TCS Daily

Overcoming Monopoly

By Bruce Fein - February 10, 2003 12:00 AM

Some businesses achieve dominance by skill, innovation, and daring enterprise. Such entrepreneurial genius should be encouraged, not punished. It is what has made America an economic colossus.

But local phone monopolists, i.e., the Baby Bells, attained dominance by government edicts that prohibited competition for decades. They enjoyed a captive subscriber base with nowhere to flee despite the lethargy and consumer unfriendliness for which monopolies are notorious. Telephony in the twentieth century became a necessity, not an amenity.

During their long years of protected monopolies, incumbent local exchange carriers (ILECs) constructed local networks featuring impressive economies of scale: local loops, switches, and transport facilities. Each new subscriber reduced the average cost of service throughout the market range.

Congress sought to replace sluggish ILEC monopolies with coltish competition with the 1996 Telecommunications Act. It ended legal barriers to new entry. But daunting economic barriers would thwart newcomers unless some transitional regulation dissipated the unfair and inherited advantages of ILECs. The objective was to achieve local phone marketplaces sporting several competitors that would have blossomed in the absence of previous government crowned monopolies.

The deregulation challenge was novel. Earlier corresponding initiatives targeted industries occupied by many competitors: airlines, railroads, trucking, busing, banking, brokerage, natural gas production, and electricity generation. In contrast, deregulation of local phone service required a temporary incubation of competitive local exchange carriers (CLECs) to insure survival against the monopoly ILECs. Otherwise, the contests between the rivals would be as suspenseless as Christians fighting lions in the Roman Coliseum.

The 1996 Act thus requires ILECs to provide CLECs "nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory...."

It further directs ILECs to combine unbundled elements for CLECs to facilitate provision of competitive exchange services.

The Act shrewdly embraces a federal-state partnership in determining the need for ILEC unbundling. The Federal Communications Commission is entrusted with setting a floor. At a minimum, a network element must be unbundled if "necessary" for viable CLEC operations and its absence would "impair" the CLEC in providing the telecommunications service it was offering. State public utility commissions (PUCs), however, were empowered to unbundle further than the federal floor in light of localized competitive conditions.

The economic wisdom of the ILEC unbundling obligations can be easily demonstrated. To require CLECs to duplicate network elements with natural monopoly earmarks of declining average costs of service would be to squander real economic resources and threaten providers with bankruptcy from overcapacity. Just ask WorldCom. In contrast, providing CLECs access to unbundled elements at reasonable rates enables all market participants to enjoy ILEC economies of scale and compete on an even playing field.

The United States Supreme Court declared the F.C.C.'s initial unbundling menu too adventuresome in AT&T Corporation v. Iowa Utilities Board (1999). Justice Antonin Scalia, writing for the majority, upbraided the Commission for shortchanging the "necessity" and "impairment" standards of the 1996 Act. But the decision cast no shadow over the authority of state PUCs to demand more unbundling by ILECs than the F.C.C.'s federal floor.

In the aftermath of Iowa Utilities Board, the F.C.C. promulgated fresh nationwide unbundling rules indifferent to local market conditions or customer classes. The Local Competition Order required discrete leasing by ILECs to CLECs of local loops; subloops; network interface devices; circuit switching; restricted packet switching; dedicated transport; shared transport; signaling networks and call-related databases; and, operations support systems. The United States Court of Appeals for the District of Columbia Circuit voided the Commission's order because it ignored the variability of CLEC needs for network elements turning on local market conditions and customer classes.

The Commission will address unbundling anew at its meeting on February 13, 2003. Competition with ILECs by CLECs has just begun to take root with the interim unbundling rules. Consumers and small businesses have saved billions, and would be severely injured without continued comprehensive unbundling. Thus, the 600,000 member National Federation of Independent Business and the Office of Advocacy of the U.S. Small Business Administration have urged retention of unbundling network elements to insure a choice among local exchange competitors. The latter declared that a removal "would have... a drastic effect on small businesses." The former underscored: "Since the 1996 Act, the Unbundled Network Element Platform (UNE-P) has been critical to the development of competition for small business customers and now serves 7.6% of the small business market...[S]mall businesses could save between $2.2 billion and $6 billion a year in lower phone bills if competitive providers maintain full access to UNE-P."

The Commission seems wisely poised to defer to state PUCs in fashioning unbundling rules tailored to local markets and customer classes. The most prudent PUC approach would presume unbundled elements are necessary to foster CLEC competition. But PUCs would entertain petitions from ILECs to waive unbundling in particular cases if necessity were disproved.

Telecommunications is too important to be left to dull and slothful monopolists.

Bruce Fein is a former general counsel of the Federal Communications Commission.

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