UNE‑P and the Future of Telecom ‘Competition’

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On February 8th the Telecommunications Act of 1996turns seven years old. Few will be celebrating the occasion. Thetelecom industry lies in shambles. While job creation, newinvestment, and increased entry followed the passage of the Act,recent years have witnessed a stark reversal of fortune forcompanies, consumers, and investors alike as the market has tankedwith a vengeance. Job cuts have been severe, once mighty stocks aretrading for a tiny fraction of where they previously stood, debtloads are ballooning, bankruptcies are everywhere, and industryinvestment has plummeted. What gives? Has the Telecom Act been afailure?

It depends on who you ask, of course. Some companies andpolicymakers argue that the only problem with the Act is that ithas not been given enough time to work, or that regulators have notgone far enough in enforcing the Act's "pro-competitive"provisions. Another crowd argues that the Act has beenover-zealously interpreted by the Federal Communications Commission(FCC), so much so that it has been the primary cause of theindustry's recent woes. These intellectual combatants have clashedin Congress, the courts, the states, and before the FCC. While nolobbyists have fallen in battle, forests of trees must have, giventhe voluminous paperwork trail that accompanies thismêlée. The number of pages in the FCC Recordalone has tripled in the wake of the Act, according to Greg Sidak of the AmericanEnterprise Institute. A virtual avalanche of filings accompaniesthis circus no matter what town or venue it's visiting.

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

Under the Telecom Act, Congress granted the FCC a generousdegree of latitude in terms of how to interpret theinterconnection, open access, and unbundling provisions of theTelecom Act. Consequently, under the leadership of Chairman ReedHundt, the FCC embarked on a grandiose experiment in re-orderingthe affairs of the telecom sector. Hundt saw himself as an almostmessianic figure sent to save the industry from the Bells, so muchso that in his 2000 book, You Say You Want a Revolution, Hundtcandidly 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 alimited time…one of the most powerful persons in thecommunications revolution." Indeed it did, and during Hundt's reignat the FCC, the agency aggressively crafted the implementingregulations in such a way as to maximize short-term CLEC entry byguaranteeing them cheap access to virtually every element of theBells' networks. Hundt's managed competition vision for the telecomsector could be filed under the "burn the village in order to saveit" theory of political philosophy. In several chapters of hisbook, Hundt boasts about Commission efforts to deliberatelyhandicap the Bells and advantage rivals. Considerations of futureinnovation and investment took a backseat to the short-term goal ofrapidly increasing the number of new entrants into the market.While Hundt's regulatory house of cards did foster short-termentry, these new rivals largely built "networks out of paper" inthe words of Manhattan Institute scholar PeterHuber. They deployed few actual new facilities and insteadfocused on lobbying the FCC for the broadest possible package ofUNEs at the lowest price possible. Regulatory arbitrage replacedgenuine marketplace competition. Counting noses (new entrants)became more important than counting networks. And as for thefuture, well, that was another day. Hundt's crew had taken Keynes'famous quip about us all being dead in the long run a little tooseriously.

The fatal conceit underlying this UNE-P regime and the forcedaccess regulatory ethos in general is that it presumes that newproducts, systems, or technologies will be produced by companiesregardless of the regulatory environment or legal incentives inplace. UNE-P proponents repeatedly ignore the risk-rewardrelationship in a capitalist society and its importance forlong-term economic investment and innovation. One need not beversed in the works of Schumpeter or Hayek to understand whatAT&T Chairman and CEO Michael Armstrong eloquently summed up ina 1998 speech: "No company will invest billions of dollars tobecome a facilities-based broadband service provider if competitorswho have not invested a penny of capital nor taken an ounce of riskcan come along and get a free ride on the investments and risks ofothers." Worse yet, UNE-P supporters conveniently sidestep thequestion of what happens if things turn sour. We know what openaccess supporters will say if incumbents spend billions deploying aubiquitous and successful new network: open it up to "competitors"and let everyone share that new system equally. But what if thosenetworks 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: privatizingthe risks and socializing the rewards, to paraphrase technologyguru George Gilder.

At a minimum, therefore, it should be relatively uncontroversialfor the FCC to rule that investment in new technologies andservices will be exempted from the infrastructure sharingprovisions. That's the easy part. The more difficult issue is whatto do about the older copper loops, switches and support systemsthat are currently shared at below-cost rates. CLECs claim theycannot survive without them and yet one wonders whether they shouldif they cannot provide at least some of their own facilities.Moreover, switching can be competitively supplied; many CLECsalready install their own switches in many regions. Andhigh-capacity loops (typically fiber) or inter-office transportlines don't need to be shared. There's a lot of fiber in the groundin most regions the CLECs serve today; they can negotiate access ata good rate. And operations support systems (operator and directorassistance services or databases, for example) never belonged onthe list to begin with. They should be removed promptly from thesharing regime.

Local loops ("last mile" copper lines) are the only element ofthe local telephone infrastructure where the CLECs can make acredible case that reproduction costs are prohibitively expensive.Ignoring wireless competition and the fact that some cablecompanies are serving some customers today, the short termreality is that most citizens only have one phone line. Of course,largely ignored in this debate is the question of whether or notsome of these CLECs might have more seriously considered investingin new last mile facilities to homes and businesses if not for thegenerous FCC unbundling rules. True, it would have been capitalintensive and required many agreements and alliances to deploy lastmile facilities, but the sharing rules essentially gave the rivalsan excuse for not even trying it to begin with. For that reason,the FCC needs to consider a sunset plan for even these sharingprovisions. The gradual march of technological progress will likelysolve this problem for policymakers as wireless options proliferateand carriers gradually deploy more fiber. It would make sense,therefore, to place a firm cutoff on all sharing rules, includinglocal loops, after a gradual phase out. Set a date - perhapsFebruary 8, 2006? - and close the book on this misguided experimentwith micro-managing telecom markets.