Margit Vanberg, The present regulatory framework in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 148 - 150

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6

Series: Freiburger Studien zur Netzökonomie, vol. 14

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148 new entrants. Among ILECs and also among many academic commentators of the regulation process UNE-P regulation was highly contested (see Hausman and Sidak, 2005: 177; Vogelsang, 2005; Bauer, 2005). 9.1.2 The present regulatory framework There were several appeals before the courts against the FCC interpretation of the 1996 Telecommunications Act. The following focuses only on the ultimate results of a long legal battle over the proper implementation of the legislation laid down in the 1996 Act.137 A Supreme Court decision in 1999 and a D.C. Circuit Court of Appeals decision in 2003 found that the FCC had to reconsider its unbundling requirements and to significantly reduce the scope of its unbundling regulation. In particular, the FCC was called upon to take more account of infrastructure-platform competition from, for instance, Cable-TV operators or operators of wireless access technologies.138 Regulation was not to take away investment incentives for facilities-based entry, especially in the newly emerging broadband-access markets. Furthermore, the FCC was called upon to observe differences in “particular markets and particular customer classes” instead of applying regulations on a nation-wide basis (FCC 2004, 7ff.). In response to the court decisions, the FCC revised its approach for locating those network elements which were to be unbundled from the criterion whether unbundling is technologically possible and associated with lower costs for competitors to focusing on whether a “reasonably efficient” competitor cannot economically duplicate the network element in question due to structural barriers to entry in the market. This criterion is closer to the definition of “essential facilities” as used in U.S. general competition law. The FCC now defines structural entry barriers as characterized by (1) economies of scale, (2) sunk costs, (3) first-mover advantages, (4) absolute cost advantages, and (5) barriers within the control of the incumbent (FCC, 2005: 4 and 8). Characteristics (1) and (2) of this list resemble the criteria that the theory of monopolistic bottlenecks has formulated for monopolistic bottleneck network areas, although the theory of monopolistic bottlenecks is more specific in requiring that the 137 Bauer (2005) provides a more detailed overview of the process. 138 For a long time the FCC failed to address the question of how cable operators offering bidirectional ISP-services on their networks were to be treated compared to common carriers offering these services. Open-access obligations placed on common carriers required wireline telecommunications companies to offer network access to all ISPs wanting to serve their customers, whereas cable operators cooperated with exclusively licensed ISPs on their networks. The FCC formalized this differential treatment in 2002 by officially declaring cablebased Internet services to be “information services” not subject to the common carrier openaccess regulations (Werbach, 2002: 53). 149 economies of scale and scope must substantiate a natural monopoly.139 Criteria (3), (4), and (5) of the FCC list are not clearly defined and leave room for the FCC for a wider interpretation of the unbundling requirements than the theory of monopolistic bottlenecks does. Using these new criteria for locating structural entry barriers, the FCC abolished much of the previous unbundling regulations and especially those obligations which focused on the broadband-access network.140 For those network elements no longer regulated, competitive providers must now either pay unregulated rates, should the incumbent continue to offer wholesale access to these network elements, or they must build out their own network infrastructure (or exit the market). In particular, the FCC abolished all UNE-P regulation, and with it all requirements to offer local circuit switching at regulated rates (FCC, 2004: 109ff.). It further removed all linesharing obligations (FCC, 2003). With respect to local loop unbundling it determined that high-capacity interoffice transport routes and high-capacity local loops need only be unbundled under particular local circumstances (whenever the number of business-lines between, or to wire centers and the number of fiber-based collocators at a wire center fall under a given threshold, thereby indicating that revenue opportunities in this particular geographic area may not justify facilities duplication by alternative providers) (FCC, 2004: 43f. and 82f.). With respect to access regulation in next generation networks, the investments of ILECs into FTTH and FTTC projects were explicitly exempted from unbundling requirements (FCC, 2003 and 2004). The FCC clarified that only “…where a FTTH loop is deployed in overbuild, or “brownfield” situations, […] LECs must either provide unbundled access to a 64 kbps transmission path over the fiber loop or unbundled access to a spare copper loop” (FCC, 2004:3). In an order released in September 2005,141 the FCC further eliminated all open access requirements on wireline broadband access providers established by the Computer Inquiries. The FCC determined that DSL-service providers would henceforth be considered providers of information services and therefore no longer be obliged to offer transmission capacity to unaffiliated ISPs.142 The reclassification of 139 See sections 4.3.1 and 4.4.1 above. The essential facilities doctrine also recognizes the need to justify market intervention by natural monopoly characteristics in that it requires a competitor’s inability to practically or reasonably duplicate the facility. 140 The revisions of the unbundling rules are in the Triennial Review Order of 2003 (FCC, 2003), in the Order on Reconsideration of 2004 (FCC, 2004) and in the Triennial Review Remand Order of 2005 (FCC, 2005). 141 FCC 05-150 available at 150A1.pdf; site last visited on Feb. 15, 2008. 142 Following the 1996 Act, the FCC had introduced the term “information services” instead of “enhanced services.” Information services continued to be exempted from common carrier regulation. Internet service providers were explicitly excluded from the term “telecommunications carrier”. In its 1998 Universal Service Report to Congress, the FCC had declared that “Internet Service Providers that lease telecommunications capacity from common carriers, in order to operate an Internet backbone, are not themselves common carriers, but are providers 150 DSL services from telecommunications services to information services put an end to the unequal treatment of telephone operators and cable providers in the broadband-access market; cable-TV providers have never faced open-access requirements. What remains of the previously very generous unbundling requirements for competitors is essentially the obligation to unbundle the copper local loop in all areas in which the incumbent is using this access technology for narrowband telecommunications purposes. Competitive local exchange carriers are granted access to the copper local loop at TELRIC prices whenever they intend to (also) provide telecommunications services over this line. Since local circuit switching is no longer regulated, entrants are now required to build out their network to the local switch and set up own switching equipment or alternatively buy switching and transport services from other carriers. For competition in the broadband-access market the new regulatory framework relies on infrastructure-platform competition from Cable-TV networks and high-speed wireless technologies. DSL service by competitors using the unbundled local loop is only a source of competition when the unbundled local loop is available and technically adequate to support broadband services, or when local circumstances are such that obligations to provide access to a high-capacity loop apply. For the development of NGA networks (FTTH and FTTC projects) the regulatory framework practices restraint in order to entice investments by either the incumbent or new entrants. 9.1.3 Assessment of telecommunications regulation in the U.S. The fundamental change in U.S. unbundling policy since 2003 is a direct reflection of the impact that network convergence has had on regulatory policy. U.S. courts believe that infrastructure-platform competition has increased to such a significant extent, that asymmetric regulation of telecommunications infrastructure, especially for broadband access, is no longer justifiable. They plead for regulatory abstinence to further the investment incentives in broadband infrastructure. The practical implications of the new limited unbundling rules have not yet been analyzed. This is mostly due to the fact that the transition periods, in which most of the discontinued unbundled elements were still on offer, lasted into the year 2006. The effects of the new unbundling rules on competition in the telecommunications markets are therefore only now becoming evident. At this time, the appraisal of the new unbundling regulation is therefore mostly theoretical. Positive, from the point of view taken in the normative analysis in chapter 8, is the fact that the current U.S. unbundling legislation strives to avoid overregulation by using a limiting theoretical framework for the identification of the regulatory basis. The Supreme Court decision of 1999 explicitly mentions the essential facilities doctrine as an example of a standard, which should be applied in telecommuniof information services” (Oxman, 1999: 23). DSL services in the local access market were, however, considered part of telecommunications services provision.

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Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.