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

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

The long and winding search for a sustainable approach

The rationale and substance of the most recent Order can only be understood in the context from which it emerged. Space constraints do not permit a detailed discussion here, but this section offers a synopsis of the major milestones in this process (3). The Telecommunications Act of 1996 codified many regulatory practices that had been adopted before its passage. The predecessors to the Act's unbundling provisions were the rules governing access to network facilities and services for enhanced service providers. These had evolved from earlier policies dating back to the Computer Inquiries, a series of proceedings that began in 1966 to delineate the rights and obligations of basic and enhanced service providers. From these deliberations, in the late 1980s the concept of Open Network Architecture (ONA) emerged, specifying rules whereby enhanced service providers could access essential network functions provided by carriers that also had a presence in enhanced service markets (NOAM, 2001, chapter 6). Whereas ONA was never fully implemented, unbundling became a cornerstone of the Act's objective to expand the reach of competition to local voice markets.

Telecommunications Act and Local Competition Order

The drafters of the Act envisioned that three forms of competition would emerge in local markets: facilities-based competition, service-based competition (resale) and competition via unbundled network elements (UNEs), a hybrid form in which carriers could combine network components purchased from incumbent service providers with their own facilities. Resale, and to some degree UNEs, were seen as transitory stages on the road to facilities-based competition. For resellers, ILECs were required to make their retail services available at wholesale at retail price minus avoided costs (such as marketing, invoicing and billing costs). With regard to unbundling, section 251(c)(3) of the Act proscribed that ILECs must provide requesting telecommunications carriers "nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable and nondiscriminatory in accordance with [...] the requirements of this section and section 252". It further stated that incumbent local exchange carriers had to provide: "unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service". This obligation to bundle UNEs for new entrants became one of the most hotly contested areas of the rules.

The FCC was instructed to use an "impairment" standard in determining which network elements had to be unbundled (section 251(d)(2)). More specifically, the Act stated that:

    "in determining what network elements should be made available for    purposes of subsection (c)(3) of this section, the Commission shall    consider, at a minimum, whether (A) access to such network elements    as are proprietary in nature is necessary; and (B) the failure to    provide access to such network elements would impair the ability of    the telecommunications carrier seeking access to provide the    services that it seeks to offer" (emphasis added). 

It is the standard used to establish "impairment" that was at the heart of court challenges and eventually led to an elimination of many of the earlier unbundling rules. Section 252(d)(1) further required that such network elements must be made available at cost-based rates, "... however determined without reference to a rate-of-return or other rate-based proceeding". This last provision is often interpreted as requiring the use of price caps to set rates for unbundled network elements.