Margit Vanberg, Assessment of telecommunications regulation in the U.S. in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 150 - 152

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

Bibliographic information
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. 151 cations regulation in order to limit the scope of market intervention. Justice Breyer, for instance, suspected that Congress did not explicitly write the essential facilities principle into the 1996 Act because it had been uncertain of the extent of necessary unbundling. Nevertheless, the Supreme Court was certain that Congress had intended for a limiting principle analogue to the essential facilities doctrine (Hausman and Sidak, 2000: 436, 445). The FCC has taken up this suggestion in its legislation. A further positive aspect of the present U.S. framework is the particular focus it places on investment incentives and infrastructure-platform competition. There are less unbundled elements at regulated prices on offer. This will presumably take downward pressure off retail prices and may therefore foster investments. Bauer (2005: 80) argues that ILECs have accelerated their DSL rollout since the changes in the unbundling requirements. New to the framework is also the focus on regional differences. Especially in a country with such diverse geographical and demographic regions as are present in the U.S., the flexibility to regulate according to local circumstances is mandatory. A further positive element of the regulatory regime is that the Telecommunications Act requires the FCC to review the regulation every two years and to abstain from regulating if the measures are no longer in the public interest (Stockdale, 2003: 263f.). The critical aspects of the present U.S. telecommunications regulation mostly have in common that the theoretical framework as described, for instance, in the Triennial Review Remand Order of 2005 (FCC, 2005) has not been consequentially implemented in practice. Rather, the FCC provisions often seem to be guided by a political policy decision where to regulate and where not to intervene. For instance, narrowband local loop unbundling is regulated everywhere, even when facilitiesbased competition from cable operators, that also offer voice telecommunications services is strong. On the other hand, FTTH or FTTC projects are everywhere exempted from regulation, even when no alternative infrastructure platform is present. In overbuild situations, the FCC only requires the telecommunications incumbent to offer a low-speed 64 kbps channel on an unbundled basis. A low-speed channel will, however, not suffice to compete in the broadband market. When there is no alternative infrastructure platform, as is often the case in rural areas where cable access is not available, and competition from wireless operators is stifled by institutional barriers, then the incumbent carrier will have a monopoly position in the broadbandaccess market. To allow for effective competition also in these broadband-access markets, access to the ducts and ductworks of the incumbent would be necessary, together with an unbundling offer for the last segment of the end-user line from the customer premises to the street cabinet to which the fiber network is built out.143 Lastly, even with the focus on infrastructure-platform competition, the new regulatory framework of the U.S. has been criticized for not doing enough to further competition from wireless operators. As Speta (2004: 5) states: “Congress ought to quickly adopt proposals that decrease the barriers to entry faced by wireless and cable operators.” He especially emphasizes the need for a reform of spectrum policy 143 See discussion of the extent of the monopolistic bottleneck in NGNs in section 8.3.2. 152 as a critical means to increase infrastructure-platform competition in broadband access. The government could increase available spectrum; it could open spectrum use to any kind of service that the owner of the spectrum would like to offer, and state and municipal policy concerning the use of public right-of-way could be reformed (Speta, 2004: 62). Others have argued for establishing a property rights system in spectrum and allowing spectrum to be traded, such that it can be allocated to its most efficient use (Faulhaber, 2006; Hazlett and Munoz, 2004). In conclusion, the U.S. legal framework, as laid down in the 1996 Act and interpreted by the Triennial Review Order of 2003 (FCC, 2003), in the Order on Reconsideration of 2004 (FCC, 2004), as well as in the Triennial Review Remand Order of 2005 (FCC, 2005) in theory meets many of the demands the disaggregated regulatory framework places on regulation. However, the regulatory practice is not always grounded in this theory. To improve U.S. communications-markets regulation, the FCC needs to consistently verify whether entry barriers are hindering actual or potential competition in a market and regulate non-discriminatory access when monopolistic bottlenecks can be located and remove regulations in all other cases. 9.2 The Regulatory framework in the European Union 9.2.1 History of telecommunications regulation in Europe144 Traditionally, European countries had state-owned monopolies for the provision of telecommunications services. As in the U.S., an underlying rationale was that telecommunications services were generally regarded to be natural monopolies. Public ownership was justified by the social objectives pursued by telecommunications regulation such as universal service provision. As part of the European integration process, the European Commission encouraged a common policy for the communications industry. In a 1987 Green Paper on Telecommunications Services, the Commission introduced the concept of open network provision (ONP), which was to further the goal of establishing a common market for communications services (Knieps, 2000: S92). With ONP policy, equal access to national communications infrastructure was to be achieved. The Commission commenced the liberalization process in 1988 by opening the markets for terminal equipment. In 1990 the Commission declared the exclusive rights of national telecommunications carriers in the markets for value-added network services to be in violation of the common market. When the Maastricht Treaty of 1993 provided the legal basis for further measures, the Commission began a consultative process on full telecommunications liberalization. In this process, the European Parliament accepted the goal to liberalize telecom services and telecom net- 144 For an overview of telecommunications regulation in Europe see Knieps (2000) and Oldale and Padilla (2004).

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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.