Summary
The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective
See the full content of this document
Extract
Are regulators forward-looking? The market price of copper versus the regulated price of mandatory access to unbundled local loops in telecommunications networks.
I. INTRODUCTION II. THE DATA REQUIREMENTS FOR FORWARD-LOOKING COST MODELS III. COPPER PRICES AND THE CALIFORNIA PUBLIC UTILITIES COMMISSION IV. COPPER PRICES AND THE NEW ZEALAND COMMERCE COMMISSION A. Biased LL U Benchmark Estimates B. Long-Term Benefits to End Users and Distortion of Investment Incentives C. Benchmark Rates Predicted from a Regression Model D. Benchmark Data That Are Not Forward-Looking E. Subsequent Developments V. REGULATORY OPPORTUNISM AND THE FAILURE TO RECTIFY THE KNOWN DEFICIENCIES OF TELRIC PRICING: THE ILEC's RIGHT UNDER ANTITRUST AND TELECOMMUNICATIONS LAW TO DECOMMISSION COPPER LOOPS VI. CONCLUSION I. INTRODUCTION
Beginning in 1996, regulators in virtually every industrialized nation started down the path of mandating that the incumbent telecommunications operator offer competitors access to its network at regulated prices that reflect the forward-looking cost of the network, rather than the incumbent's historic cost. In the United States, the Telecommunications Act of 1996 requires that incumbent local exchange carriers (ILECs) provide certain elements of their networks to competitive local exchange carriers (CLECs). (1) Most prominent among these elements is the local loop (the connection between a subscriber and a telephone company's local switch). The Telecommunications Act requires that these network elements be priced at cost, with the possible addition of a reasonable profit. (2) In August 1996, the Federal Communications Commission (FCC) issued rules for determining these prices. (3) The agency invented the concept of total element long-run incremental cost (TELRIC) and made it the foundation for the rules for pricing mandatory access to unbundled network elements. The FCC's rules were based on a model of a hypothetical carrier that places switches in the ILEC's existing switch locations but otherwise builds an entirely new network to serve customer locations: "[t]he total element long-run incremental cost of an element should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the incumbent LEC's wire centers." (4) The FCC's objective in establishing this rule was unexceptionable: to determine the "incremental costs that incumbents actually expect to incur in making network elements available to new entrants" (5) and to adopt a pricing methodology that "best replicates, to the extent possible, the conditions of a competitive market." (6) To say that the FCC's pricing rules proved to be controversial both in theory and practice would be an understatement. (7) Between 1999 and 2002, the Supreme Court twice interpreted the rules for mandatory unbundling (8) and thereafter issued two more decisions in 2004 and 2007 construing the relationship of antitrust law to this new regulatory regime. (9) Much of the theoretical debate has focused on establishing proper cost of capital and depreciation values that reflect the risk facing firms owning substantial amounts of capital assets that become sunk upon deployment. (10) Certain components of modern telecommunications networks typically experience steady decreases in equipment prices because of technological progress. For example, the network operator usually can replace a switch or a piece of fiber optic electronic equipment for less than its original purchase price, yet maintain comparable quality and capabilities. The theoretical literature explains how levelized annual cost calculations, widely used by U.S. regulators, can produce economically incorrect cost estimates in these circumstances. This article describes another potential source of error in estimating the economic costs of network elements--an error that, despite its great practical significance, has elicited no commentary and evidently has caught regulators around the worl...See the full content of this document
Sponsored links
