Volume 1, Issue 2

In May 2002, the Supreme Court upheld the rules promulgated by the Federal Communications Commission (FCC) to implement provisions in the Telecommunications Act of 1996 (the Act) regarding mandatory resale of the components of local telephone networks. This article explains the background of the forward-looking pricing rules adopted by the FCC, the economic rational for their use, and the implications of the Court's ruling for the future of local telecommunications competition.

The Supreme Court's decision in Verizon v. FCC rests on two errant interpretations of the 1996 Telecommunications Act: First, the Act represents a new form of regulation rather than a deregulatory statute; Second, Congress intended that the playing field be tilted in favor of new entrants. Under the Chevron Doctrine, deference is given to the controlling federal agency if there is a "rational connection" between the regulations and statutory intent. The Court ruled that the FCC's implementation of the Act survives that scrutiny. This discussion contests that finding and argues that the FCC's regulations undermine the goals of the Act.

The Supreme Court decision in Verizon et al v. FCC et al has finally settled the legality of the FCC's methodology for setting prices for wholesale services that are "based on cost", as required by the Telecommunications Act of 1996. The Court's decision reveals unanimous agreement that forward-looking costs may be used as the measure of cost. It also reveals agreement that the FCC's leeway in establishing a methodology for measuring these costs is limited by the need for the methodology to bear a "rational connection" to the goals of the Act. The majority and Justice Breyer differ in whether this limitation was binding in this case. This paper examines the theoretical and empirical evidence that could have shed light on the Court's disagreement – evidence that was not part of the case presented to the Court. While the evidence casts considerable doubt on the wisdom of the public policy approach adopted by the FCC, it does not lead to the conclusion that the Court should have ruled differently.

The Supreme Court Opinion on local exchange competition in general and on pricing and unbundling in particular was much anticipated and will be much discussed. Because of the very technical nature of the pricing and unbundling rules facing incumbent local exchange carriers there is a considerable risk that students of the Court's Opinion will be mired in the details of that Opinion and miss what we believe is a clear, unequivocal meta-message embedded in the Opinion. Specifically, this decision unequivocally affirms a fundamental shift in regulatory policy reflected in the Telecommunications Act of 1996. That is, the Act dictates that regulators act not merely to disable monopoly but to adopt policies that affirmatively enable competition. The Court's Opinion now confirms this interpretation of the congressional intent behind the legislation. Thus, while it is fair to say that the Court's specific decision with respect to the pricing and unbundling issues represents an important component of a regulatory policy designed to promote competition in local exchange telephony, there is a larger lesson embedded in the Court's reading of the Telecommunications Act. In this paper we first consider in some detail the Opinion and how it reflects an unambiguous endorsement of a competition-enabling framework for the development of local exchange competition. Next, we point out that, despite the Court's unambiguous and clear ruling, a dispassionate scrutiny of economic and regulatory conditions present in local exchange markets — even in the wake of the Court's ruling — reveals a number of extraordinary obstacles to the successful emergence of effective local exchange competition that still remain.

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.

One of the most important issues in the debate on interconnect regulation has been use of forward looking costs for setting of interconnection charges. This debate has been ongoing within the EU as well as in US. This paper discusses the European experiences and in particular the Danish experiences with use of cost based interconnection charges, and their impact on competition in the telecom market.

This paper demonstrates the feasibility of the TELRIC standard. We develop an engineering-economic model of an interoffice telephone network suitable for calculating a TELRIC interconnection cost. The model utilizes the method of simulated annealing to determine an "optimal" SONET ring. Using actual switch location data for Maryland we calculate such a network and demonstrate its incremental cost for interconnection.