Unbundled Network Elements Research Articles

Do UNE Rates Reflect Underlying Costs?

The regulatory regime under which incumbent telephone companies are required to offer portions of their networks to competitors is a joint product of Federal and state authorities. While the regime is extremely complex, it can broadly be described as having two main substantive components: 1) Regulations setting out which elements of the incumbents' networks must be offered (or unbundled); and 2) Regulations that set the prices that must be charged for those elements. Under the Telecommunications Act (the Act), as implemented, authority for both components of the regulatory regime is shared between the Federal Communications Commission (FCC) and the states, generally acting through state Public Utility Commissions (PUCs).While the precise division of authority between the FCC and the PUCs is a source of substantial controversy and ongoing litigation, there is general agreement that the policy of mandated access to incumbent networks should be implemented on a nationally consistent basis--i.e., that, regardless of the level at which decisions are made, they should be made on the basis of, and comport with, a single analytical framework. Broadly speaking, it is the FCC's responsibility to establish the framework, and the PUCs' responsibility to implement it.In this study, we examine state PUCs' implementation of the FCC's rules regarding the pricing of Unbundled Network Elements (UNEs), i.e., the portions of the network which the FCC requires be made available to competitors. We find that variations in costs among the states explain only about half of the variation in the rates set by state PUCs. Furthermore, the typical deviation of state-set rates from costs is at least 15% from the levels that would be implied by a systematic approach. These results suggest that the current regime has not resulted in consistent application of the FCC's regulatory framework.

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.

PROMOTING INNOVATION AND THE DEPLOYMENT OF ADVANCED TELECOMMUNICATIONS SERVICES TO BUSINESSES

This paper examines the concomitant effects that competition, regulation, market characteristics, and corporate ownership have on the deployment of advanced telecommunications services (ATS) to business customers through the econometric analysis of a rich data set that identifies the competitive, regulatory, and economic climate for each incumbent’s wire center in the United States. The authors conclude that local competition, inter‐LATA (local access and transport area) approval by the Federal Communications Commission, and high unbundled network element price to embedded cost ratios have positive impacts on the deployment of ATS, while voluntary federal price cap regulation and location in a rural area have negative impacts. (JEL L51, O32, M21)

Efficiency Trade-Offs in the Design of Competition Policy for the Telecommunications Industry

Trade-offs between imitation and innovation create natural tensions in the design of competition policy for the telecommunications industry. We explore the relationship between the prices of unbundled network elements (UNEs) and static/dynamic efficiency. We find that even when UNEs are priced to induce efficient make-or-buy decisions from a static perspective, mandatory unbundling reduces the incumbent's incentive to invest from a dynamic perspective. Moreover, while the literature focuses on disincentives for investment in innovation associated with low UNE prices, we find that raising prices for UNEs, when such prices preserve the efficient make-or-buy decision, can discourage investment in process innovation.

Vertical Leverage and the Sacrifice Principle: Why the Supreme Court Got Trinko Wrong

Trinko, a local telecommunications services customer of AT&T, sued Verizon for anti-competitively raising the costs of AT&T, its rival in the market for local telecommunications services who, pursuant to the rules of the Telecommunications Act of 1996 was leasing parts of the local telecommunications network (unbundled network elements, UNEs) from Verizon at cost plus reasonable profit prices. The Supreme Court held that Trinko's complaint failed to state a claim under Section 2 of the Sherman Act, and dismissed the complaint. I argue that the Court drew incorrect inferences from its Aspen Skiing decision. The Court also missed a key vertical leveraging issue in Trinko. Verizon leveraged its monopoly of local telecommunications network infrastructure by raising the costs of rivals in retailing services who leased unbundled network elements from it as well as decreasing the quality of their services so that such rivals were disadvantaged. Verizon used such actions that raised the costs and/or decreased the quality of rivals in retailing services aiming to preserve its traditional monopoly in the local telecommunications services market which was challenged by the opening of competition mandated by the Telecommunications Act of 1996. In doing so, Verizon caused a lower number of leases of unbundled network elements from itself to retailing rivals, and thus incurred a revenue sacrifice. Therefore the actions of Verizon in raising the costs of retailing telecommunications services rivals are an indication of liability according to the proposed in the Government's brief in Trinko, according to which a defendant is liable if its conduct involves a sacrifice of short-term profits or goodwill that makes sense only insofar as it helps the defendant maintain or obtain monopoly power, even though the sacrifice principle defines a stringent condition for a finding of liability.

Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting

SummaryThis article provides an empirical evaluation of a recent and important exercise in regulatory price setting in the United States. The 1996 Telecommunications Act required incumbent local phone companies to sell components of their network to rival firms at regulated prices, and the prices for these ‘unbundled network elements’ were based primarily on independent estimates of forward‐looking economic costs. Our econometric analysis reveals that, while cost is a primary determinant of element prices, the prices also reflect foregone retail profits for incumbent firms. Statistical tests suggest that ‘splitting the baby’ is an accurate positivist description of public agency behavior.

Services to support regulatory action and requirements

Regulatory action is a key stimulus to telecommunication software services. At Lucent Worldwide Services (LWS), we have a long history of developing and delivering services that help providers implement new features or meet new regulatory requirements. We have built services to support and implement changes to local number portability (LNP), the Communications Assistance for Law Enforcement Act (CALEA), the North American Numbering Plan Administration (NANPA), and more. We continue to develop a suite of services that swiftly and safely migrate service between switching peripherals or switching entities, minimizing end-user impact, keeping downtime at acceptable levels, and allowing complex network realignment. These services will remain valuable as the Federal Communications Commission (FCC)-regulated competitive landscape changes. There has been FCC activity regarding unbundled network elements (UNEs) (created under the Telecommunications Act of 1996). Changes regarding UNEs and Voice over Internet Protocol (VoIP) might be coming. If they do, the changes could present tremendous challenges for our customers.

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.

A Fox in the Hen House: An Evaluation of Bell Company Proposals to Eliminate their Monopoly Position in Local Telecommunications Markets

In this brief Policy Paper, the incentives of the Bell Companies to promote real by eliminating the Unbundled Network Element Platform as an entry mode are examined. As common sense dictates, the Bell Company anti Unbundled Network Element Platform message is not driven by a desire for real competition, but an effort to shift competitive entry toward slower, less ubiquitous entry modes such as UNE Loop and facilities-based entry. The increase and protection of profits is the goal of the Bell Company, not the altruistic promotion of consumer benefits created by the rapid introduction of competition into the local exchange market. Policymakers, at least wise policymakers, should not ignore this fact.

Why ADCo? Why Now? An Economic Exploration into the Future of Industry Structure for the "Last Mile" in Local Telecommunications Markets

This Policy Paper discusses important economic characteristics of local exchange markets and the firms that participate therein. First, this Policy Paper, building on the work in PHOENIX CENTER POLICY PAPER NO. 10, explains that entry into the local exchange market requires large fixed and sunk costs, making entry risky and necessitating scale economies. Consequently, only a few local access networks can supply the market. These few local access networks cannot be small, however, because a large market share is required to realize sufficient scale economies to effectively compete with the Incumbent Local Exchange Carrier or and survive. Secondly, using publicly available data from the Federal Communications Commission and industry filings with the Security and Exchange Commission, this Policy Paper explains that acquiring sufficient market share in network services to realize scale economies may be difficult for entrants who either attempt to purchase unbundled network elements from the incumbent or attempt to build their own network from the ground up. Instead, given the substantial scale economies required in the local exchange network, it may not be possible for a single carrier to acquire sufficient retail market share in a timely manner to exhaust economies of scale in its wholesale network. An integrated firm supplying the wholesale market, in an effort to expand output, is conflicted; the integrated firm's retail market share raises the opportunity cost of wholesale supply. Accordingly, this Policy Paper shows that if economies of scale are sufficiently large, reaching a scale of operation that allows the entrant to compete with the ILEC may be best achieved through the entry of an Alternative Distribution Company or which is a wholesale-only carriers'-carrier for the proverbial last mile. (This is a very different concept from a LoopCo, which is formed via the structural separation of the ILEC's network facilities and marketing operations.) The ADCo can consolidate the consumer demand held by retail CLECs, thereby reducing risk and costs by expanding output quickly. The disincentives to wholesale supply possessed by the integrated firm, furthermore, do not exist for the ADCo, and therefore the ADCo - unlike the ILEC - has no incentive to sabotage its customers (i.e., the ability to increase or raise the cost of a rival's key input of production by non-price behavior.) As a result, while the number of local access networks the market can sustain may be few, the exclusively wholesale nature of the ADCo nonetheless permits the number of providers of advanced telecoms products and services to be many (the raison d'etre of market restructuring). Equally as important, given the existence of these discriminatory incentives resulting from the current and foreseeable economic conditions of the U.S. telecommunications industry, the most probable and viable long term, competitive market structure involves a substantial presence by an unintegrated, but larger wholesale supplier - in other words, an ADCo - to function efficiently. As such, their presence in the market should be welcomed and encouraged.

Judge Kocoras’s injunction

A federal district court injunction in Illinois will reverberate beyond the Land of Lincoln by reaffiriming policy and law for local phone competition in the USA. Chief District Judge Charles P. Kocoras reminded legislators, regulators and telecommunications executives that state regulators are to employ federal telecommunications law and policy, specifically total element long run incremental pricing (TELRIC) for unbundled network elements (UNE‐s), to administer markets for local telephone services. The genius of the decision resides in its fidelity to sedulous implementation of telecommunications statute and precedents, and by so doing, in sustaining public policy that enhances consumer welfare, stimulates investment and spurs innovation.

The FCC and Telecom Recovery: A Scorecard for Evaluating the New Unbundling Rules

This paper provides a set of benchmarks, or a scorecard if you will, that will aid in evaluating whether the Federal Communications Commission's actions in three major rulemakings - the Unbundled Network Elements Triennial Review Proceeding, the Wireline Broadband Proceeding, and the Cable High-Speed Access Proceeding - are pro-competitive and deregulatory (that is, consistent with a Dynamic Deregulation Vision) or anti-competitive and pro-regulatory (that is, consistent with a Static Regulated Competition Vision). The scorecard benchmarks are as follows: - Unbundling and sharing should not be required for newly installed fiber or other non-copper facilities; - Regardless of technology platform, broadband services should not be subject to unbundling and sharing requirements or computer-II-type separation requirements; - Local switching should be removed promptly from the unbundling and sharing regime; - Inter-office transport and high capacity loops should be removed promptly from the unbundling and sharing regime and special access should not be re-regulated; - A presumptive sunset regime with triggers should be established for the removal of copper local loops from the unbundling and sharing requirements; - The Commission should preempt the states from mandating unbundling and sharing requirements that exceed the scope of the federal obligations; and - Elements that have been removed from the unbundling and sharing regime should not be considered on the competitive checklist for evaluating section 271 applications.

(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.

Pricing Unbundled Network Elements and the FCC's TELRIC Rule: Economic and Modeling Issues

This paper addresses the fundamental question of what costs and prices would look like under competitive conditions and how close the FCC's total element long-run incremental cost (TELRIC) pricing rules allow one to approximate such competitive outcomes. We consider: what types of firms would enter in competitive network industries, what effect would new entry have on the asset values and prices of incumbent firms, and what impact would competition have on (1) the types and vintages of capital equipment, (2) prices for that equipment, and (3) conditions in the operating environment? The paper concludes by highlighting alternative pricing proposals offered by contending parties and identifying the major drivers that explain what have proven to be large differences among competing proposals.

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.

In their Own Words: A Review of Recent Bell Operating Company 10-Qs

The Regional Bell Operating Companies (RBOCs) have launched a coordinated campaign to convince both policymakers and stakeholders that their financial woes are attributable to Congressionally-mandated Federal Communications Commission policies necessary to open local telecoms markets to competition. Specifically, that regulators force the BOCs to sell unbundled network elements at their Total Element Long Run Incremental Cost (TELRIC). The law, econometrics and RBOCs' own public filings before regulators and the Securities and Exchange Commission simply do not support the Bells' position, however. In fact, despite some recent difficulties, BellSouth, SBC, and Verizon remain extremely financially strong companies that enjoy a growing opportunity to gain customers and revenue as they accelerate their entry into the long distance marketplace. To the extent these companies are financially troubled, the problems reflect bad business decisions in unregulated ventures. Problems at Qwest are well documented and clearly unrelated to UNE-P or the impact of competition generally.

The fragmentation of America’s telecommunications system: the operational implications of network unbundling

This paper traces the history of the various disaggregations that have taken place in the telecommunications industry in the United States during the past 20 years, culminating in the directive in the Telecommunications Act of 1996 to allow interconnection ‘at any technically feasible point’. It then shows how the resulting network unbundling differs from all previous network separations, identifies the operational risks of the various ‘unbundled network elements’, or UNEs, specified by the FCC and compares those risks with the potential benefits to competition. It concludes that some of the UNEs are not unbundled network elements at all, but merely sharply discounted versions of services that are or could be offered at retail. As such, they have little or no operational impact. The remainder, however, pose substantial risks of service degradation or disruption, and only one, the ‘loop’—the connection between the telephone network and the customers’ premises, has attracted many users, and appears to have benefits to competition commensurate with those risks.

Access to Networks: Economic and Constitutional Connections

A fundamental transformation is taking place in the basic approach to regulating network industries. Policy makers are in the process of abandoning their century-old commitment to rate regulation in favor of a new regulatory approach known as access regulation. Rather than controlling the price of outputs, the new approach focuses on compelling access to and mandating the price of inputs. Unfortunately, this shift in regulatory policy has not been met with an accompanying shift in the manner in which regulatory authorities regulate prices. Specifically, policy makers have continued to base rates on either historical or replacement cost. We argue that courts and policy makers have largely ignored the fact that this fundamental shift in regulatory approach demands an equally fundamental shift in the approach to setting prices. Economic theory suggests that regulatory authorities should base access prices on market prices. In addition, because compelled access to most telecommunications networks requires that competitors be permitted to place equipment on the network owner's property, access requirements constitute physical takings for which market-based compensation must be paid. Although the unavailability of market-based determinants once justified basing prices on some measure of cost, the shift in regulatory policy (especially when combined with the emergence of direct, facilities-based competition made possible by technological convergence) has caused the justifications for refusing to set rates on the basis of market prices to fall away. We then use these insights to analyze access pricing with respect to three emerging regulatory issues: (1) access to unbundled network elements mandated by the Telecommunications Act of 1996, (2) the access to utility poles compelled by the 19996 amendments to the Pole Attachments Act, and (3) open access to digital subscriber line (DSL) and cable modem networks providing high-speed broadband services.

Exporting Telecommunications Regulation: The U.S.-Japan Negotiations on Interconnection Pricing

Since 1997, the U.S. government has attempted to use the World Trade Organization (WTO) agreement on telecommunications services as a vehicle for exporting American principles of telecommunications regulation to other nations. The United States took the position in 1997 that the WTO telecommunications agreement requires its signatory nations to follow the practices of the Federal Communications Commission (FCC) on telecommunications regulatory policy. Subsequently, the Office of the U.S. Trade Representative (USTR) has sought to influence, under the implicit threat of trade sanctions, Japan's domestic regulatory policy on the pricing of mandatory competitor access to the unbundled elements of the local network belonging to the operating companies of Nippon Telegraph and Telephone Corporation (NTT). In this Article, we examine the substantive difficulties of engrafting the FCC's interconnection policy onto the telecommunications marketplace of another nation. For more than six years, many American experts on telecommunications policy have disagreed whether American consumers have benefited from the very FCC policies that the USTR would have Japanese regulators emulate. The USTR's initiative appears to ignore that the transition to cost-oriented rates for interconnection and retail telecommunications services has been a difficult and unfinished process in the United States; that the cost models used by the FCC to set interconnection prices have significant deficiencies; that actual interconnection prices both within and outside the United States diverge considerably from the estimates of the FCC's cost models; that variations across countries in the prices of inputs have a significant effect on the costs of interconnection; and that, with respect to depreciation in particular, regulators treat this cost differently -- and, from an economic perspective, more reasonably -- in Japan than in the United States. Such substantive economic considerations suggest why the FCC's policy in this area has generated continuous litigation, including two Supreme Court cases since 1996, and consequently is too unresolved at this point in the American experience for the United States to force on its trading partners. Next, we ask whether the USTR has the detailed knowledge required to negotiate trade agreements on interconnection pricing. We question the propriety of using the USTR to influence the domestic regulatory policy of another country on a topic as complex as the efficient pricing of mandatory access to unbundled network elements. The USTR's power to formulate trade policy on this subject resides in officials who are unlikely to possess the economic expertise and resources necessary to evaluate the consumer-welfare implications of the policies that they would have Japan and other nations adopt. For these reasons, the USTR cannot credibly make the interconnection pricing policies of another nation a legitimate concern of U.S. trade policy.