Local Telecommunications Research Articles

Real Options and the Costs of the Local Telecommunications Network

The Telecommunications Act of 1996 invites entry in the local telecommunications networks whereby entrants will lease parts of the network (unbundled network elements) from incumbents at cost plus reasonable profit. A crucial question in the implementation of the Act is the appropriate measure of cost. This paper examines the economic principles on which the cost calculation should be based. I conclude that the appropriate measure of cost (maximizing allocative, productive, and dynamic efficiency) is forward-looking economic cost and not the historical, accounting, or embedded cost of the incumbent's network. In calculating costs, demand and supply uncertainty, as well as the asymmetric position of incumbents and entrants should be taken into account. Close examination of the issue of uncertainty in the local telecommunications network reveals that (i) for most unbundled network elements, there is little demand uncertainty; and (ii) that those elements that face significant uncertainty, do not have sunk value. Thus, the incumbent does not face higher expected cost by investing. Moreover, the rewards of the incumbent can be higher because buyers prefer to buy services from the owner of the network. Finally, strategic considerations in oligopolistic interaction are likely to dominate any uncertainty considerations and will increase the incentive of incumbents to invest.

Bargaining over Interconnection: The Clear‐Telecom Dispute

We explore the problem of network interconnection in local telecommunications. We develop a model with a competitive business sector and a regulated residential sector. The model is used to analyze the celebrated New Zealand antitrust case between Clear and Telecom. We discuss implications of the model for the economics of antitrust, including issues of competition versus efficiency and the use of appropriate economic models. We also examine the implications of some proposed rules for interconnection. In particular, we examine reciprocity, ‘bill and keep’, and the rule that the courts ultimately endorsed, the Baumol‐Willig rule.

Access costs and entry in the local telecommunications network: a case for de-averaged rates

The telecommunications bill passed by Congress in February 1996 means that the present method of covering the cost of customer access to the local telecommunications network through non-cost based access charges cannot be sustained over the long run. However, there is a belief that cost-based rates at the local level would be prohibitively high and would threaten universal service objectives. Major tasks facing the Federal Communications Commission and state regulators will be determining what the terms and charges for interconnection should be, and who will bear the costs associated with universal service. This work estimates a generalized translog cost function of access costs at the local level in order to address these issues. The results of this study are that there are economies of scale in the provision of access to the local network and that these costs differ by geographical location. One of the important findings of this study is that, contrary to popular belief, cost-based rates at the local level would not be prohibitively high and would not threaten universal service objectives. However, given the existence of economies of scale, pro-competitive regulatory controls will be required that will restrain dominant carriers from abusing their market power and network owners from squeezing out new entrants.

Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets

This paper relies on an engineering optimization model of the local telecommunication exchange network to calibrate the functions entering various regulatory mechanisms, from both traditional and modern (incentive) regulation, and evaluate their relative performance. The engineering process model is used to generate data, which are econometrically synthesized in a translog economic cost function. Using this estimated cost function and some empirical and institutional information on market and regulatory conditions, we then calibrate demand, social‐surplus, and disutility‐of‐(cost‐reducing)‐effort functions. These functions, together with probability distributions reflecting the regulator's beliefs about technology characteristics, allow us to quantitatively assess the social value of regulatory transfers and of good cost auditing procedures, the redistributive consequences of the various forms of regulation, and the sensitivity of their relative performance to the cost of public funds.

Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets

Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets

Planning cybercities: integrating telecommunications into urban planning

This article seeks to demonstrate how urban planning strategies can creatively address the complex interlinkages between telecommunications, urban form, and transportation. The first part sets the context for local telecommunications and planning interventions by exploring the broad relations between new information technologies, and the changing form and development of cities and systems of physical mobility and location. The second part reviews a range of relevant emerging urban planning and policy initiatives drawn from North America, Europe, and Asia. Finally, the article concludes by assessing the significance of these policies and suggests ways for creatively integrating telecommunications into urban policy and planning practices and strategies.

The Great Transformation of Regulated Industries Law

The nation's approach to regulating its transportation, telecommunications, and energy industries has undergone a great transformation in the last quarter-century. The original paradigm of regulation, which was established with the Interstate Commerce Act's regulation of railroads beginning in 1887, was characterized by legislative creation of an administrative agency charged with general regulatory oversight of particular industries. This approach did not depend on whether the regulated industry was naturally competitive or was a natural monopoly, and it was designed to advance accepted goals of reliability and, in particular, non-discrimination. By contrast, under the new paradigm, which is manifested most clearly in the Telecommunications Act of 1996, the goals of regulation have become the promotion of competition and maximization of consumer choice. The role of agencies has been reduced to monitoring access and pricing of 'bottleneck' monopolies such as the local telecommunications loop and electricity distribution systems.Having described this transformation in six core common carrier and public utility industries-railroads, airlines, trucks, telecommunications, electricity, and natural gas-the Article sets out on a quest to find its causes. No consistent pattern of institutional leadership can be discerned in any of the three types of government actors with the power to compel change: the regulatory agencies, the courts, and the Congress. This suggests that the causes are rooted in deep-seated economic and social forces, such as technological changes, and chain reactions that have emerged as regulatory reform in one industry segment has spread to another segment. The Article concludes that the two most persuasive explanations are that key interest groups have discovered that regulatory change is in their interests, and that an ideological consensus has emerged among economists and other policy elites that the original paradigm entails risks of regulatory failure that exceed the risks of market failure under the new paradigm.

Pricing Regulation under Bypass Competition

We analyze optimal pricing policies in local telecommunications subject to bypass for the access of long-distance carriers. We first consider the case of a regulated monopoly that operates the local network and has access to an additional technology (bypass) more efficient for large customers. We then study how competition in bypass affects the optimal nonlinear pricing policy and the resulting allocation. When transfers are allowed between the regulator and the network operator, bypass competition benefits consumers at the expense of the taxpayer, otherwise it benefits large consumers but hurts small ones.

The Simple Welfare Economics of Network Externalities and the Uneasy Case for Subscribership Subsidies

The goal of universal service has dominated the telecommunications policy landscape for at least the past half century. This policy objective has been promoted with cross subsidies from long-distance telecommunications services to subscribers to local telecommunications service. The economic rationale for these cross subsidies is network externalities. In this paper, we show that: (1) the presence of network externalities, even if substantial in overall magnitude, does not generally justify a subscribership subsidy, even a well-designed one; and (2) the empirical realities of telecommunications markets make it unlikely that subscribership subsidies of any kind will increase social welfare.

Efficient competition in local telecommunications without excessive regulation

Competition in local telecommunications can provide large benefits. The U.S. has made great progress in promoting such competition, but the U.S. approach is extremely regulatory. We describe a possible way to introduce competition efficiently in local telecommunications without excessive regulation. It involves the combination of symmetrical call-termination charges and substantial pricing flexibility for the incumbent LEC. In this context, symmetry provides a strong safeguard against anticompetitive pricing.

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.

Local exchange competition, rate restructuring and universal service

Some perceive a dilemma between ‘Universal Service’ and competition in local telecommunications markets. Universal service objectives have been met primarily by a system of cross-subsidies that keep rates artificially low for some (usually residence) and artificially high for others (usually businesses). Increasingly regulators realize that these subsidies are untenable, but voice concern that cost-based rate restructuring will produce ‘rate shock’ and lower subscribership. Based on a quantitative analysis, the authors show that rate rebalancing may raise local rates in some cases, but these increases will be more than offset by reductions in intra-LATA toll prices. More importantly, declines in business rates will reduce enduser operating costs, ultimately translating to substantial indirect benefits to all consumers through lower prices for goods and services.

Incentive Regulation and The Cost Structure of The Local Telephone Exchange Network

This paper combines an engineering process model of the cost of local exchange telecommunications firms with an analytical model of optimal incentive regulation (with ex post cost observability), to study empirically the properties of the optimal regulatory mechanism. Relying on detailed properties of the cost function, we examine three issues: (i) the extent of natural monopoly when informational rents associated with regulation are taken into account; (ii) the extent of incentive correction, which expresses the divergence of pricing under the optimal mechanism from optimal pricing under complete information; (iii) the implementation of optimal regulation through a menu of linear contracts. Our findings are that, for fixed territory, strong economies of scale allow local exchange telecommunications to retain monopoly characteristics even when the (informational) costs of regulation are properly accounted for, the incentive correction term is small in magnitude, and that optimal regulation can be well approximated through relatively simple linear contracts.

Regulating an Input Monopolist with Minimal Information: The Local Cap

The uses minimal information to establish an optimal price for a monopolized input in a vertically integrated firm. Under it only upstream costs need be known. No demand information is required. It is comparatively welfare efficient and has a small regulatory footprint. Profits are capped upstream (e.g., in local telecommunications) and unregulated competition enabled downstream (e.g., long distance telephony). The input (interconnection) price is set by the monopolist rather than the regulator, subject to it being less than the monopolist's downstream price and to a simple cap: at most, upstream retail (local call) and interconnection revenues (including fees imputed to the monopolist for its downstream services) cannot exceed upstream (local transport) costs taking account of social programs imposed on the incumbent. The local cap is compatible with upstream regulation including universal service obligations, guarantees access deficit coverage by an efficient provider, and may be implemented as a price cap or cost-of-service-approach. Using Australian data, it is estimated that the local cap could have halved Australian long distance prices in 1989.

Telecommunications regulation in New Zealand: Light-handed regulation and the Privy Council's judgment

Abstract This article reviews the Privy Council's appeal judgment between Clear Communications and the Telecom Corporation over the price of access for local loop telecommunications interconnection. The judgment reflects four years of negotiation and two years of court proceedings between the two parties. The Council's decision that use of the Bamoul-Willig pricing model did not have an anticompetitive purpose in terms of New Zealand law has a number of important ramifications for New Zealand's light-handed regulatory environment. This article provides background to the case, examines the judgment and draws implications from and consequences for regulatory policy in New Zealand.

Expanded competitiveness and regulatory safeguards in local telecommunications markets

Expanded competitiveness and regulatory safeguards in local telecommunications markets

Can local telecommunications be self-policing?: A proposed discovery procedure

Abstract To discover whether markets for local telecommunication services can be competitively self-policing, this paper advocates a comprehensive approach to policy making as opposed to a more piecemeal approach. The problem with a piecemeal approach is that the merits of particular policies are difficult to assess without reference to the total program in which they are embedded. What seems reasonable when considered along with other complementary policies may be unreasonable if undertaken in a different context. We describe the necessary conditions for an illuminating experiment that will both insure a fair test of competition's viability and afford adequate protections to the consuming public.

The Americans with Disabilities Act: Implications for Social Services

The Americans with Disabilities Act (ADA) of 1990 prohibits discrimination on the basis of disability in employment, state and local government services, public accommodations, and telecommunications. The act prohibits denying individuals with disabilities the opportunity to participate in a program or service or providing a service that is not equal to or that is different or separate from that given others. This article provides examples of possible barriers to full participation that might exist in social services and gives illustrations of reasonable modifications to increase access. Employers, private and government, profit and nonprofit, must make reasonable physical accommodations for disabled employees, unless such accommodation would cause undue hardship. This article gives examples of reasonable accommodations and undue hardship and discusses the ADA as a resource to clients with mental and physical disabilities and as a framework of protection for agencies serving them.

Strategies and Policy for Local Telecommunications Competition

This paper presents an account of the concepts of local network interconnection and network component unbundling that will provide potential local exchange competitors with the knowledge of the telecommunications market they need to assess their competition opportunities. It will also help policy-makers to achieve the competitive results that they desire. Copyright 1995 by Oxford University Press.

Deregulation, competition, and the network size in the market for telecommunication services

This paper analyzes the networking aspect in telecommunication services and the recent divestiture and increased competitiveness of the industry. The product considered is the right to access the network. The utility of a consumer from having access to a network depends on the network's quality, defined by the number of other local and long-distance consumers which can be reached. Network services are provided in two layers; On the lower layer consumers within a local access and transport area (LATA) are connected to a central office which provides the basic switching facility for local telecommunication. On the upper layer, LATAs are connected together by an interLATA carrier, to enable long distance communication from different localities. It is shown that relative to the choices of an unconstrained monopolist, larger networks at both layers may be obtained by imposing quality controls, while price controls may have the opposite effect. A divestiture policy in which all local carriers are connected to a single long distance carrier is likely to reduce the quality of services at both layers. Introducing competition among long-distance carriers further reduces the quality of long distances services but may improve the local service.