TechKnowledge No. 48

UNE-P and the Future of Telecom ‘Competition’

By Adam D. Thierer
February 1, 2003

On February 8th the Telecommunications Act of 1996 turns seven years old. Few will be celebrating the occasion. The telecom industry lies in shambles. While job creation, new investment, and increased entry followed the passage of the Act, recent years have witnessed a stark reversal of fortune for companies, consumers, and investors alike as the market has tanked with a vengeance. Job cuts have been severe, once mighty stocks are trading for a tiny fraction of where they previously stood, debt loads are ballooning, bankruptcies are everywhere, and industry investment has plummeted. What gives? Has the Telecom Act been a failure?

It depends on who you ask, of course. Some companies and policymakers argue that the only problem with the Act is that it has not been given enough time to work, or that regulators have not gone far enough in enforcing the Act’s “pro-competitive” provisions. Another crowd argues that the Act has been over-zealously interpreted by the Federal Communications Commission (FCC), so much so that it has been the primary cause of the industry’s recent woes. These intellectual combatants have clashed in Congress, the courts, the states, and before the FCC. While no lobbyists have fallen in battle, forests of trees must have, given the voluminous paperwork trail that accompanies this mêlée. The number of pages in the FCC Record alone has tripled in the wake of the Act, according to Greg Sidak of the American Enterprise Institute. A virtual avalanche of filings accompanies this circus no matter what town or venue it’s visiting.

The latest battle in this protracted war of words and paper is currently taking place at the FCC as both sides eagerly await a decision from the FCC in its Unbundled Network Element Triennial Review. This proceeding is reevaluating the unbundled network element platform (UNE-P) that incumbent local exchange carriers (ILECs) or Baby Bells must provide to competitive local exchange carriers (CLECs) at regulated rates. And according to supporters of the UNE-P regime, nothing less than the entire future of telecom industry competition is at stake with this decision. They may be right, but for all the wrong reasons.

Under the Telecom Act, Congress granted the FCC a generous degree of latitude in terms of how to interpret the interconnection, open access, and unbundling provisions of the Telecom Act. Consequently, under the leadership of Chairman Reed Hundt, the FCC embarked on a grandiose experiment in re-ordering the affairs of the telecom sector. Hundt saw himself as an almost messianic figure sent to save the industry from the Bells, so much so that in his 2000 book, You Say You Want a Revolution, Hundt candidly noted that, “Congress had not been mindful of Senator [John] McCain’s repeated warnings against transferring power to me. [T]he Telecommunications Act of 1996 made me, at least for a limited time…one of the most powerful persons in the communications revolution.” Indeed it did, and during Hundt’s reign at the FCC, the agency aggressively crafted the implementing regulations in such a way as to maximize short-term CLEC entry by guaranteeing them cheap access to virtually every element of the Bells’ networks. Hundt’s managed competition vision for the telecom sector could be filed under the “burn the village in order to save it” theory of political philosophy. In several chapters of his book, Hundt boasts about Commission efforts to deliberately handicap the Bells and advantage rivals. Considerations of future innovation and investment took a backseat to the short-term goal of rapidly increasing the number of new entrants into the market. While Hundt’s regulatory house of cards did foster short-term entry, these new rivals largely built “networks out of paper” in the words of Manhattan Institute scholar Peter Huber. They deployed few actual new facilities and instead focused on lobbying the FCC for the broadest possible package of UNEs at the lowest price possible. Regulatory arbitrage replaced genuine marketplace competition. Counting noses (new entrants) became more important than counting networks. And as for the future, well, that was another day. Hundt’s crew had taken Keynes’ famous quip about us all being dead in the long run a little too seriously.

The fatal conceit underlying this UNE-P regime and the forced access regulatory ethos in general is that it presumes that new products, systems, or technologies will be produced by companies regardless of the regulatory environment or legal incentives in place. UNE-P proponents repeatedly ignore the risk-reward relationship in a capitalist society and its importance for long-term economic investment and innovation. One need not be versed in the works of Schumpeter or Hayek to understand what AT&T Chairman and CEO Michael Armstrong eloquently summed up in a 1998 speech: “No company will invest billions of dollars to become a facilities-based broadband service provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and risks of others.” Worse yet, UNE-P supporters conveniently sidestep the question of what happens if things turn sour. We know what open access supporters will say if incumbents spend billions deploying a ubiquitous and successful new network: open it up to “competitors” and let everyone share that new system equally. But what if those networks that the incumbents threw billions at prove to be a bust? Will the so-called competitors help foot the bill then? Unlikely, but that’s really what the UNE-P regime is all about: privatizing the risks and socializing the rewards, to paraphrase technology guru George Gilder.

At a minimum, therefore, it should be relatively uncontroversial for the FCC to rule that investment in new technologies and services will be exempted from the infrastructure sharing provisions. That’s the easy part. The more difficult issue is what to do about the older copper loops, switches and support systems that are currently shared at below-cost rates. CLECs claim they cannot survive without them and yet one wonders whether they should if they cannot provide at least some of their own facilities. Moreover, switching can be competitively supplied; many CLECs already install their own switches in many regions. And high-capacity loops (typically fiber) or inter-office transport lines don’t need to be shared. There’s a lot of fiber in the ground in most regions the CLECs serve today; they can negotiate access at a good rate. And operations support systems (operator and director assistance services or databases, for example) never belonged on the list to begin with. They should be removed promptly from the sharing regime.

Local loops (“last mile” copper lines) are the only element of the local telephone infrastructure where the CLECs can make a credible case that reproduction costs are prohibitively expensive. Ignoring wireless competition and the fact that some cable companies are serving some customers today, the short term reality is that most citizens only have one phone line. Of course, largely ignored in this debate is the question of whether or not some of these CLECs might have more seriously considered investing in new last mile facilities to homes and businesses if not for the generous FCC unbundling rules. True, it would have been capital intensive and required many agreements and alliances to deploy last mile facilities, but the sharing rules essentially gave the rivals an excuse for not even trying it to begin with. For that reason, the FCC needs to consider a sunset plan for even these sharing provisions. The gradual march of technological progress will likely solve this problem for policymakers as wireless options proliferate and carriers gradually deploy more fiber. It would make sense, therefore, to place a firm cutoff on all sharing rules, including local loops, after a gradual phase out. Set a date - perhaps February 8, 2006? - and close the book on this misguided experiment with micro-managing telecom markets.

Adam Thierer (athierer [at] cato [dot] org) is the Director of Telecommunications Studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.