Abstract
The 1996 Telecommunications Act requires incumbent local exchange telephone companies to provide components of their networks to their competitors at prices “based on cost.” The Federal Communications Commission devised a pricing methodology to be used by state regulatory commissions in their reviews of these prices. This paper demonstrates that most state commissions have misapplied the FCC’s pricing method and that network component prices are often far below the costs that the incumbent companies actually incur to provide them. Underpricing of network elements is systematic and substantial, which indicates a flaw in the process used to determine these prices.
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