Class 9 Platforms and Networks Spring 2020 Telcom

Class 9 Platforms and Networks Spring 2020 Telcom: Unbundling under the 1996 Act Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2014 -20 Randal C. Picker. All Rights Reserved.

The Focus Today n Key Questions/Issues u. The 1982 AT&T breakup was based on the idea of unbundling long-distance and local telephone service, where the former was seen as competitive and the latter as a natural monopoly u. How should we extend that framework to the unbundling of the local telephone network? September 18, 2021 2

Natural Monopoly: Two Key Pricing Issues n Above MC Pricing Loses Welfare u. Pricing above marginal costs entails a loss of welfare. There are consumers who would be happy to pay more than what it costs to generate the next unit who will be denied access to the good. September 18, 2021 3

Natural Monopoly: Two Key Pricing Issues n MC Pricing Causes Insolvency u. At the same time, if price is set at marginal cost, the firm loses money. It recovers only the marginal costs of production and does not recover its fixed costs. September 18, 2021 4

Ramsey Pricing: Max Welfare Subject to Solvency n Goal u. Set prices so as to maximize consumer welfare while ensuring that the firm is just solvent. n Question u. How do we price in the best way while recovering the fixed costs? September 18, 2021 5

Ramsey Pricing: Max Welfare Subject to Solvency n Intuition u. Lose less social welfare by trying to recover the fixed costs from the relatively inelastic market September 18, 2021 6

Expected Savings from Price Caps September 18, 2021 7 FCC Chair Statement (16 Mar 1989)

Problems with Rate-of-Return Regs September 18, 2021 8 FCC Chair Statement (16 Mar 1989)

Dynamic Reg Structure September 18, 2021 9 FCC Chair Statement (16 Mar 1989)

Price Caps v. Rate of Return Regulation n Perverse or Missing Incentives under Rate of Return Regulation u. Utilities just pass through costs (subject to prudence); no incentive to reduce costs or innovate u. If utility has regulated and unregulated components, will dump costs from unreg to reg September 18, 2021 10

1996 Act: 107 Pages September 18, 2021 Telecommunications Act of 1996 (Pub. 11 L. 104 -104 (110 Stat 56)) (Feb 8 1996)

Spurring Local Competition September 18, 2021 12 Telecommunications Act of 1996

Special RBOC Regs September 18, 2021 13 Telecommunications Act of 1996

Broadcast September 18, 2021 14 Telecommunications Act of 1996

Cable/Regulatory Reform September 18, 2021 15 Telecommunications Act of 1996

Obscenity and Violence September 18, 2021 16 Telecommunications Act of 1996

Miscellaneous September 18, 2021 17 Telecommunications Act of 1996

BOC Entry Into Non. Local Calling September 18, 2021 18 Telecommunications Act of 1996

Facilities-Based Competition September 18, 2021 19 Telecommunications Act of 1996

BOCs and Electronic Publishing September 18, 2021 20 Telecommunications Act of 1996

Relationship between 1996 Act and Consent Decrees September 18, 2021 21 Telecommunications Act of 1996

Unbundling Local and Long Distance n Long Distance Success Story u. Separate local calling from long distance u. Microwave entry—facilities-based entry—as starting point u. Creates lots of competition in long distance u. Mental model for 1996 Act approach September 18, 2021 22

Telco Act Structure n 1996 Act u. Passed February 8, 1996 u. Kills off the Modified Final Judgment n Basic Idea u. Instant competition by reducing state law entry barriers u. Limited, targeted entry while offering full-slate of services September 18, 2021 23

1996 Act’s Local Competition Framework n Three Key Changes u. Kills State Entry Barriers w Feds preempt state entry barriers (47 USC 253(a)) u. Quarantine BOCs w Can’t enter long distance unless facilities-based local competitor exists (47 USC 271) September 18, 2021 24

1996 Act’s Local Competition Framework u. Incumbent Local Exchange Carrier Access Rules (47 USC 251(c)) w Interconnection • Exchange and completion of telephone calls w Unbundling • More on this w Resale • Offer telecommunications services for resale at wholesale rates September 18, 2021 25

251(c)(2): ILEC Interconnection Obligation September 18, 2021 26 Telecommunications Act of 1996

251(c)(3): UNEs: Unbundled Network Elements September 18, 2021 27 Telecommunications Act of 1996

Definition of Network Element September 18, 2021 28 Telecommunications Act of 1996

251(c)(4): Resale September 18, 2021 29 Telecommunications Act of 1996

251(d): Reg Timeline/Access Standards (necessary/impair) September 18, 2021 30 Telecommunications Act of 1996

252(a): Access at What Price? : Contracts Sent to PUCs September 18, 2021 31 Telecommunications Act of 1996

252(b): Arbitration before State PUC September 18, 2021 32 Telecommunications Act of 1996

252(d): Pricing Standards September 18, 2021 33 Telecommunications Act of 1996

252(d)(3): Wholesale Prices September 18, 2021 34 Telecommunications Act of 1996

TTYN (1 of 2) Implementing the 1996 Act n Hypo u. It is 1996 and you are a the FCC and have six months to issue new rules to implement the new act u. You have been tasked to offer an understanding of “necessary” and “impair” in implementing the sharing obligations of the 1996 September 18, 2021 35

TTYN (2 of 2) Implementing the 1996 Act n Hypo u. You have also been asked to offer an interpretation of the pricing provisions of 252(d)(1)(A) n What goal do you have in establishing the rules? What choices can you make to reach that goal? September 18, 2021 36

758 Pages September 18, 2021 FCC 1 st 37 Report and Order (8 Aug 1996)

Understanding “Necessary” September 18, 2021 FCC 1 st 38 Report and Order

Understanding “Impair” September 18, 2021 FCC 1 st 39 Report and Order

Pricing: Forward Looking Costs September 18, 2021 FCC 1 st 40 Report and Order

Iowa Utilities, 525 US 366 (1999) n Question u. Does the FCC’s interpretation of “necessary” and “impair” under Section 251(d)(2) survive Chevron deference? September 18, 2021 41

Access and Necessary: Three Approaches n Essential Facilities as Physical Necessity u. Impossible n physically to build new element Economic Necessity u. Yes, a new facility could be built, but it could not be sustained economically September 18, 2021 42

Access and Necessary: Three Approaches n Policy Necessity u. Yes, it could be sustained economically, but it would take many years, and that would delay local competition substantially September 18, 2021 43

Iowa Utilities Result n Key Results u. FCC ignored the possibility of self-provisioning or buying from other third parties in assessing whether access was necessary u. FCC counted even a minimal impairment as an impairment justifying access September 18, 2021 44

262 Pages September 18, 2021 45 FCC Third Report and Order (1999)

UNE by UNE September 18, 2021 46 FCC Third Report and Order (1999)

Toughening Up “Necessary”: Preclude September 18, 2021 47 FCC Third Report and Order (1999)

And “Impair”: Materially Diminishes September 18, 2021 48 FCC Third Report and Order (1999)

nd 2 n Set Overturned in USTA I, 290 F 3 d 415 (DC Cir 2002) Says the Court re the FCC’s 2 nd Set of Rules u“As to almost every element, the Commission chose to adopt a uniform national rule, mandating the element’s unbundling in every geographic market and customer class, without regard to the state of competitive impairment in any particular market. ” September 18, 2021 49

Overturned in USTA I, 290 F 3 d 415 (DC Cir 2002) n Says the Court u“As a result, UNEs will be available to CLECs in many markets where there is no reasonable basis for thinking that competition is suffering from any impairment of a sort that might have the object of Congress's concern. ” n Issued on May 24, 2002 (Verizon out on May 13, 2002) September 18, 2021 50

Verizon, 535 US 467 (2002) n Question u. Does the FCC’s interpretation of “cost” under Section 252(d)(1) survive Chevron deference? September 18, 2021 51

UNE Pricing: 47 USC 252(d)(1) n Determinations by a State commission of the just and reasonable rate for the interconnection of facilities and equipment for purposes of subsection (c)(2) of section 251 of this title, and the just and reasonable rate for network elements for purposes of subsection (c)(3) of such section-- September 18, 2021 52

UNE Pricing: 47 USC 252(d)(1) u(A) shall be-- w (i) based on the cost (determined without reference to a rate-of-return or other ratebased proceeding) of providing the interconnection or network element (whichever is applicable), and w (ii) nondiscriminatory, and u(B) September 18, 2021 may include a reasonable profit. 53

TTYN (1 of 3) Sec. 252(d)(1) Rewrite I u(A) shall be-- w (i) based on the historical cost of providing the interconnection or network element (whichever is applicable), and w (ii) nondiscriminatory September 18, 2021 54

TTYN (2 of 3) Sec. 252(d)(1) Rewrite II u(A) shall be-- w (i) based on the replacement cost of providing the interconnection or network element (whichever is applicable), and w (ii) nondiscriminatory September 18, 2021 55

TTYN (3 of 3) Buy v. Build Hypo n Facts u. Cost $1000 to build facility yesterday u. Costs $500 to build same facility today u. Will cost $100 to build same facility tomorrow, if we build the facility today. n Question u. What price should an entrant face to use the existing facility? September 18, 2021 56

Buy v. Build Hypo n Framework u. This is learning by doing in the possible presence of spillovers. (See Tirole, Theory of Industrial Organization, 329 -330 (1988). ) September 18, 2021 57

576 Pages September 18, 2021 58 FCC Report and Order (2003)

Expanded Role for States September 18, 2021 59 FCC Report and Order (2003)

Overturned in USTA II, 359 F 3 d 554 (DC Cir 2004) n Says the Court u“We therefore vacate, as an unlawful subdelegation of the Commission’s § 251(d)(2) responsibilities, those portions of the Order that delegate to state commissions the authority to determine whether CLECs are impaired without September 18, 2021 60

Overturned in USTA II, 359 F 3 d 554 (DC Cir 2004) n Says the Court u“access to network elements, and in particular we vacate the Commission’s scheme for subdelegating mass market switching determinations. ” September 18, 2021 61

185 Pages September 18, 2021 62 FCC Order on Remand (4 Feb 2005)

UNE Revisions September 18, 2021 63 FCC Order on Remand (4 Feb 2005)

Blessed in Covad, 450 F 3 d 528 (DC Cir 2006) n Says the Court u“The Federal Communications Commission has thrice attempted—unsuccessfully—to implement the “unbundling” provisions of the Telecommunications Act of 1996. This case involves a series of petitions for review of the FCC’s fourth attempt. ” September 18, 2021 64

Blessed in Covad, 450 F 3 d 528 (DC Cir 2006) n Says the Court u“Because we conclude the Commission’s fourth try is a charm, we deny all of the petitions for review. ” Act Passed: Feb 8, 1996 th Set of Rules Accepted: June 16, 2006 n 4 n September 18, 2021 65

So What Happened? : Landlines by Carrier Type September 18, 2021 FCC, Local Telephone Competition 66 Report (as of 31 Dec 2009)

Landlines by Carrier Type September 18, 2021 FCC, Local Telephone Competition 67 Report (as of 31 Dec 2013)

Cell Phone Growth September 18, 2021 68 FCC Wireless Report (18 Aug 1995)

Wireless Growth September 18, 2021 FCC 10 th 69 Ann Wireless Report (30 Sept 2005)

Wireless Growth September 18, 2021 FCC 15 th 70 Ann Wireless Report (27 June 2011)

U. S. Wireless Connections September 18, 2021 FCC, 20 th 71 Annual Wireless Report (27 Sept 2017)