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

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

To remedy the weaknesses found by the U.S. Supreme Court, the FCC issued its UNE Remand Order in November 1999 in which the list of UNEs was narrowed by eliminating operator service and directory assistance from the list of network elements (FCC, 1999b). However, in a separate Order, the list was expanded by adding dark fiber, subloops, and the high frequency portion of the copper loop used to provide DSL as unbundled network elements (FCC, 1999a). In response to the FCC's limited effort to improve the impairment standard, the UNE Remand Order was again challenged by the incumbents in the D.C. Circuit Court of Appeals, which granted petitions for review. Early in 2001--the FCC now composed of three Republican and two Democratic Commissioners--Republican Michael K. Powell, who was strongly in favor of light regulation, was appointed Chairman of the agency. While the appeals court case was pending, the FCC released its Triennial Review Notice of Proposed Rulemaking (NPRM) (FCC, 2003), in which it sought comment on whether the unbundling regime should be further modified to reflect changing technological and market conditions.

During the NPRM comment phase, the D.C. Court issued its decision in United States Telecom Association v. FCC (USTA I), in which it vacated and remanded the FCC's interpretation of the impairment standard and the list of UNEs based on it (D.C. Circuit Court, 2002). The court reasoned that the FCC's impairment analysis did not take into account differences in particular markets and customer classes and was hence not "sufficiently granular". It also found that the Commission's analysis had failed to adequately weigh the costs of unbundling, such as disincentives to invest for incumbent service providers, and that it had not distinguished between impairment cause by the natural monopoly characteristics of the market and cost disadvantages faces by all new entrants. Furthermore, it vacated and remanded the FCC's line sharing requirements, arguing that the Commission had failed to consider competition from cable modem service, which actually was the market leader. In response, the FCC asked commenters in the Triennial Review NPRM also to respond to the issues raised by the court decision.

The Triennial Review Order and USTA II

The Triennial Review Order, adopted in February 2003 and released in August 2003, proposed a new impairment standard and narrowed the unbundling obligations in several areas. According to the refined standard, impairment existed "when lack of access to an incumbent LEC network poses a barrier or barriers to entry [...] that are likely to make entry uneconomic" (FCC, 2003, pp. 58-64). Relevant structural barriers to be considered in the impairment analysis were "(1) economies of scale; (2) sunk costs; (3) first-mover advantages; (4) absolute cost advantages; and (5) barriers within the control of the incumbent" (FCC, 2005, p. 8). In a political compromise, the two Democratic Commissioners and Republican Commissioner Martin agreed to keep the narrowband unbundling framework (UNE-L, UNE-P) in place, but to free ILECs from unbundling rules in the broadband markets (5). For switching, high-capacity loops and dedicated transport, the Commission asked the states to conduct the impairment analysis on a granular basis. Against the votes of Chairman Powell and Commissioner Abernathy, who had considered keeping line sharing in place for copper lines to provide an additional incentive for ILECs to invest in fiber-based networks, but was opposed to UNE-P, the Order required that line sharing be phased out over a three-year period. Furthermore, new ("greenfield") fiber deployment was fully exempted from the unbundling rules. For overlays to existing copper networks and hybrid copper-fiber networks ("brownfield" projects), the Order established that only a narrowband channel needed to be unbundled. The Order delegated the task of promulgating the more granular rules required by the court decision to the state public utility commissions and set a strict time-table to that end. Various parties, including the United States Telecom Association (USTA) representing the ILECs, appealed several parts of the Order, including the finding that the narrowband mass market switching and the enterprise markets were impaired and that the states should promulgate the more granular rules required by earlier court directions.