Incumbent Local Exchange Carriers Research Articles

The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements under the Telecommunications Act of 1996

Until 1996, local telephone markets had been treated as natural monopolies and thus subject to regulation. The Telecommunications Act of 1996 (the Act) seeks to introduce competition into these markets. One method the Act adopts to stimulate such competition is to mandate that incumbent local exchange carriers (LECs) provide access to their unbundled network, such as loops and switches. In August of 1996, the Federal Communications Commission (FCC) issued its First Report and Order, which established a pricing rule for UNEs. The FCC's pricing rule sets the price for a UNE at its total element long-run incremental cost (TELRIC) plus a reasonable share of the incumbent LEC's forward-looking common costs. We propose a pricing methodology to implement that rule based on a combination of what we call the market-determined efficient component-pricing rule (M-ECPR) and competitively neutral end-user charges. We assert that using the M-ECPR to price UNE access is more faithful to the language and intent of the Act than is the approach adopted by the FCC. We also maintain that the FCC misunderstood the efficient component-pricing rule when the agency rejected it as a basis of pricing UNEs. After outlining our proposal for pricing UNEs, we argue that the FCC's pricing rule is problematic because it prevents the incumbent LEC from recovering its total costs by denying any recovery of the LEC's historical costs and ensuring that it will not fully recover its forward-looking costs. We then respond to criticisms of the M-ECPR by various economists and refute the assertions that the principal authors of the original efficient component-pricing rule rejected the M-ECPR in favor of TELRIC pricing for UNEs. We conclude by warning that the FCC's pricing rule would discourage investment in local telecommunications networks and may eventually drive LECs into bankruptcy.

The Irwin handbook of telecommunications

The Irwin handbook of telecommunications

An Efficient Avoided Cost Pricing Rule for Resale of Local Exchange Telephone Services

The Telecommunications Act of 1996 requires incumbent local exchange telephone companies to make their retail telecommunications services available to resellers at a discount that reflects the costs that will be avoided by providing the services at wholesale rather than at retail. In this article, we develop a pricing methodology to apply to such wholesale services. The methodology, which we label the Avoided Cost Pricing Rule, is designed to generate an economically efficient discount that may be applied to the incumbent local exchange carriers' services that are offered to resellers.

A market test for natural monopoly in local exchange

Is the incumbent local exchange carrier (LEC) a natural monopolist? The analysis indicates that the LEC cost function is not supportable: LECs appear to be either nonsustainable natural monopolies or non natural monopolies over the set of services they currently offer. However, recent technological changes suggest that whether LECs are natural monopolies over their current offerings is immaterial for policy making, because competitors are enjoying economies of scope in offering both LEC and non LEC services. Based on these results, deregulation of LECs is discussed in a Type I/Type II error framework.

The Local Telecommunications Market: It's not Competitive Now; Will it Ever be?

The "information superhighway" is an attractive idea and is no doubt essential to the competitive economic growth of communities throughout the United States. Getting on and off the highway requires use of the local exchange network-just as local roads are used to get on and off the vehicular interstate highways. Right now those local roads are controlled by monopoly local exchange carriers, so government policies are needed to allow private enterprise to construct new, competitive access systems in a cost-effective manner It is critical for legislatures and federal and state utility regulators to allow new entrants into the local telecommunications marketplace to establish themselves on fair and reasonable competitive terms. To do so requires continued constraints on the incumbent local exchange carriers, who have and will continue to have extraordinary market power Without such asymmetric policies, local telecommunications competition will be stifled, and businesses and other consumers who want a selection of local telecommunications providers from which to choose will never get one.