Spring 2003

Ed. Note: The February 20^th press release by the Federal Communication Commission, "FCC Adopts New Rules for Network Unbundling Obligations of Incumbent Local Phone Carriers," has many technical dimensions, but, as a major competition policy proceeding, it's been greeted by widespread comment among community communication specialists as well as the corporate community. As with a previous Point / Counterpoint exchange involving different points of view on the Tauzen-Dingell bill, we present here two differing perspectives on this recent decision. For a counterpoint to Debbie Goldman's perspective here, see Bruce Kushnick's commentary and analysis.

The FCC's decision to shift to the states decision-making on UNE-P – the unbundled network element platform – for voice telephony sets up policy battlegrounds in each of the 50 states. The key decision the FCC punted to the states is over local switching, which competitors combine with local loops into a platform known as UNE-P for resale.

Fortunately, on broadband, the FCC's action does encourage investment by removing new fiber investments from the unbundling requirements, thereby moving policy in the right direction to promote the availability and access of information technology for all.

The goal of regulatory policy must be to encourage facilities-based competition, not resale. Resale brings nothing new to consumers – it is simply rebranding of the incumbents' network. Real consumer choice depends on competitive offerings that use different technologies to drive innovation, new services, and improved quality.

Proponents of UNE-P unbundling and pricing policies argue that resale is necessary to jumpstart facilities-based local competition. They point to the long-distance model, whereby new entrants such as MCI and Sprint used resale of AT&T's network to generate revenues and customers as they built their own networks.

But this model fails for several reasons. First, should public policy aim to jumpstart building a second telephony wire into the home? Is that realistic, given the ubiquity of the telephone network? Or is the future for local competition between companies offering service using different technologies – telephony wires, cable wires, and wireless? If so, public policy should focus on ensuring a level playing field for competition to drive investment in networks using all these technologies.

Second, to return to a focus on wireline telephony competition, the critical issue is to ensure that UNE-P pricing sets the appropriate investment incentives for incumbents and new entrants alike. If resale prices are below-cost, new entrants will never invest because it is cheaper to rent. Likewise, incumbents will put no new money into the network, because they can't recover their costs. Service quality will deteriorate, and deployment of new and advanced services will be delayed. Resale customers suffer as well from deteriorating networks, since their service rides on the incumbents' network.

This is effectively the impact of UNE-P prices on telecom investment. Residential telephone rates have historically been set below-cost to encourage universal service, offset by above-cost pricing to business customers and for features such as call waiting and call forwarding. Competitors currently use UNE-P prices to resell local service to high-revenue customers. The incumbent is left with low-revenue customers. If competitors siphon off the high-revenue retail customers that subsidize those rates, incumbents don't recover the cost of the network.

According to stock analyst UBS-Warburg, the Bell companies lose an average of $18 in revenue and almost $15 in profits for each UNE-P resold line.

Incumbent Bell companies have now resold about 10 million UNE-P lines. Last year they cut capital expenditures by $13.8 billion, or 35 percent over the prior year, and slashed more than 30,000 jobs of front-line technicians who build, repair, and maintain the lines. To be sure, the economic downturn and other management policies account for much of the decline. But revenue loss due to below-cost UNE pricing played a role as well.

As noted earlier, the FCC decision did the right thing on broadband, removing new investments in fiber technology from the unbundling regime. Getting investment incentives right is essential to encourage broadband deployment.

But the states must now also get it right for voice telephony. The critical decision is whether competitors are "impaired" without access to local switching at UNE prices. Competitors have placed more than 1,300 circuit (voice) switches in local telephone wire centers that serve 86 percent of all access lines and have deployed at least 1,700 packet (data) switches. Competitors serve more than 20 million lines using their own switches.

Removing local switching from the UNE regime will not impair competition. Rather, it will facilitate the transition to facilities-based competition by encouraging competitors to move customers' lines onto their own switches. Incumbents will still be required by law to provide non-discriminatory access to their networks to ISPs.

Resale competition based on UNE-P prices creates the illusion of competition but it comes at high cost to consumers. It undermines any incentive for new entrants and incumbents alike to invest in current and new networks, services, and technologies.

We need more investment in telecommunications networks to ensure that all Americans have access to affordable, quality broadband services. According to the FCC's most recent report, only about 14 million American households subscribe to high-speed Internet services. Cost, access, and quality continue to be barriers. With proper investment incentives, economies of scale and competition between competing technologies can drive down cost and build-out of networks with new services.

Market incentives alone will not close the digital divide. There will continue to be a role for public subsidies and programs such as support for Community Technology Centers (CTC) and the Technology Opportunity Program (TOP) to ensure that all Americans have affordable, quality high-speed broadband. But getting the regulatory incentives right is a first step. The FCC did the right thing for consumers by removing broadband from the below-cost UNE pricing regime; now let's hope the states do the right thing on voice telephony.