Competitive Local Exchange Carriers Research Articles

Prices based on current cost or historical cost: How different are they?

In 1996, The Federal Communications Commission (FCC) prescribed total element long-run incremental cost (TELRIC) to determine rates incumbent local exchange carriers (ILECs) charge for most mandated wholesale services. TELRIC, which bases prices on a hypothetical incumbent that serves current volumes with completely new equipment, was a major departure from the predominant use of historical (or original) costs for regulated prices. The FCC made two exceptions: total service resale of local exchange services and rental of space by cable television providers and competitive local exchange carriers on poles and conduit owned by electric utilities and ILECs are based on original cost calculations. The FCC’s use of both current cost and historical cost methodologies recalls the fierce debates over whether regulated rates should be based on replacement (current) costs or original (historical costs) that preceded the US Supreme Court’s 1944 FPC v Hope decision. Parties advocating low rates favored replacement costs when equipment costs were expected to decrease, but original costs when such asset prices would be expected to increase. The Hope decision upheld the Federal Power Commission’s use of original costs, which subsequently were widely used by federal and state regulators. While rates based on current costs have, indeed, differed in the expected way from the corresponding rates based on historical costs, this paper demonstrates that (1) the large differences expected by conventional wisdom are the result of faulty application of the current cost methodology and (2) proper application substantially narrows the difference between the rates produced by the respective approaches.

Local Telephony Rates: Has Deregulation Lead to Higher Competition and Lower Rates?

Since the mid 2000’s, sixteen states have deregulated local telephony rates under the assumption that increasing competition among cable digital phone, over-the-top VoIP, competitive local exchange carriers (CLECs), wireless telephony, and incumbent local exchange carriers (ILECs) is sufficient to discipline rates and therefore regulation would no longer be necessary. Using a cross sectional time/series panel of states to analyze how local telephony rates have changed as a function of state regulatory policy, we found that rates have risen more rapidly in states that have deregulated in comparison to states that have not. Moreover, the increase in residential local rates is not due to rate rebalancing between small-business and residential rates, nor to the loss of ILEC market share which in turn might increase average ILEC costs per remaining customer. Thus, results suggest that ILECs still have sufficient market power to increase local rates despite the presence of competition.

Emerging Frameworks for Regulation of Over-the-Top Services on Mobile Networks: An International Comparison

This paper is a comparative analysis of national regulations proposed for Over-The-Top (OTT) services provided over mobile networks. Specifically, the paper will examine the terms of access, interconnection and pricing for OTT services, where they are delivered to end-customers over unaffiliated mobile networks. The objective would be to evaluate alternative national regulations for the degree to which they offer fair compensation to mobile network operators while ensuring competitive neutrality between platforms and providers, and thus suggest best practices for OTT regulation. OTT services such as Skype, WeChat, KakaoTalk and WhatsApp have dramatically proliferated in the past two years, and are increasingly drawing voice and SMS traffic away from mobile operators. Mobile revenues have stagnated or declined in many major markets, leading many mobile operators to propose to slow or block OTT traffic, or deploy their own OTT services in competition with the third-party providers, or ask for regulatory relief in the form of termination charges for OTT traffic. These attempts raise troubling questions about access, interconnection, and discrimination. Such debates have previously occurred regarding access for video content providers over ISPs, or for interconnection of competitive local exchange carriers with incumbents’ networks.In this paper, we will compare regulations in different national jurisdictions dealing with OTT services on mobile networks. These proposals have ranged from an outright ban on OTT services in Vietnam, to the European Telecommunications Network Operators’ (ETNO) proposal in 2012 to request payment for termination of OTT traffic, to the unrestricted markets currently obtaining in most countries. Specifically, we compare the provisions relevant to OTT-mobile network interconnection in selected national regulations: (1) the Korea Communications Commission’s 2011 Guidelines for Network Neutrality and Internet Traffic Management; (2) the Chinese Ministry of Industry and Information Technology’s 2013 proposal to require WeChat to pay mobile carriers for the use of their facilities; and (3) the European Commission’s 2009 regulatory framework on net neutrality. Comparative analysis suggests that asking OTTs to pay for having their content delivered to consumers – as WeChat was asked to do in China – may be a form of “double dipping” since consumers already pay for their subscriptions. Jurisdictions have taken specific steps to prevent the use of pricing as a form of barrier to entry against competing OTTs, by ISPs that provide substitute services. Also, regulations have generally avoided restrictions or asymmetric pricing only on some OTTs as impractical since OTT service markets have low barriers to entry and consumers can switch easily to “free” OTT services. Finally, regulations have considered OTT-mobile network access generally in the context of legal requirements for net neutrality, though no jurisdiction currently has an unequivocal stand for or against net neutrality. Though interconnection and pricing issues for OTT services on mobile networks have not been satisfactorily resolved in any jurisdiction, comparative analysis identifies the contours of emerging “best practices” in terms of access, interconnection and pricing for OTT services. However, a sustainable pricing plan has to be competitively neutral between competing OTTs; cannot be used to favor of the ISP’s own vertically integrated services; has to be reflective of the mobile networks’ costs of providing access and network services; and cannot “double dip” – that is, collect payments for the same traffic from content provider and consumer. Potentially, only a pricing model based on usage based pricing, in which consumers are subject to a two-part tariff, inclusive of a basic access fee and a usage charge indexed to user’s data usage, might fulfill all these requirements.

Who Do Start‐Up Firms Imitate? A Study of New Market Entries in the CLEC Industry

Institutional theory contends firms imitate other firms with ideal traits, whereas the strategicgroups literature on imitation suggests firms imitate similar firms. We address this debate bystudying 1,067 market entries by founder‐managed start‐ups in the U.S. Competitive LocalExchange Carrier industry from 1996 to 2004. In support of the strategic groups literature,start‐ups imitate entry decisions of and gravitate toward markets that are densely populated byother start‐ups. Though start‐ups avoid markets already densely populated by corporate ventures,they imitate the market entries of corporate ventures. Our discussion of these and other findingsprovide insights for start‐ups navigating new industries.

Building cost effective lower layer VPNs: The ILEC/CLEC dilemma

Layer 2 and layer 1 Virtual Private Network (VPN) services; ranging from simple leased lines to extending private LANs across public networks, are commonplace today. With the continuously growing economic difficulties, capital meltdown, and telecommunication business turmoil, delivering those VPN services at the lowest cost or with the maximum revenue margin, while committing to Service Level Agreements (SLA), has become essential. We show that whether we tackle the optimal VPN design problem from an Incumbent Local Exchange Carrier (ILEC) standpoint or from a Competitive Local Exchange Carrier (CLEC) standpoint, we obtain contradictory rules. We show that by building Edge Disjoint VPN trees and spreading the traffic all over the network, the ILEC can achieve maximum throughput and enhanced network performance; while by concentrating all the VPN traffic over a single tree, the CLEC can minimize the cost of leased bandwidth. We then propose two simple algorithms that can help carriers and service providers leverage their networks and increase their revenue margins while meeting SLA requirements. Copyright © 2010 John Wiley & Sons, Ltd.

Public Policy and Entrepreneurship: The Development of the Competitive Local Telephone Service Industry - Executive Summary

In this dissertation, I examine how political environments influence industry structure and entrepreneurial opportunities following deregulation. Within the competitive local exchange carrier (CLEC) industry, which was created by the federal Telecommunications Act of 1996, I find that founding rates of CLECs were higher in states with more experience with incentive-based regulation and in those states with new governors or new commissioners. I also find that states were attractive expansion targets when their political and regulatory characteristics were similar to those of a CLEC's founding state and when they had new governors or new commissioners. Together, my findings support my argument that a state's current policy is built upon its previous policies and that changes in political leadership can serve as punctuating moments that stimulate competition and industry development.

Economic Implications of the FCC's UNE Decision: An Event Analysis Study

On February 20, 2003, the Federal Communications Commission (FCC) voted to approve new unbundled network element (UNE) rules modifying the terms under which incumbent telephone companies must resell their network facilities to competitors. The previous rules were widely criticized - and indeed, had been invalidated by the courts - for being too broad and requiring that facilities be made available at rates far below cost, even in the absence of evidence they were necessary for competitive entry. The FCC's February 2003 decision modified the prior rules by giving the states authority to forbear from enforcing the UNE or rules, and were seen as a defeat for those who had argued for doing away with the rules altogether. In this study, we examine the impact of the FCC's decision on the two telecommunications industry sectors most directly affected by the FCC's decision, the Regional Bell Operating Companies (RBOCs) and the competitive local exchange carriers that rely on the platform (UNE-P CLECs). We also examine the impact of the decision on facilities-based CLECs and telecom equipment makers. We find that the FCC decision had a significant negative impact on RBOC market capitalization, reducing their going-forward value by approximately $19 billion compared to what it would have been had the FCC repealed the UNE-P rules. By impairing access to capital needed for investment in telecommunications infrastructure, the decision will likely slow deployment of advanced broadband telecommunications services, impede growth in the information technology sector, and result in a less robust economic recovery than would otherwise have occurred.

Technology innovations and architecture solutions for the next-generation optical access network

Although deployment of fiber to the home (FTTH) systems has been ongoing for over 5 years in certain markets, the industry is still in the early phases of what is expected to be a decades-long optical fiber–based access network build-out. Deployment so far has been largely opportunistic, as in greenfield deployment or copper rehab; competitive, as competitive local exchange carriers (CLECs), utilities, and small multiple systems operators (MSOs) roll out solutions; policy-driven, at the national or municipal level; and strategic, in some isolated cases of a few large carriers. In the coming years as the appetite for bandwidth continues to grow, fiber-based networks will become the only acceptable solution. FTTH technologies have already undergone several stages of evolution, from asynchronous transfer mode passive optical network (APON) to broadband PON (BPON), Ethernet PON (EPON), and Gigabit PON (GPON)—and they will continue to do so in the future. Continuous innovations will allow for a long term increase in bandwidth, an improved cost structure, and greater reach. Starting from current FTTH architectures, including PON, point-to-point (PP), active Ethernet (AE), this paper will focus on the next-generation architectures and supporting technologies that will be used in the future including 10 Gbps PON (10GPON), multi-lambda GPON, coarse wavelength division multiplexing (CWDM) PON, and dense WDM (DWDM)-PON. It will show the relative merits of each architecture, the required supporting technologies, and the role of these solutions in the long term evolution of access networks.

Competition and investment in telecommunications

This study examines the relationship between competition and investment by Incumbert Local Exchange Carriers (ILECs) in US telecommunications markets. A panel data model and a dynamic panel data model that have not been used in previous studies are applied in this analysis. Results of the panel data model suggest that investment by ILECs is positively related to the market share of Competitive Local Exchange Carriers (CLECs), and negatively to the absolute number of CLECs. However, once the persistence in ILECs’ investment behaviour is controlled for using the dynamic model, our measures of the existing competition from CLECs, at best, have a weak effect on ILECs’ investment. Therefore, while strengthening competition in the telecom sector may be key to restoring telecom investment, it is uncertain that competition spurred by the mandatory sharing policy in this sector stimulates ILECs’ incentives to invest in new infrastructure.

Developing a Telecommunication Operation Support Systems (OSS)

The Telecommunications Act of 1996 opened competition in the telecommunications market in the U.S. and forced the incumbent telecommunications companies to open both their physical and logical infrastructure for Competitive Local Exchange Carriers (CLECs). In this case study we focus on the problems that face a CLEC with regard to designing an information system and getting a back office system, called an Operations Support Systems (OSS), operational in a highly competitive, complex, fast-paced market in a compressed time frame when a change in a critical telecommunications network component, namely the central office switch, is made after 75% of the system implementation was completed. This case deals with the factors that led to this change in central office switches, its impact on the IT department, its impact on the company, and the alternatives considered by the IT department as possible solutions to the many problems created by this change.

Bureaucrats as entrepreneurs: Do municipal telecommunications providers hinder private entrepreneurs?

We consider how government-owned enterprises affect privately owned rivals. Specifically, we compare the types of markets that municipally owned telecommunications providers in the United States serve to the types of markets that competitive local exchange carriers (CLECs) serve. We find that CLECs focus on potential profitability while municipalities appear to respond to other factors, such as political considerations or the desire to provide competition to incumbents. As a result, municipal providers tend to serve markets that CLECs do not. We also find that the presence of a municipal provider in a market does not affect the probability that a CLEC also serves that market. Our results suggest municipalities may not pose a significant competitive threat to CLECs and do not preclude CLEC participation.

Developing a Telecommunication Operation Support Systems (OSS)

The Telecommunications Act of 1996 opened competition in the telecommunications market in the U.S. and forced the incumbent telecommunications companies to open both their physical and logical infrastructure for Competitive Local Exchange Carriers (CLECs). In this case study we focus on the problems that face a CLEC with regard to designing an information system and getting a back office system, called an Operations Support Systems (OSS), operational in a highly competitive, complex, fast-paced market in a compressed time frame when a change in a critical telecommunications network component, namely the central office switch, is made after 75% of the system implementation was completed. This case deals with the factors that led to this change in central office switches, its impact on the IT department, its impact on the company, and the alternatives considered by the IT department as possible solutions to the many problems created by this change.

THE ROLE OF DIFFERENTIATION STRATEGY IN LOCAL TELECOMMUNICATION ENTRY AND MARKET EVOLUTION: 1999–2002*

We examine the role of differentiation among competitive local exchange carriers (CLECs) in nearly 1,200 U.S. cities in 1999 and 2002, before and after a valuation crash affecting communications firms. We test and reject the null hypothesis of homogeneous competitors. We also find strong evidence that differentiated CLECs account for both potential market demand and the business strategies of competitors when making their entry decisions. Finally, product heterogeneity in markets in 1999 helps predict how the structure of markets evolved through 2002. We conclude that the policy debate for local telecommunications regulation should account for differentiated behavior.

The rise and fall of the competitive local exchange carriers in the U.S.: An institutional perspective

The debacle of the telecommunications industry at the turn of the millennium resulted in significant consequences for investors, workers, financial institutions, telecom companies, and the economy in general worldwide. In the midst of the telecom bubble, the CLECs (competitive local exchange carriers) adopted similar or identical business plans and saturated the market, which resulted in destructive competition. In this study, we investigate the isomorphic business models of the CLECs from the perspectives of the new institutional theory. We argue that the combined coercive, mimetic, and normative institutional forces exerted on the companies by the actors who controlled the funding, managed the business, and provided the information fashioned the isomorphic CLEC business models, which in turn contributed to the demise of these companies and thus the burst of the telecom bubble. Evidence of the institutional influences on CLECs and the actors exerted the influences are presented and their consequences are discussed.

“Build-or-Buy” Strategies in the Local Loop

We provide a dynamic model to study how the presence of the option to buy the incumbent local exchange carrier's (ILEC) facilities via local loop unbundling affects the competitive local exchange carriers' (CLECs) incentives to build alternative infrastructures. We show that an unregulated incumbent sets a rental path for its local loop which delays technology adoption compared to the case in which there is no unbundling. We also characterize the equilibrium rental path set by the unregulated incumbent; it is prohibitively high at the initial phases when there is no effective threat of entry with alternative technologies, and it is decreasing over time in later phases. The decrease in the rental price follows the rise of the entrant's opportunity cost of leasing lines. We also argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. By studying the unregulated ILECs decision regarding unbundling, we challenge the implicit assumption behind the sunset clauses, which is that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We claim that the ILECs that initially resist unbundling requirements would tend to charge attractive access prices (relative to the entrants' alternatives) for their infrastructure, which become less essential over time.(This abstract was borrowed from another version of this item.)

'Build or Buy' Strategies in the Local Loop

We provide a dynamic model to study how the presence of the option to buy the incumbent local exchange carrier's (ILEC) facilities via local loop unbundling affects the competitive local exchange carriers' (CLECs) incentives to build alternative infrastructures. We show that an unregulated incumbent sets a rental path for its local loop which delays technology adoption compared to the case in which there is no unbundling. We also characterize the equilibrium rental path set by the unregulated incumbent; it is prohibitively high at the initial phases when there is no effective threat of entry with alternative technologies, and it is decreasing over time in later phases. The decrease in the rental price follows the rise of the entrant's opportunity cost of leasing lines. We also argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. By studying the unregulated ILECs decision regarding unbundling, we challenge the implicit assumption behind the sunset clauses, which is that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We claim that the ILECs that initially resist unbundling requirements would tend to charge attractive access prices (relative to the entrants' alternatives) for their infrastructure, which become less essential over time.

On the design of performance measurement plans in the telecommunications industry

This paper analyzes the design of performance measurement and remedy plans that have been implemented in the telecommunications industry to ensure competitive local exchange carriers are afforded a meaningful opportunity to compete in the provision of local exchange services. It demonstrates that the plans can impose penalties on incumbent local exchange carriers even when the incumbents provide the same or higher level of wholesale service quality to their competitors than they provide to themselves. Simulations are employed to illustrate the magnitude of these penalties.

Wholesale pricing and local exchange competition

Examines recent trends in local exchange competition in the US telecommunications industry. Shows that the predominant modes of operation by competitive local exchange carriers (CLECs) have been changing over time. These operating modes also vary substantially in different regions of the country. Provides a preliminary exploration of the role of potential profit in explaining the extent of overall CLEC activity. Also considers the role of prices in explaining variation in CLEC operating mode, and discuss possible additional determinants of CLEC activity that merit further investigation.

CenturyTel, Inc.

AbstractCommunications (MIC: 10.1 SIC: 4813 NAIC:517110)CenturyTel is a regional telecommunications company that is primarily engaged in providing local exchange telephone services. Co. also provides long distance, Internet access, fiber transport, competitive local exchange carrier, security monitoring, and other communications and business information services in certain local and regional markets. As of Dec 31 2003, Co.'s local exchange telephone subsidiaries operated approximately 2.4 million telephone access lines, primarily in rural, suburban and small urban areas in 22 states, with over 70.0% of these lines located in Wisconsin, Missouri, Alabama, Arkansas and Washington.

Innovation, Investment and Unbundling

In this Article, we examine the neglected tradeoff between innovation and mandatory unbundling of telecommunications networks. Our analysis is prompted by the Supreme Court's 1999 decision in AT&T Corp. v. Iowa Utilities Board and by the Federal Communications Commission's Second Further Notice of Proposed Rulemaking released later the same year, which address which network elements in the local telecommunications network shall be subject to compulsory sharing among competitors at regulated cost-based rates. Economic analysis indicates that mandatory unbundling at prices computed on the basis of the total element long-run incremental cost of the various network elements belonging to an incumbent local exchange carrier will adversely affect the ILEC's incentives not only to upgrade or maintain existing facilities, but also to invest in new facilities. Mandatory unbundling at TELRIC prices will also encourage competitive local exchange carriers to deviate from the socially optimal level of investment and entry. Finally, the confluence of mandatory unbundling and other FCC policies aggravates the distortion of investment decisions.