United States: Unbundling

Editor’s Note: In February 2005 the Federal Communications Commission (FCC) released new unbundling rules for Incumbent Local Exchange Carriers (ILECs). The new rules were designed to bring an end to the cycle of court reversals, boost investment in broadband facilities, promote service innovation, encourage facilities based competition in local telecommunications services, and spread the benefits of alternative technologies to all customers. In June 2006, the FCC’s rules were upheld by a federal court. This note summarizes the main differences between the FCC’s initial unbundling rules and those adopted in March 2005.

The 1996 United States Telecommunications Act establishes that all telecommunications carriers have the duty to interconnect to exchange traffic. [1] The Act also provides that Incumbent Local Exchange Carriers (ILECs) must unbundle network elements (UNEs) if they are proprietary in nature, or where the absence of the UNE would impair the ability of a Competitive Local Exchange Carrier (CLEC) to offer telecommunications services. [2] Moreover, prices for UNEs must be “just and reasonable” and reflect the cost incurred to provide them.

Initial FCC Rules for Unbundling of Network Elements

The FCC’s original rules [3] called for extensive unbundling of ILECs’ networks. The FCC required ILECs to offer unbundled network elements subscriber loops, end-office switching, signaling, access to databases and operations support systems. ILECs were also required to offer a combination of unbundled network elements to CLECs. This combination of network elements called Unbundled Network Element-Platform (UNE-P) allowed CLECs to provide services throughout an ILEC’s local service area without collocating in all the ILEC’s switching areas.

The rules required the ILECs to offer unbundled network elements at regulated prices based on the Total Element Long-Run Incremental Cost (TELRIC) of the element. TELRIC measures cost on a forward-looking basis and assumes that the most efficient technology is deployed and the network is configured on the basis of least cost as against the outdated technology and network architecture operated by ILECs.

The original rules deemed a CLEC requesting network elements to be “impaired” if the quality of the service it offered declined and/or the cost of providing the service rose without access to the requested element. In determining whether a carrier was impaired the FCC placed no reliance on self-provision by CLECs, or the availability of alternative elements from ILECs and other carriers using alternatives such as cable, fiber optic, or satellite. The initial impairment standards were nation-wide in scope. That is they applied to every geographic market and customer class, despite differences such as the state of competitive deployment and geography that may have existed between regional markets. The initial impairment rules applied only to the core services offered by CLECs in competition with ILECs.

Revised Rules for Unbundling, March 2005

The FCC’s original rules were the subject of ongoing litigation. After several court decisions that declared the FCC’s unbundling rules inconsistent with the Telecommunications Act, in 2005 the FCC limited the number and types of elements that must be unbundled on a mandatory basis. [4]

The FCC’s new rules substantially reduce the unbundling obligations in several market segments, and adopt a more rigorous standard for determining when a requesting carrier is impaired. The new impairment standard focuses on the question of whether the absence of an unbundled element would impose a barrier to entry to an efficient competitor, which is large enough to make entry uneconomic. [5]

In contrast to the original rules, the new rules severely reduced the number and types of elements that ILECs must unbundle on a mandatory basis. In particular, the FCC:

  • Removed the mandatory requirement for ILECs to unbundle Fiber-to-the-Home (FTTH),
  • Abolished line sharing as an unbundled element,
  • Prohibited access to UNEs for the exclusive service to mobile wireless services and long distance services, and
  • Removed unbundled switching from the list of UNEs. This has the effect of removing the requirement that incumbents provide the UNE-P at TELRIC rates.

The most obvious effect of these changes is a substantial narrowing of the elements of the network subject to price regulation. This gives ILECs greater pricing flexibility. For example, ILECs now offer the equivalent of UNE-P at commercially negotiated rates.

The new rules also established a link between the duty to unbundle and whether alternative sources of supply are economically feasible. They do this by specifying a list of structural factors or impediments that regulators must consider when assessing whether a “reasonably efficient” competitor faces economic or operational impairment in a relevant market. These factors include scale economies, absolute cost advantages, sunk costs, first-mover advantages, and operational barriers within the control of the ILEC.

The new unbundling rules generally put an end to the initial country-wide unbundling rules for all network components in favor of more differentiated approach. Impairment analysis was to be done on a granular basis, i.e., taking into account market specific variation, such as disparities in customer classes, geography, service and the state of competitive deployment in the relevant geographic market. One important exception is the ordinary local loop, for which CLECs are generally viewed as impaired without access to such facilities.

Under the initial rules, impairments were restricted to the core services offered by CLECs in competition with ILECs. In contrast, the new impairment rules are applicable to any telecommunication service with the exception of mobile wireless services and long distance services. This change reflects the FCC’s finding that workable competition has already developed in these markets, without access to unbundled network elements.

Endnotes:

[1] United States Telecommunications Act, 1996 § 251 (a)(1).

[2] United States Telecommunications Act, 1996 § 251 (d)((2).

[3] The Commission’s initial decision is summarized in the statement “Commission Adopts Rules to Implement Local Competition Provisions of Telecommunications Act of 1996” (CC Docket No. 96-98) (accessed August 2006)

[4] United States Telecom Ass’n. v. FCC, 299 F.3d 415.422 (D.C. Cir. 2002), cert. Denied, 123 S. Ct. 1571 (2003).

[5] Federal Communications Commission, Unbundled Access to Network Elements, WC Docket No. 04-313, Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket No. 96-98, Order on Remand, February 4, 2005, 21-22.

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