a day's work.