Did mandatory unbundling achieve its purpose? Empirical evidence from five countries

Journal of Competition Law and Economics

Volumn 1, Issue 1, 2005, Pages 173-245

  Hausman, Jerry A ^a   Sidak, J Gregory ^b  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

^b GEORGETOWN UNIVERSITY LAW CENTER   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 27844515170     PISSN: 17446414     EISSN: None     Source Type: Journal    
DOI: 10.1093/joclec/nhi005     Document Type: Review

References (180)

1. The nearest example in the antitrust literature was an abandoned remedy in Microsoft that would have forced the incumbent operating system provider to disclose its source code to rivals. See J. Gregory Sidak, An Antitrust Rule for Software Integration, 18 Yale J. on Reg. 1 (2001).
2. For a detailed analysis of the scope of the unbundling decision and the access pricing decision by a telecommunications regulator, see Jerry A. Hausman & J. Gregory Sidak, A Consumer-Welfare Approach to Mandatory Unbundling of Telecommunications Networks, 109 Yale L. J. 417 (1999).
3. For a review of unbundling in other contexts, see J. Gregory Sidak & Hal J. Singer, Interim Pricing of Local Loop Unbundling in Ireland: Epilogue, 4 J. Network Indus. 119 (2003);
4. J. Gregory Sidak & Allan T. Ingraham, Mandatory Unbundling, UNE-P, and the Cost of Equity: Does TELRIC Pricing Increase Risk for Incumbent Local Exchange Carriers?, 20 Yale J. Reg. 389 (2003);
5. J. Gregory Sidak & Hal J. Singer, How Can Regulators Set Nonarbitrary Interim Rates? The Case of Local Loop Unbundling in Ireland, 3 J. Network Indus. 273 (2002);
6. Thomas M. Jorde, J. Gregory Sidak, & David J. Teece Innovation, Investment, and Unbundling, 17 Yale J. Reg. 1 (2000).
7. J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 Colum. L. Rev. 1081 (1997).
8. U.S.C. §153(29).
9. Id. §251(d)(2)(B).
10. Id. §252(d)(1) (stating that '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, and the just and reasonable rate for network elements for purposes of subsection (c)(3) of such section - (A) shall be - (i) based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection or network element (whichever is applicable), and (ii) nondiscriminatory, and (B) may include a reasonable profit.').
11. Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket Nos. 96-98, 95-185, First Report and Order, 11 F.C.C. Rcd. 15499 ¶620 (1996) [hereinafter First Report&Order].
12. Id. at ¶672.
13. Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, Report and Order and Order on Remand and Further Notice of Proposed Rulemaking, CC Dkt. No. 01-338, 18 F.C.C. Rcd. 16978, 17020 ¶59 (2003) [hereinafter Triennial Review].
14. Id. at 16985-91 ¶7.
15. 47 U.S.C. §251.
16. Id. §252(d)(3) ('a State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier.').
17. First Report & Order, supra note 6, at ¶908.
18. Id.
19. Triennial Review, supra note 8, at ¶41.
20. Id.
21. See, e.g., Robert W. Crandall, Allan T. Ingraham, & Hal J. Singer, Do Unbundling Policies Discourage CLEC Facilities-Based Investment?, Topics in Economic Analysis & Policy, vol. 4, no. 1, art. 14 (2004) (http://www.bepress.com/bejeap/topics/vol4/iss1/art14).
22. Deployment of Wireline Services Offering Advanced Telecommunications Capability and Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Dkt. Nos. 98-147, 96-98, Third Report and Order in CC Dkt. No. 98-147 and Fourth Report and Order in CC Dkt. No. 96-98, 14 F.C.C. Rcd. 20,912 (1999) [hereinafter Third Report].
23. Id. at 20,916 ¶5.
24. U.S. Telecom Ass'n v. FCC, 290 F.3d 415, 428-29 (D.C. Cir. 2003) [hereafter USTA].
25. Triennial Review, supra note 8, at ¶199.
26. Id. at ¶258.
27. Id. at ¶259.
28. Id. at ¶260.
29. Id. at ¶263. Interestingly, the chairman of the FCC, Michael K. Powell, did not agree with the decision to terminate line sharing, arguing that 'the continued availability of line sharing and the competition that flowed from it likely would have pressured incumbents to deploy more advanced networks in order to move from the negative regulatory pole to the positive regulatory pole, by deploying more fiber infrastructure.' Separate Statement of Chairman Michael K. Powell, Dissenting in Part, Feb. 20, 2003, at 1 (available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-231344A3.doc).
30. United States Telecom Ass'n v. FCC, 359 F.3d 554, 585 (D.C. Cir. 2004).
31. Id.
32. Id.
33. New Zealand Commerce Commission, Section 64 Review and Schedule 3 Investigation into Unbundling the Local Loop Network and the Fixed Public Data Network, Final Report, December 2003 (available at http://www.comcom.govt.nz/telecommunications/llu/finalreport.PDF).
34. Id. at app. 5.
35. Id. at 117.
36. Id. at 20.
37. Id. at 21.
38. Triennial Review, supra note 8, at ¶44.
39. For a review of CAPs, see Daniel F. Spulber & J. Gregory Sidak, Deregulatory Takings and the Regulatory Contract: The Competitive Transformation of Network Industries in the United States 80-82 (Cambridge University Press 1997).
40. Triennial Review, supra note 8, at ¶44.
41. FCC, Local Telephone Competition: Status as of December 31, 2002, at tbl. 2 (rel. Jun. 12, 2003) (available at http://www.fcc.gov/Bureaus/ Common_Carrier/Reports/FCC-State_Link/IAD/lcom0603.pdf) [hereinafter FCC Local Competition Report 2002].
42. BOC UNE Fact Report 2002, App. L, at L-1, L-2.
43. FCC, Local Telephone Competition: Status as of June 30, 2003, at tbl. 15 (rel. Dec. 22, 2003) (available at http://www.fcc.gov/Bureaus/ Common_Carrier/Reports/FCC-State_Link/IAD/lcom1203.pdf) [hereinafter FCC Local Competition Report 2003].
44. Id. at tbl. 1.
45. Id. at tbl. 2.
46. See, e.g., Bruce Meyerson, AT&T plans to slash another 7,500 jobs; After U.S. court loss, carrier to cut value, Detroit Free Press, Oct. 8, 2004, at 2.
47. See, e.g., Robert W. Crandall & Leonard Waverman, Who Pays for Universal Service?: When Telephone Subsidies Become Transparent 9-11 (Brookings Institution 2000).
48. FCC Local Competition Report 2003, supra note 37, at tbls. 14, 15.
49. 47 U.S.C. §251(f)(1), (2).
50. FCC Local Competition Report 2003, supra note 37, at tbl. 5.
51. Id.
52. See, e.g., Jerry A. Hausman, J. Gregory Sidak & Hal J. Singer, Cable Modems and DSL: Broadband Internet Access for Residential Customers, 91 Am. Econ. Ass'n Papers & Proceedings 302 (2001).
53. National Cable Television Association, Statistics & Resources (available at http://www.ncta.com/Docs/PageContent.cfm?pageID=86).
54. FCC, High-Speed Services for Internet Access: Status as of June 30, 2003, at tbl. 5 (rel. Dec. 22, 2003) (available at http://www.fcc.gov/ Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hspd1203.pdt) [hereinafter FCC High-Speed Services].
55. Triennial Review, supra note 8.
56. Id. at ¶200 ('As explained more fully below, this unbundling approach - i.e., greater unbundling for legacy copper facilities and more limited unbundling for next-generation network facilities - appropriately balances our goals of promoting facilities-based investment and innovation against our goal of stimulating competition in the market for local telecommunications services.').
57. See Jerry A. Hausman, Valuation and the Effect of Regulation on New Services in Telecommunications, 1997 Brookings Papers on Econ. Activity: Microeconomics 1.
58. Third Report, supra note 17, at ¶7.
59. Id. at ¶9 n.12.
60. Id. at ¶315.
61. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999) (Breyer, J., concurring in part and dissenting in part) ('a sharing requirement may diminish the original owner's incentive to keep up or to improve the property by depriving the owner of the fruits of value-creating investment, research, or labor.').
62. Third Report, supra note 17, at ¶2.
63. Id. at ¶507.
64. See, e.g., Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513 (1995);
65. J. Gregory Sidak & Robert W. Crandall, Is Structural Separation of Incumbent Local Exchange Carriers Necessary for Competition?, 19 Yale J. on Reg. 335 (2002).
66. Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal: Why Aspen and Kodak Are Misguided, 68 Antitrust L.J. 669 (2001).
67. Id.
68. FCC News Release, Rochester Telephone Corporation Granted Rule Waivers to Implement its Open Market Plan, Mar. 7, 1995 (available at http://www.fcc.gov/Bureaus/Common_Carrier/News_Releases/1995/ nrcc5030.txt).
69. BellSouth Signs Deals with CLECs, TR Daily, Apr. 29, 2004.
70. AT&T Offers UNE Rate Plan, TR Daily, Apr. 29, 2004.
71. Id.
72. Deutsche Bank Securities, AT&T Corporation, Apr. 30, 2004, at 1.
73. BellSouth in Deals with Four Carriers, TR Daily, May 5, 2004.
74. SBC Offers CLECs Fixed Rate for UNE-P through 2004, TR Daily, Apr. 20, 2004.
75. Verizon Announces Framework for Commercial Agreements with CLECs, Comm. Daily, Apr. 22, 2004.
76. See, e.g., James S. Granelli, PUC Suggests SBC Lease Rate Increase, L.A. Times, May 4, 2004, at *1.
77. See, e.g., Yuki Noguchi, FCC Adds 6 Months to Local Phone Line Rules, Wash. Post, Aug. 21, 2004, at E2.
78. See, e.g., Hope Yen, Justices Decline to Consider Phone Competition Rules, Wash. Post, Oct. 12, 2004.
79. Triennial Review, supra note 8, at 9.
80. Id.
81. Id.
82. USTA, 290 F.3d at 427 (emphasis in original).
83. For a description of the role of sunk costs in access pricing and unbundling, see generally Hausman & Sidak, supra note 2.
84. Id.
85. Similarly, regulators may consider mandatory roaming at regulated prices to be a stepping-stone to a wireless carrier's eventual investment in base stations and spectrum in another geographic region. In this second example, however, a component of the relevant infrastructure is radio spectrum, the allocation of which is controlled by the government (at least in the primary market). Consequently, it is not clear where the stepping-stone of mandated access leads in wireless.
86. Third Report, supra note 17, at ¶6 (emphasis added).
87. Id. at ¶7.
88. Id. at ¶5.
89. Id. at ¶7 n.12 (quoting Promotion of Competitive Networks in Local Telecommunications Markets, Notice of Proposed Rulemaking and Notice of Inquiry, WT Dkt. No. 99-217, and Third Further Notice of Proposed Rulemaking, CC Dkt. No. 96-98, FCC 99-141, ¶ 4,23 (rel. July 7, 1999)).
90. See, e.g., J. Gregory Sidak, The Failure of Good Intentions: The WorldCom Fraud and the Collapse of American Telecommunications After Deregulation, 20 Yale J. on Reg. 207 (2003) (showing that the average FCC appropriations increased from dollar;158 million per year in 1981-95 to dollar;212 million per year in 1996-2001 in real terms).
91. Third Report, supra note 17, at ¶3.
92. Trends in Telephone Service, FCC Industry Analysis Division, 2003 Report, at 13-1 (rel. Aug. 2003) (available at http://www.fcc.gov/ Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/trend803.pdf).
93. Robert D. Willig, William H. Lehr, John P. Bigelow & Stephen B. Levinson, Stimulating Investment and the Telecommunications Act of 1996 (report filed by AT&T in FCC Docket 01-338, Oct. 11, 2002).
94. Robert W. Crandall, Competition and Chaos: The U.S. Telecommunications Sector Since 1996 (forthcoming Brookings Institution Press 2007).
95. Id. at 9-10 (manuscript).
96. Kevin A. Hassett, Zoya Ivanova & Laurence J. Kotlikoff, Increased Investment, Lower Prices - the Fruits of Past and Future Telecom Competition, Sept. 2003.
97. Anna Maria Kovacs & Kristin Burns, The Status of 271 and UNE Platform in the Regional Bells' Territories, Commerce Capital Markets, Apr. 2002.
98. Billy Jack Gregg, A Survey of Unbundled Network Element Prices in the United States, National Regulatory Research Institute (2001, 2002, 2003). Crandall notes that there does not seem to be academic agreement as to what, exactly, the regulated UNE-P rates are for each state at any point in time.
99. Crandall, Competition and Chaos, supra note 87, at 14-15, 17-18 (manuscript).
100. Id. at 20.
101. Id.
102. Id.
103. Phoenix Center, UNE-P Drives Bell Investment: A Synthesis Model, Policy Bulletin No. 6 (2003) (available at http://www.phoenix-center.org/ PolicyBulletin/PolicyBulletin6Final.pdf).
104. Declaration of Thomas W. Hazlett, Arthur M. Havenner & Coleman Bazelon on Behalf of Verizon, In the Matter of Petition for Forbearance from the Current Pricing Rules for Unbundled Network Elements, WC Dkt. No. 03-157 (Sept. 2003).
105. National Cable Television Association, Statistics & Resources (available at http://www.ncta.com/Docs/PageContent.cfm?pageID=86).
106. Id.
107. Id.
108. FCC High-Speed Services, supra note 48, at 6 (tbl. 1).
109. Third Report, supra note 17, at ¶ 188-89.
110. FCC High-Speed Services, supra note 48, at 10 (tbl. 3).
111. Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Dkt. Nos. 01-338, 96-98, 98-147, Report and Order and Order on Remand and Further Notice of Proposed Rulemaking, 18 F.C.C. Rcd. 16,978, 16,979 ¶229 (2003) [hereinafter Section 251 Review].
112. U.S. Telecom Ass'n v. FCC, 290 F.3d 415, 428 (D.C. Cir. 2002) [hereinafter USTA].
113. Bernstein Research, U.S. Telecom and Cable: Faster Rollout of Cable Telephony Means More Risk for RBOCs, Faster Growth for Cable, at 3 (Dec. 17, 2003).
114. Id.
115. Peter Grant, Comcast Pushes into Phone Service, Wall St. J., May 26, 2004, at A3.
116. Justin Hyde, Verizon to sell video over fiber in 2005, ReuterS News, May 19, 2004.
117. Id.
118. See, e.g., Cannon Carr & Gregor Dannacher, Can Wireline Cannibalization Save Wireless ARPU in 2003?, CIBC World Markets, Dec. 11, 2002, at 8 (estimating that wireless minutes in the United States have now displaced roughly 30 percent of total wireline minutes). See also Health of the Telecommunications Sector: A Perspective from Investors and Economists, before the House Subcommittee on Telecommunications and the Internet, 108th Cong. (Feb. 5, 2003) (statement of Blake Bath, Managing Partner, Lehman Brothers); id. (statement of Robert W. Crandall);
119. Linda Mutschler et al., The Next Generation VII, Merrill Lynch, Equity Research, Feb. 21, 2003, at 28-29, 38-42.
120. JD Power and Associates, Consumer Survey, May 2004.
121. Indeed, AT&T has recognized the displacement effect of wireless service on its long-distance business. See, e.g., AT&T Corp., 2003 SEC Form 10-K, filed Mar. 15, 2004 ('For example, consumer long distance voice usage is declining as a result of substitution to wireless services, internet access and e-mail/instant messaging services, particularly in the 'dial one' long distance, card and operator services segments.').
122. FCC Local Competition Report 2003, supra note 37, at tbl. 3.
123. Id. at tbl. 4.
124. See, e.g., Robert W. Crandall, An Assessment of the Competitive Local Exchange Carriers Five Years After the Passage of the Telecommunications Act, Criterion Working Paper, June 27, 2001 (finding evidence that CLECs were best able to produce revenue growth by building their own networks or significant parts of their own networks).
125. Crandall, Ingraham & Singer, supra note 16.
126. James Eisner & Dale E. Lehman, Regulatory Behavior and Competitive Entry, Presented at the 14th Annual Western Conference Center for Research in Regulated Industries, June 28, 2001.
127. Triennial Review, supra note 8, at ¶37.
128. BOC UNE Fact Report 2002 at III-8 to III-14.
129. Triennial Review, supra note 8, at ¶222.
130. Id. at ¶202 (emphasis added).
131. Id. at ¶298.
132. Id.
133. Id. at ¶324.
134. Id.
135. Id. at ¶436.
136. Id. at ¶442.
137. 47 U.S.C. §271.
138. See FCC, RBOC Applications to Provide In-region, InterLATA Services Under §271 (available at http://www.fcc.gov/Bureaus/ Common_Carrier/in-region_applications/).
139. In the Matter of Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act of 1934, as Amended, to Provide In-Region, InterLATA Services in Michigan, Memorandum Opinion and Order, 12 F.C.C. Rcd. 20,543, 20,746 ¶388 (1997).
140. Jerry A. Hausman, Gregory Leonard & J. Gregory Sidak, Does Bell Company Entry into Long-Distance Telecommunications Benefit Consumers?, 70 Antitrust L.J. 463 (2002).
141. Id.
142. Oftel, Oftel's Policy on Indirect Access, Equal Access and Direct Connection to the Access Network, at ¶46, July 1996 (available at http://www.ofcom.org.uk/static/archive/oftel/publications/1995_98/ competition/access96.htm).
143. Id.
144. Id. at ¶ 46-47. Facilities-based investment by BT's competitors existed even in the early 1990s. In particular, ILECs in the United States and Canada invested in U.K. cable companies. Those cable companies then began to offer telephone services to their customers. See, e.g., Declaration of Oliver E. Williamson, Motion of Bell Atlantic Corporation, BellSouth Corporation, Nynex Corporation, and Southwstern Bell Corporation to Vacate the Decree at ¶ 17-22, United States v. Western Elec. Co., Civ. Act. No. 82-0192 (D.C. Cir. 1994). Consequently, by January 2004, over 400,000 homes in the United Kingdom were offered telephone service by a cable operator. Id.
145. See, e.g., Damien Geradin & Michel Kerf, Controlling Market Power in Telecommunications: Antitrust vs Sector-Specific Regulation 163 (Oxford University Press 2003).
146. Oftel, Promoting Competition in Services over Telecommunication Networks, June 1996.
147. Oftel, Access to Bandwidth: Bringing Higher Bandwidth Services to the Consumer, Dec. 1998 (available at http://www.ofcom.org.uk/static/archive/ oftel/publications/1995_98/competition/llu1298.htm) [hereinafter Oftel Access to Bandwidth December 1998].
148. Id. at ¶1.3.
149. Id.
150. Oftel, Access to Bandwidth: Delivering Competition for the Information Age, Nov. 1999 (available at http://www.ofcom.org.uk/static/archive/ oftel/publications/1999/consumer/a2b1199.htm) [hereinafter Oftel Access to Bandwidth 1999].
151. For a thorough discussion of the regulatory requirements under mandatory unbundling in the United Kingdom, see Geradin & Kerf, supra note 137, at 172-74. Along with the requirement of mandatory unbundling, the Director General of Telecommunications (DGT) permitted that rates for mandatory unbundling should (1) permit the recovery of an appropriate share of common cost, (2) permit the recovery of reasonably incurred long-run incremental cost, (3) may differ across BT's service area according to varying economic circumstances, and (4) should include a reasonable return on capital employed.
152. Id. at 173.
153. Oftel Access to Bandwidth 1999, supra note 142, at ¶2.4.
154. Select Committee on Trade and Industry, Sixth Report, Mar. 20, 2001, at ¶4 (available at http://www.parliament.the-stationery-office.co.uk/ pa/cm200001/cmselect/cmtrdind/90/9006.htm) [hereinafter Select Committee Sixth Report].
155. Id. at ¶6.
156. Oftel has stated that 'competitive markets are most likely to promote innovation and increased productivity with resulting benefits in terms of lower prices and better quality and choice for consumers.' Oftel Access to Bandwidth 1998, supra note 139, at ¶4.2. Oftel has also maintained that regulatory intervention 'should be limited to situations where competition is either not possible or is not working effectively or where costs and benefits accruing to third parties are not taken into account by market participants.
157. Id. By pursuing a policy of mandatory unbundling, Oftel believed that it could correct a market failure which, once eliminated or reduced, would result in lower retail prices.
158. Oftel, The UK Telecommunications Industry Market Information: 2001/02, Mar. 2003, at 7 (available at http://www.ofcom.org.uk/static/archive/ oftel/publications/market_info/2003/ami0303.pdf).
159. OECD Reviews of Regulatory Reform: Regulatory Reform in the UK - From Transition to New Regulation Challenges, 2002.
160. Id.
161. Id.
162. Commission of the European Communities, Ninth Report from the Commission on the Implementation of the Telecommunications Regulatory Package: European Telecoms Regulation and Markets 2003, Annex 1, Nov. 11, 2003, at 59 [hereinafter EU Ninth Report].
163. Id.
164. OECD, The Development of Broadband Access in OECD Countries 42 (Oct. 29, 2001) (hereinafter OECD 2001 Broadband Study].
165. Id.
166. Id.
167. Id.
168. Oftel's Internet and Broadband Brief, Oct. 12, 2003 (available at http://www.ofcom.org.uk/legacy_regulators/oftel/ oftel_internet_broadband_brief/?a=87101#10).
169. OECD 2001 Broadband Study, supra note 154, at 42.
170. Id.
171. Id.
172. BT, Annual Report & Form 20-F 2003, at 27 (available at http://www.btplc.com/report/report03/index.htm).
173. Id.
174. Id.
175. Id.
176. OFCOM, Strategic Review of Telecommunications: Phase I Annex F-J 35 (Spring 2004) available at: http://www.ofcom.org.uk/codes_guidelines/telecoms/ strategic_review_telecoms/?a=87101#remit
177. EU Ninth Report, supra note 152, at 59.
178. Id.
179. Oftel, The UK Telecommunications Industry Market Information: 2001/02, Mar. 2003, at 27 (tbl. 8a) (available at http://www.ofcom.org.uk/static/ archive/oftel/publications/market_info/2003/ami0303.pdf) [hereinafter 2003 UK Telecommunications Information Report].
180. Ofcom, Ofcom Fixed Telecoms Market Information Update, May 2004, at tbl. 7 (available at http://www.ofcom.org.uk/research/