Allegiance Telecom, Inc. ("Allegiance"), herewith submits its Comments on the Directorate-General Information Society Working Document on Unbundled Access to the Local Loop ("Working Document") released on February 9, 2000. Allegiance, whose very existence is closely tied to the opening of telecoms competition in the U.S., welcomes this opportunity to express its strong support for the European Commission's ("Commission") determination that local loop unbundling ("LLU") is critical to the development of high quality, diverse, low-cost service to the European public and to the growth of e-commerce across the Community. Allegiance would respectfully suggest that full local loop unbundling would best serve the public policy purposes which underlie the Directorate-General's recent proposal.

1. ALLEGIANCE TELECOM
   

To permit the Commission to properly weigh the comments which follow, and because Allegiance does not yet operate in Europe, Allegiance provides a very brief description of its history and operations. Allegiance was established to compete in the marketplace created in the U.S. by the Telecommunications Act of 1996. It is a company built for the specific purpose of providing businesses with competitively priced, state-of-the-art telecommunications products, all from a single source. Allegiance is not, however, just another reseller. It owns its own switch in every market in which it competes. Its infrastructure is based on the latest developments in network operations, engineered to provide businesses with cutting-edge products and highly responsive customer service. The company provides its own dial tone from its own switch, and it seeks to provide as much of its own infrastructure as is economically and technically feasible.

Specifically, Allegiance offers its small and medium-sized business customers a full array of services including local, long distance, international calling, high-speed data transmission and Internet services. The company, headquartered in Dallas, Texas, currently serves 20 major markets in the U.S., and plans to be operational in at least 24 by mid-year 2000, adding metropolitan areas at the rate of approximately one per month. This extraordinarily rapid growth relies to a significant degree on the availability in the U.S. of unbundled local loops and other unbundled network elements. In the two years it has existed, the company has raised capital of more than $1.5 billion, of which only about 20% is debt, and its revenues are growing very rapidly. Allegiance's stock is listed on the NASDAQ national market under the symbol ALGX. The company's Chairman and CEO, Royce Holland, was one of the founders of MFS Communications Company, an early entrant into the competitive telecoms market in the U.S. and Europe. MFS was the first major competitor to the Bell System and a company which was instrumental in the passage of the pro-competitive Telecommunications Act in the U.S.

This background not only provides context to the substantive views that follow, but also illustrates in the most immediate way the advantages that a robust, competitive telecoms market can provide by stimulating the creation of new entrepreneurial enterprises which, by attracting capital and experienced management, can provide a host of competitive services to the public. Allegiance notes also that, while it currently operates only within the U.S., its expansion to various international and foreign markets is essential for the growth of the company. In choosing markets to enter in Western Europe, the extent to which such markets are open to Allegiance's business plan will, of course, be crucial. This factor is undoubtedly an important one for many non-European enterprises as they assess into which markets to invest their limited financial and human resources. Simply put, capital will flow to markets in which marketplace forces have the freest rein. Where, to the contrary, an incumbent is allowed to use its historic dominance to inhibit or delay competitive offerings, local users will be deprived of the benefits of new capital infusions.

2. COMMENTS ON THE FEBRUARY 2000 WORKING DOCUMENT

While Allegiance suggests that the Commission should publish a Directive, rather than a Recommendation which may be less effective in developing a fully and uniformly competitive telecoms market across Europe, Allegiance nevertheless wishes to emphasize at the outset that the Commission is to be commended for having made the basic decision to support the unbundling of local loops by the European incumbents. The availability of LLU throughout Europe is critical to the development of a competitive telecoms market, and the Directorate- General has properly taken the first very significant step in that direction. A competitive market in the provision of modern telecoms services is, moreover, not an end in itself, as important as such services are to business and residential subscribers. Indeed, a fully competitive telecoms market is one of the critical elements for the development of an environment in which e-commerce can thrive in the European economy. LLU is critical to ensuring that business and residential customers alike can participate in this fundamental expansion of the Community's economy.

The Directorate-General is correct to conclude that a competitive telecoms market cannot develop in the face of the overwhelming dominance of carriers with significant market power unless LLU is adopted as Commission policy. See Working Document, 1. There simply are no feasible alternatives. Neither wireless nor cable facilities are today, or are likely to become in the foreseeable future, adequate alternative sources of infrastructure. LLU, however, facilitates broadly deployed competition in virtually every aspect of voice and data services. Moreover, as amply demonstrated by the experience of Allegiance and numerous other similarly-situated competitive carriers, reliance on LLU does not preclude investment in, or development of, new infrastructure. To the contrary, by providing new entities with a practical path to the development of a customer and revenue base sufficient to justify further investment, LLU is actually a great stimulant to the growth of alternative infrastructure. In addition, the possibility of shared use of the copper loop will also give competitors the flexibility to offer services with their own choice of technology and thereby put added competitive pressure on incumbents. It is doubtful whether an entity like Allegiance would have been able to raise the $1.5 billion mentioned above, and to devote a portion of such funds to the purchase and installation of new switches in 20 major markets, had the availability of LLU in the U.S. marketplace for a wide potential customer base not been a central element of the competitive environment.

Allegiance believes that highly segmented, country-specific markets are not generally sustainable, and that new entrants must be prepared to broaden their operations beyond initial, tightly-focused market entry plans. Infrastructure is so expensive, and economies of scale and scope so strong, however, that network deployment must be able to proceed uniformly throughout Member States. Allegiance strongly urges the Directorate-General and the Commission to declare that LLU should be ubiquitous as a matter of mandatory policy, and that the presumption in favor of such mandate may be overcome only in limited and very special circumstances. If the Commission does not proceed in this fashion, it will almost certainly find that incumbents will seize every available opportunity to limit the scope of LLU and Member States may be amenable to incumbent pleas for exceptions and delays.

         C.  The Commission Should Adopt Full Loop Unbundling

Allegiance urges the Commission to adopt full loop unbundling as its primary mandate. See Working Document, 2.1. High speed bit stream access, by leaving incumbents in the role of a service provider (see Working Document, 2.3), will not maximize the competitive pressures which have had such a dramatic impact on the expansion of telecoms services in the U.S. No party B and least of all incumbents B should be in a position to control technology choices or technical specifications. If incumbents retain any role at all in the speed of roll-out and in the technical details of that roll-out, as they will certainly do to the extent that high speed bit stream access is viewed as an acceptable substitute, the Commission may be sure that incumbent incentives will be to protect their own market share, to control the migration to a competitive model, and to exalt the interests of its shareholders above those of the public. This is not to cast aspersions on the integrity or competence of incumbents, but only to recognize that old-line monopolistic institutions march to drummers different from those of scrappy, rapidly growing, revenue-oriented start-ups. However closely regulators attempt to watch what incumbents are doing, the greater the incumbents= role in dictating the timing and condition for the provision of LLU, the harder it will be for the Commission, with its necessarily limited resources, to assure itself that LLU roll-out is proceeding as rapidly and as diversely, creatively, and experimentally as it should.

The Commission should assume that incumbents will attempt to set prices, standards, or availability criteria to serve their own interests rather than those of the competitive carriers and, more importantly, those of the general public. In short, the role of incumbents in setting the standards governing the provision of LLU must be strictly minimized if the European public is to reap the greatest advantages of a competitive marketplace.

Allegiance concurs, of course, with the need for administrative or regulatory oversight in the introduction of LLU. See Working Document, 3.3. Spectral management issues, in particular, will no doubt be the basis for incumbent resistance to full loop unbundling and shared use of copper. However, resolution of such issues can be addressed analogously to U.S. practice, meaning that resolution can begin concurrently with competitor deployment of high bandwidth services.

Because it is in everyone's interests to have a practical spectral management plan, certain straightforward standards and procedures can be set forth immediately. Any spectral management scheme should establish certain baseline principles, including a presumption that any loop technology complying with current industry-accepted standards is presumed to be acceptable; that claims of harm should rest on actual difficulties rather than theoretical calculations; and that if a spectral management scheme is already working effectively in some installations without significant problems, it should be deemed acceptable. On the other side, Allegiance would agree that if a technical proposal has not been approved by a regulator or recognized standards body, and has not otherwise been proven acceptable in actual deployment experience, a party proposing to use such scheme should have the burden of demonstrating its practicality. The fact is, however, that equipment and procedures exist today which have permitted the widespread provision of LLU in the U.S. without significant spectrum management difficulties. There is thus no need to delay the LLU implementation for analysis of technical issues that are already receiving careful attention and have already been resolved in some operational contexts.

The spectrum issues associated with deployment of ADSL technology do not preclude its deployment and use today -- they merely limit the usable portion of a loop. Therefore, while substantial technical work is underway in order to improve the technology, its goal is to assure the most efficient utilization of the local loop facilities, and these improvements are not a prerequisite to ADSL deployment. As the improvements become available, they will allow increased bandwidth to be made available without increasing the potential for service-limiting cross-talk.

To that end, work has been ongoing for some time now with the participation of industry experts worldwide in the ETSI, ITU-T and ANSI standards bodies. Over the past three years analytical techniques and practical measures of spectrum compatibility have been developed, with significant contribution by outside industry experts. During the past 12 months the pace of the work has accelerated, resulting in better definition of technical standards at the international level (in the ITU-T Study Group 15, Question 4 process) and at the European level (in the ETSI TM 6 group). These groups have already developed a sound technical basis for deployment guidelines and spectral management practices, and expect to complete much of their work prior to the ITU-T Study Group 15 meeting in April 2000. In addition, because competitors and manufacturers have every interest in ensuring that they deploy equipment that will allow the

maximum use of each local loop facility, ongoing technical work is to be expected, but there is no need on that account to defer LLU. ADSL technology is available for deployment now.

As an on-going implementation matter, however, the spectral management process must be open and even-handed. All pertinent data concerning facilities and their use must be made available to any interested or potential participant; claims of interference or potential interference must be fully documented and subject to objective evaluation by a third party. Even if it is deemed desirable to create a new working group to address specifically spectral management issues in the LLU context, it should be possible to initiate LLU with the understanding that, if spectral management matters have not been completely resolved, service would be permitted to commence subject to termination if documented instances of unresolvable interference, cross-talk, or other similar difficulties arise. In this context, incumbents cannot be allowed to referee such matters; their self-interest is so strong that some neutral industry arbiter should be empowered to address claims of spectral difficulties.

With respect to network administration and inter-carrier cooperation (see Working Document, 3.3), no major systems or procedures need to be developed prior to the initiation of LLU. No new standards, software, or hardware upgrades are required. However, the Commission should adopt as Community policy the requirement that incumbents provide all relevant and necessary data to competitors or potential competitors concerning the physical layout of individual local loops, including matters such as the length of each run and the presence of bridge taps, load coils, or other mechanical or electronic barriers to implementing DSL services. In the same vein, the Commission’s rules and policies should specify that any testing which is to be undertaken to assess the suitability of a particular loop must be announced in advance to all parties known to have an interest in the use of that or collocated loops or similar facilities. Data concerning local loop infrastructure should be fully open to competitors who should also have the right to participate in decisions concerning the testing, realigning, or any other modification of the local loop plant. Speed to market is an important consideration for potential new entrants, and the need is to eliminate barriers to competitive entry, not to prolong the 100 year head start that incumbents have enjoyed. The focus should be on promoting on an expedited basis the broadest possible deployment of DSL and other advanced service offerings so that a choice of such services will be available to business and residential customers as soon as possible.

The goal of prompt and effective implementation of ADSL service -- one of the principal new services reliant on LLU -- cannot be achieved unless collocation issues are addressed at the outset. Here, Allegiance urges the Commission to take a more active role in assuring that collocation is made available under the terms of Articles 9 and 11 of the Interconnection Directive 97/33/EC. As Allegiance has found in the roll-out of its domestic U.S. service, incumbents "discover" and seek to raise regulatory concerns about a myriad of alleged difficulties in implementing collocation. With rare exceptions, these difficulties are more a matter of negative attitudes towards competitive options than of any real impediments to collocation. Frequently, purported difficulties involve trivial issues. Where legitimate issues exist, they can almost always be addressed and resolved in a pragmatic fashion.

A wide variety of collocation arrangements has evolved in the U.S., including employing various sized cages and shared cages, as well as cageless, cross-connects, single rack and other case-by-case resolutions. In addition, collocation requirements imposed on incumbents should not exist only at local exchanges. Regional concentrators and remote locations may also be suitable sites for collocation and should be available, as a general matter, for such use.

The general principle should be that collocation where feasible is required, and the burden should be on the incumbent to demonstrate unresolvable technical problems to overcome the presumption of mandatory collocation. To this end, the Commission should also be vigilant not to countenance alleged - but virtually always specious - requirements relating to security, insurance, or escort. Moreover, if incumbents claim an absence of collocation space in any particular structure, close review of the circumstances should be required to determine whether the difficulties are insurmountable or may in fact be capable of resolution, as by imposing an obligation on the incumbent to dispose of obsolescent or unused facilities to make space available for competitors’ equipment. In Allegiance’s experience, most such incumbent concerns can be readily resolved.

Allegiance also supports a forward-looking incremental cost regime. See Working Document 2.1.3, (discussion of long-run average increments costs). Loop pricing is, of course, a critical factor in the development of a competitive market. In the pricing of unbundled local loops to competitors, incumbents will naturally seek to recover sunk costs (including, presumably, their own DSL equipment expenses) and, under the "efficient component pricing rule" cited in the Working Document (2.1.3, n. 16), even the opportunity cost of lost profit from not better utilizing loop plant. These positions have been widely discredited in regulatory proceedings in the U.S. and are contrary to sound tenets of modern economic theory.

Allegiance respectfully submits that the Directorate-General should remain alert to prevent variants of historical or stranded costs from creeping back into pricing schemes. Forward-looking long-run incremental cost is the only appropriate standard for setting prices in a competitive environment(1).^/ Stranded costs simply must be borne by the incumbent or abandoned to ensure that competitive providers and their subscribers are not strangled in the crib by the obligation to compensate the incumbent for prior facility decisions made by the incumbent and which are of no value whatever to forward-looking competitors.

For the same reason, Allegiance supports geographic de-averaging. See Working Document, 2.1.3.1. While the averaging approach may have been fully justified in earlier decades, particularly in the context of ensuring universal service, that social goal has been essentially achieved, and competitors now compete with an incumbent whose retail services are geographically de-averaged. In these circumstances, and where the underlying loop costs vary among areas, there is no reason to abandon the principle of cost-oriented rates and permit the incumbent to use the averaging approach to setting loop prices. Accordingly, Allegiance recommends that geographic de-averaging be the presumed standard.

Allegiance is grateful for the opportunity to help fashion a procompetitive telecoms regulatory regime across Europe. For the reasons described in these Comments, Allegiance respectfully submits that the Commission’s role in promulgating detailed, uniform standards for full local loop unbundling will ensure that European consumers enjoy the full benefits of the information age as soon as possible.

Respectfully submitted on March 7, 2000

Note (1):