Unbundling policy in the United States: players, outcomes and effects

Communications & Strategies, Jan, 2005 by Johannes M. Bauer

Abstract: Building on attempts during the 1980s to establish principles of Open Network Architecture (ONA), unbundling obligations became a cornerstone of the framework for local competition devised by the Telecommunications Act of 1996. Several of the regulations developed by the Federal Communications Commission (FCC), including the impairment test to assess whether a network element had to be unbundled, the TELRIC pricing method, the obligation to re-bundle network elements to service platforms and the unbundling provisions for broadband networks were challenged repeatedly in court. In response to multiple defeats of earlier rules, the FCC had to refine its approach and define unbundling obligations more narrowly. Effective as of March 11th, 2005, unbundling obligations will essentially be limited to the local copper loop, dedicated interoffice transportation on routes connecting small markets, and high-capacity loops in small markets. Carriers presently using unbundled network elements that do not qualify under the new rules will have to transition to alternative solutions within 12-18 months. During this period, the FCC has set higher ceiling prices for these unbundled network elements. The Commission affirmed the elimination in 2003 of its unbundling obligations in broadband markets.

Key words: Unbundling, voice, broadband.

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Unbundling is one of the most contested and in some respects poorly understood areas of communications policy. In particular, the dynamic effects of unbundling obligations on investment and innovation decisions of incumbents and new entrants are subject to considerable dispute. Predecessors to unbundling were introduced in the U.S. during the late 1980s, when Open Network Architecture (ONA) was developed as a blueprint governing access to essential network functions. Far-reaching unbundling requirements for incumbent local exchange carriers were mandated by the Telecommunications Act of 1996 (1). The specific regulations crafted by the Federal Communications Commission (FCC) and the 50 state Public Utility Commissions (PUCs) to implement the Act were more stringent and detailed than unbundling provisions in most other countries. They have been challenged by major stakeholders in court since, leaving the U.S. unbundling regime in a state of flux for more than eight years. In December 2004, responding to court directions, the FCC adopted an Order that substantially redefined the unbundling obligations of incumbent local exchange carriers (ILECs) in the narrowband markets. The full text of the Order was released on February 4, 2005 and will become effective as of March 11th, 2005 (FCC 2005) (2). It marks the current end point of the prolonged, eight-year legal struggle to translate the unbundling provisions of the Act, especially its "impairment" standard, into sustainable regulatory rules. Together with modifications that had been adopted in earlier Orders and survived court review, the latest Order constitutes the prevailing unbundling framework.

Compared to the initial rules adopted by the FCC in August 1996 and expanded in subsequent amendments, the unbundling obligations of ILECs have been drastically curtailed and the ILECs have gained considerable freedom to price network elements: although it will be possible for competitive local exchange carriers (CLECs) to buy unbundled network elements other than those that continue to be regulated, they are likely to have to do so at much higher market-based prices. Despite these major changes, the present rules cannot be regarded as a new "unbundling philosophy". Rather, they result from the confluence of several forces, including the need to find a pragmatic response to repeated defeats of earlier rules in the courts; a critical assessment of experiences with previous unbundling rules, a response to the changing technological basis of the industry and a new vision regarding the role of digital applications such as VoIP. The new rules also seem to reflect a shift in the political power balance in favor of incumbent carriers. At the heart of the FCC's approach continues to be trust in facilities-based competition with light-handed regulation only applied to cases where competitors would be impaired without access to unbundled network elements. With regard to narrowband, the new rules align the U.S. framework closer with unbundling policies in other countries. With regard to broadband, the new rules create a less regulated, more market-based environment.

This article reviews the main stages of the evolution of the unbundling rules in the narrowband and broadband markets and their rationales. It proceeds with a critical assessment of the foundations of the policy changes and their likely impact on the future development of competition. To keep the topic manageable, the emphasis is placed on the federal rules, which have determined the overall course and substance of unbundling, with only occasional reference to developments at the state level.