Competitive Local Exchange Carriers Research Articles

Intermodal competition in local telecommunications markets

In this study, we model local competition between Incumbent Local Exchange Carriers (ILECs) and Competitive Local Exchange Carriers (CLECs) and explicitly account for competitive effects from wireless service and high-speed connections. We develop and estimate a pooled model of local competition using both cross-sectional and time series data from published FCC and other governmental sources at the state level. We find that there is substantial competition between ILECs and CLECs and that wireless and high-speed services adversely affect ILEC lines. We conclude that the local market definition should be expanded for purposes of deregulation.

The Telecoms Twilight Zone: Navigating the Legal Morass Among the Supreme Court, the D.C. Circuit, and the Federal Communications Commission

Given the conflicting characteristics of the telecoms business - i.e., huge dollars at stake on the one hand but the inherent utility characterization of the industry on the other - public policy decision-making can often take on a surreal quality. After the events of the first half of 2002, however, the politics of telecoms are becoming just plain weird. First, the Federal Communications Commission (FCC) announced a new broadband initiative and releases three Notices of Proposed Rulemaking (NPRMs) and one Notice of Inquiry, all ostensibly designed to provide investors with sufficient regulatory clarity so as to lead to more advanced broadband deployment. Rather than focus on how to promote new entry and mitigate incumbents' market power for the last mile, these Four of the Broadband Apocalypse so nakedly seek to benefit incumbent monopolists exclusively that they collectively act as a proposal by the FCC to abandon the pro-competitive provisions of the Telecommunications Act of 1996. Shortly thereafter, the Supreme Court in Verizon et al v. FCC clearly upheld the FCC's forward-looking Total Element Long-Run Incremental Cost (TELRIC) methodology for unbundled network element (UNE) pricing and other unbundling rules. The Verizon decision finally put an end to nearly seven years of Regional Bell Operating Company (RBOC)-driven litigation surrounding the Telecommunications Act of 1996. More importantly, however, the Court made several important findings of law and fact (including, inter alia, that the Bells are monopolists for the last mile and, as such, Congress specifically decided to treat Competitive Local Exchange Carriers or CLECs and RBOCs differently) that rips the analytical heart out of the RBOC arguments against the Act - and, by extension, the FCC's current inter-modal broadband initiatives. Less than a fortnight after the Supreme Court finally resolved these issues conclusively in Verizon, the D.C. Circuit issued its opinion in United States Telecom Association et al. v. FCC, which significantly handcuffed the FCC's ability to identify network elements that incumbent local exchange carriers (ILECs) must unbundle pursuant to the 1996 Telecom Act. In a startling act of judicial activism, the D.C. Circuit cited Supreme Court Stephen Breyer's dissent from AT&T Corp. v. Iowa Utilities Board repeatedly and virtually ignored the Supreme Court Majority's rejection of RBOC anti-unbundling arguments in Verizon. In both in terms of analysis and factual conclusions, therefore, the USTA decision appears to ignore deliberately the Supreme Court's holding in Verizon made less than two weeks earlier. These two widely inapposite cases place the FCC into the Telecoms Twilight Zone from any conceivable perspective: legally, economically and, of course, politically. On one hand, the Supreme Court's Opinion in Verizon simply confirms the obvious: the FCC's proverbial Four Horsemen - if adopted as currently proposed - are patently antithetical to the maximization of consumer welfare and must be revised. On the other hand, the D.C. Circuit's Opinion in USTA appears to give the FCC the perfect legal and political cover to adopt the anti-unbundling agenda of the RBOCs. This Policy Paper examines both the Verizon and USTA decisions, and argues that if the FCC truly is in favor of less government and a market economy, therefore, then the FCC must demonstrate by both word and deed that the problem remains one of monopoly and not the lack of regulatory certainty.

(How) do regulated prices affect competitive entry?

Explores how in the USA the Telecommunications Act of 1996 was designed to usher in an era of competition in all telecommunications markets. In practice, the initial explosion of competitive local exchange carriers (CLECs) and an $87 billion publicly traded valuation has fallen instead to less than 200 CLECs and a value of only $4 billion; and has been beset by litigation over the Act and the cost standard for implementing the Act’s unbundling provisions. Reviews studies to date that attempt to determine the extent to which the prices for unbundled network elements (UNEs) have affected competitive entry into local exchange markets; presents new evidence and summarizes the effect of UNE policy on competitive entry.

Having Your Cake - How to Preserve Universal-Service Cross Subsidies While Facilitating Competitive Entry: A Response

The Telecommunications Act of 1996 generated substantial controversy regarding the prices that competitive local exchange carriers should pay for using the unbundled network elements (UNEs) of local exchange carriers. Throughout the debate, two primary pricing methods have been advocated: (1) setting the price of a UNE equal to its direct, forward-looking cost (known as the uniform, total element long-run incremental, cost (TELRIC) approach), and (2) setting the price equal to the incremental cost of a UNE plus the incumbent's opportunity cost of providing the UNE to a competitor (known as the efficient component pricing rule (ECPR)). A modification of the ECPR approach (known as access pricing) has been recommended by Professor William Baumol, which allows for the presence of cross subsidies in retail rates. We explore the subtleties of each pricing method, detailing background on the debate, analyzing the FCC's position, and discussing Professor Baumol's proposal. In doing so, we highlight deficiencies of the TELRIC approach, noting particularly that the method induces entrants to engage in cream-skimming while preventing them from profitably offering service to subsidized retail customers, and prevents incumbent local exchange carriers from recovering forward-looking incremental costs. Further, we discuss how Professor Baumol's differential access pricing method solves most of the problems associated with the TELRIC approach, while noting that Professor Baumol's pricing method is not without its own shortcomings. Finally, we describe our pricing methodology, called the Market-Determined ECPR (M-ECPR). We demonstrate the advantages of the M-ECPR pricing methodology, concluding that this method eliminates cream-skimming opportunities and facilitates entry into all the local exchange carrier's markets, while allowing regulators to maintain cross-subsidies. We conclude by welcoming Professor Baumol's recent change of position, since he had previously advocated TELRIC pricing.

Bankruptcy Prediction: The Case of the CLECS

The Telecommunications Act of 1996 led to the creation of the competitive local exchange carriers, known as CLECS (pronounced sea‐lecks). Despite a strong beginning and great optimism, between January 2000 and September 2002, almost half of the publicly held CLECS filed for bankruptcy. Though their path to bankruptcy was typical, the atmosphere surrounding the CLECS was not. They enjoyed the strong support of Wall Street analysts in the form of positive reports and buy ratings, as well as support from institutional investors in the form of investments, for much of their lives. This support may have been the consequence of the telecommunications mania that marked the late 1990s and part of 2000, or, it has been alleged, the result of unethical and possibly illegal behavior on the part of some of Wall Street analysts. Though this situation will no doubt generate a great deal of research in the coming years, this paper examines one of the most important issues that is prompted by the question: Using metrics that are readily available, could investors, analysts and other interested parties have predicted which CLECS would file for bankruptcy prior to the filings? This study attempts to respond to this question by envisioning a scenario in which an investor, analyst, or other observer learns in 2001 that three of the CLECS filed for bankruptcy in 2000. In response, the interested party reads some of the literature on predicting bankruptcy, and then uses certain of the methods described to determine which of the remaining CLECS are likely to become insolvent in 2001 and 2002.

Mandatory Unbundling, UNE-P, and the Cost of Equity: Does TELRIC Pricing Increase Risk for Incumbent Local Exchange Carriers?

The Telecommunications Act of 1996 sought to improve competition through facilities-based investment. Thomas Jorde, Gregory Sidak, and David Teece hypothesized in 1999 that mandatory unbundling at TELRIC (total element long-run incremental cost) prices would increase the equity costs of incumbent local exchange carriers (ILECs) and reduce their investment incentives by subjecting them to increased risk during economic recession. In particular, competitive local exchange carriers (CLECs) are more likely to lease unbundled network elements (UNEs) when demand for telecommunications services is weak, because low prices for those services cannot support the high sunk costs of facilities-based investment in the short-term. Alternatively, when demand for telecommunications services is strong, higher prices for those services will afford a CLEC additional revenue to build out its network. Because TELRIC prices are not compensatory in economic terms, ILEC returns will suffer in times of recession and improve during an expansion. We empirically test the Jorde-Sidak-Teece hypothesis. We find that the ILECs' betas increased positively and statistically during the recession that began in March 2001. Consequently, their equity costs rose by between 0.4 percentage points and 4.1 percentage points, which reduced their incentives to invest in their own networks. This result is consistent with the Jorde-Sidak-Teece hypothesis. Recent stock market events also appear consistent with the Jorde-Sidak-Teece hypothesis. On January 6, 2003, a front-page story in the Wall Street Journal speculated that the FCC would revise its rules on mandatory unbundling at TELRIC prices in a manner that would benefit the ILECs. Specifically, the report implied that CLECs would lose the opportunity to lease all network elements as an unbundled network element platform, better known as UNE-P. The report was significant because UNE-P had become an entry strategy for CLECs that rested on regulatory arbitrage: UNE-P is functionally equivalent to resale, yet it is more favorably priced for the CLECs than is resale. The practical effect of ending the pricing arbitrage created by UNE-P would be to force CLECs to pay resale prices or resort to an entire or partial facilities-based business model for providing local telephony. Put differently, UNE-P would not disappear; it would simply be priced by arms-length negotiation between ILECs and CLECs rather than by a regulatory commission. The abnormal returns of telecommunications equipment manufacturers on January 6, 2003 are highly probative of whether mandatory unbundling at TELRIC prices - epitomized in its most extreme form by UNE-P - is thought by the capital markets to increase or decrease investment in the network infrastructure required for local telephony. We find that the positive returns for the telecommunications equipment manufacturers exceeded by approximately 5 percent the return that the market could explain. If mandatory unbundling of network elements at TELRIC prices actually encouraged investment in local telecommunications infrastructure, then the abnormal returns to the telecommunications equipment manufacturers would have been negative on January 6, 2003. Instead, the positive abnormal returns to JDS Uniphase, Lucent, Nortel, and Tellabs reflected an expectation of the capital markets that these firms would have increased net cash flows, which would result from greater (not lesser) sales of telecommunications equipment.

Does Bell Company Entry into Long-Distance Telecommunications Benefit Consumers?

As part of the Modification of Final Judgment (MFJ) that implemented the divestiture of the Bell operating companies (BOCs) from AT&T on January 1, 1984, the BOCs were forbidden to carry telephone calls from one local access and transport area LATA) to another. Although the Telecommunications Act of 1996 superseded the MFJ, it retained the BOCs' interLATA prohibition and established, in section 271, a process - involving each state public utilities commission, the Federal Communications Commission (FCC), and the Department of Justice (DOJ), acting on a state-by-state basis - by which the BOCs could earn regulatory approval to enter the interLATA market within the regions in which they provide local exchange service. As of September 1, 2002, the BOCs had received section 271 authorizations to provide in-region interLATA service in fifteen states. In this Article, we review the origin of section 271. We explain that the FCC and DOJ did not expect that BOC entry would lower prices for interLATA service. Next, we report an empirical analysis designed to estimate the effect that BOC entry has had in New York and Texas, two states where section 271 authorizations has been given. We have three major findings. First, we find that the average consumer received a savings of 8 to 11 percent on the monthly interLATA bill in the states where BOC entry occurred as compared to states where BOC entry had not occurred. Second, we find that competitive local exchange carriers (CLECs) gained a substantial increase in cumulative share of the local exchange market in states where BOC entry occurred as compared to the control states. Third, we find that the average consumer experienced no significant change in her local bill in states where BOC entry into interLATA service occurred as compared to the control states. These empirical results suggest that BOC entry in New York and Texas has led to consumer benefits in terms of lower interLATA bills and greater effective choice for local exchange services in those states. We explain how these empirical results are consistent with the economic theory of double marginalization. Because this economic analysis is not part of the approach that the FCC and the DOJ take with respect to implementing section 271, it is not surprising that these two agencies did not expect price to fall after BOC entry into the interLATA market. Reprinted from Antitrust Law Journal, vol. 70, no. 2, pp. 463-484 (2002), a publication of the American Bar Association Section of Antitrust Law.

For whom the bell alternatives toll: demographics of residential facilities-based telecommunications competition in the United States

This research uses web client automation to identify a large sample of residential facilities-based customers of competitive local exchange carriers (CLECs). The research examines demographics of the Census block groups where the identified customers live, and compares the profiles to the corresponding counties and states. As expected, the results suggest a community's proximity to business matters, and persons in Census block groups with residential facilities-based competition tend to have higher average income and educational achievement levels. Importantly, low-income households appear not to be left behind, which may speak to the efficacy of income-based support programs such as Lifeline and Link-Up.

Unbundling and Facilities-Based Entry by CLECs: Two Empirical Tests

In this paper, the determinants of the provision of facilities-based lines by competitive local exchange carriers (CLECs) are examined using data collected by the Federal Communications Commission and the entry decisions of a large, facilities-based CLEC. The multiple regression models are based on the economics of entry, considering both the effects of market size and sunk costs on provision of facilities-based service to end-users by CLECs. These estimated regressions indicate that CLEC facilities-based entry is positively related to market size and inversely related to the sunk costs of entry. Both regressions indicate that unbundled element prices are inversely related to facilities-based entry. On average and other things constant, higher element rates are associated with a reduced amount of facilities-based entry by CLECs.

Paragons of virtue? Competitor entry and the strategies of incumbents in the U.S. local telecommunications industry

We investigate whether the presence of new competitors has influenced the behaviour of U.S. incumbent local exchange carriers (ILECs) with respect to pricing, advertising and the extent of diversification that they engage in. This issue is explored empirically, using data for the major local exchange carriers for the years 1994 to 1998. The period straddles periods of both absence and presence of competition in the industry, since the Telecommunications Act of 1996 has opened hitherto closed markets to competitive local exchange carriers (CLECs). While a recent Federal Communications Commission (FCC) report on local competition documents vigorous entry during the past years, the market share of the entrants is insubstantial. Our results indicate that the threat provided by market entrants has notably influenced the strategic behaviour of ILECs. The findings show that the incumbent U.S. local operators, particularly the larger ILECs, aggressively protect their profit streams from traditional business. The evidence demonstrates that the ILECs have responded to the Telecommunications Act 1996, and to the threat of market entry it has created, through entry deterrence. This strategic behaviour has been successful in providing ILECs with protection of their monopolistic markets so far.

CLEC access charges and the problem of monopoly power

The analysis in this paper looks at the problem of excessive originating and terminating access charges imposed by some competitive local exchange carriers (CLECs) in the US. The problem arises because the current institutional structure provides an incentive for CLECs to charge for access service in excess of what a competitive market would indicate. An examination the data shows that the problem of excessive access charges imposed by CLECs is very real. An analysis of terminating access charges for September 2000 reveals that average terminating access charges billed to three interexchange carriers (IXCs) are excessive, exceeding average price cap-regulated incumbent local exchange carrier (ILEC) access charges by 370–470%. A couple of solutions to the problem are offered, including a first-best solution whereby the calling party would be required to pay the for originating access service and have the receiving party pay for terminating access service. A second-best solution would be to limit CLEC’s access charges to an IXC to be less than or equal to the access charges of the ILEC with which it directly competes for customers.

Is Structural Separation of Incumbent Local Exchange Carriers Necessary for Competition?

Although competitive local exchange carriers (CLECs) collectively have gained considerable market share since the passage of the Telecommunications Act of 1996, many entrants into local telecommunications have stumbled or failed. Some argue that competitive local telephony will eventuate only if the incumbent local exchange carriers (ILECs) place their wholesale and retail operations in structurally separate subsidiaries. By mid-2001, several states began proceedings on mandatory structural separation, and influential members of Congress introduced legislation mandating structural separation. In this Article, we analyze, and reject as unpersuasive, the putative benefits of mandatory structural separation. Such regulatory intervention is unnecessary to prevent discrimination against unaffiliated retailers of telecommunications services. Nor would mandatory structural separation lower wholesale discounts or increase the CLECs' market share. Plausible hypotheses for the CLECs' problems do not require the assumption of anticompetitive behavior by the ILECs. Apart from producing no discernable benefits to consumers, mandatory structural separation would entail a substantial social cost in terms of forgone coordination of investment and production and forgone economies of scope. Moreover, mandatory structural separation would harm consumer welfare and reduce resources for investment by facilitating an anticompetitive strategy by the ILECs' largest rivals to raise the ILECs' costs of providing local telecommunications services. Policy makers should reject proposals for mandatory structural separation of the ILECs.

Monopoly power and the problem of CLEC access charges

The analysis in this paper considers the problem of excessive originating and terminating access charges imposed by some competitive local exchange carriers (CLECs) in the United States. The problem arises because the current institutional structure provides an incentive for CLECs to charge for access service in excess of what a competitive market would indicate. An examination of the data shows that the problem of excessive access charges imposed by CLECs is very real. An analysis of terminating access charges for September 2000 reveals that average terminating access charges billed to three interexchange carriers (IXCs) are excessive, exceeding average price cap regulated incumbent local exchange carrier (ILEC) access charges by 370–470 percent. Some solutions to the problem are offered including a first-best solution whereby the calling party would be required to pay for originating access service and have the receiving party pay for terminating access service. A second-best solution would be to limit CLEC's access charges to an IXC to be less than or equal to the access charges of the ILEC with which it directly competes for customers.

Paragons Of Virtue? Competitor Entry and the Strategies of Incumbents in the US Local Telecommunications Industry

The Telecommunications Act of 1996 has opened hitherto closed markets to competitive local exchange carriers (CLECs). While a recent Federal Communications Commission (FCC) report on local competition documents vigorous entry during the past years, the market share of the entrants is insubstantial. We investigate whether the presence of new competitors influences the behaviour of incumbent local exchange carriers (ILECs) with respect to pricing, advertising and the extent of diversification that they engage in. This issue is explored empirically, using data for the major US local exchange carriers for the years 1994 to 1998. Our results indicate that the threat provided by market entrants has notably influenced the strategic behaviour of ILECs. The findings show that the incumbent US local operators, particularly the larger ILECs, aggressively protect their profit streams from traditional business. The evidence demonstrates that the ILECs have responded to the Telecommunications Act 1996, and to the threat of market entry it has created, through entry deterrence. This strategic behaviour has been successful in providing ILECs with protection of their monopolistic markets so far.

Bring home the Internet

In the good old days, the only two-way communications link with a residence was provided by the local telephone company (telco). But the growth of the Internet and the passing, in the United States, of the Telecommunications Act of 1996 have changed that tradition. Today, a competitive local exchange carrier can compete in the turf of the local telco, now called an incumbent local-exchange carrier. In addition, cable TV operators are allowed to offer telephony and Internet access services to their subscribers along with TV programs. The question of who will supply the 'last mile' pipe to the home could lead to some of the toughest fights the communications marketplace has ever seen. Winners will gain the revenues from supplying a cornucopia of phone, TV and Internet services. The paper discusses these issues as well as asymmetric digital subscriber line, cable modems, service billing, wireless connections, and power grid use for optical cable laying for communications.

The PathStar access server: Facilitating carrier-scale packet telephony

The maturation of large-scale Internet protocol (IP) routing and the standardization of voice over IP (VoIP) protocols have accelerated the deployment of packet telephony products in the public network. Service providers such as the Regional Bell Operating Companies, competitive local exchange carriers, multiple system operators, and Internet service providers (ISPs) are beginning to seek out next-generation products to consolidate voice, video, and data onto converged packet-based networks. To address this market, Lucent Technologies has developed and introduced a suite of data networking and packet telephony products, one of which is the PathStar Access Server. This revolutionary new product integrates Bell Labs software innovations such as the Inferno® operating system with access and interconnection technologies developed by the Switching, Access, and Data Networking areas of Lucent Technologies. The PathStar Access Server combines the functionality and features of traditional circuit switches with advanced packet routing techniques to enable end-to-end converged network solutions. This paper presents an overview of the PathStar Access Server and briefly explores its hardware and software architectures.

Without Public Peer: The Potential Regulatory and Universal Service Consequences of Internet Balkanization

Since its inception the Internet has generated positive networking externalities, widespread access and seamless connectivity through a combination of TCP/IP routing technologies and widespread interoperability. During this promotional period, Internet Service Providers (ISPs) appeared to have a keen interest in collaboration seemingly without concern for profit maximization and without regard for operator size, traffic volume and flow of traffic. ISPs coordinated traffic primarily at quasi-public access points and exchanges, in much the same was as two local exchange carriers receive and hand off traffic at Meet Points to secure wide area call access. Growing service demand, congestion at quasi-public interconnection sites and commercialization of the industry have motivated major ISPs and large volume users to pursue more reliable, quasi-private interconnection. Private peering arrangements promote security, reliability and higher service quality. They add robustness and new, faster and higher capacity routing options. But on the other hand private peering arrangements help create a hierarchy of networks and users while previously generated positive networking externalities arose from a flat, democratic, 'sender keep all network of networks.' This paper will examine the evolution of ISP interconnection arrangements with an eye toward determining the consequences resulting from the migration from sender-keep-all, zero cost interconnection arrangements to commercially driven ones modeled closely after conventional telecommunication carrier-to-carrier interconnection agreements. While private peering will enhance quality of service and reliability, it may trigger the same sort of parity and cost of access concerns raised by competitive local exchange carriers and other market entrants. The paper concludes that Internet interconnection and cost of access have begun to raise the same sort of questions raised by local and interexchange carrier interconnection.

The Irwin handbook of telecommunications

The Irwin handbook of telecommunications

The Welfare Impacts of Competitive Telecommunications Supply: A Household-Level Analysis

THE TELECOMMUNICATIONS ACT of 1996 defines a regulatory framework for increasing the intensity of competition in all aspects of telecommunications supply. The act requires all regional Bell operating companies (RBOCs) to provide interconnection, unbundled access to their basic network elements, and resale of any retail services that they offer to potential competitive local exchange carriers. Once an RBOC meets a checklist of standards for providing access and interconnection services, the act allows it to ask the Federal Communications Commission (FCC) for permission to provide interLATA (Local Access and Transport Area) long-distance service.' The entry of competitive local ex-

The future of competition in long-distance telecommunications

The author discusses legislation in 1995 or 1996, together with how the U.S. Telecommunications sector, both local and long-distance, is being transformed due to competitive pressures and technological advances. The author discusses the role of the Regional Bell Operating Companies. He goes on to consider the competitive local exchange carrier, cable TV, and full service provision through local service resale.