The University of Chicago 12/29/2018 Class 5 Network Industries, Spring, 2014 Unbundling under the 1996 Telcom Act Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2000-14 Randal C. Picker. All Rights Reserved.

NY Times, Dec 20, 1913 (Kingsbury Commitment) December 29, 2018

December 29, 2018 NY Times, Dec 20, 1913

December 29, 2018 NY Times, Dec 20, 1913

December 29, 2018 NY Times, Dec 20, 1913

December 29, 2018 NY Times, Dec 20, 1913

December 29, 2018 NY Times, Dec 20, 1913

December 29, 2018 NY Times, Jan 25, 1956

December 29, 2018 NY Times, Jan 25, 1956

December 29, 2018 NY Times, Aug 4, 1983

Unbundling Local and Long Distance 12/29/2018 Unbundling Local and Long Distance Long Distance Success Story Separate local calling from long distance Microwave entry—facilities-based entry—as starting point Creates lots of competition in long distance Mental model for 1996 Act approach December 29, 2018

Telco Act Structure 1996 Act Basic Idea Passed February 8, 1996 12/29/2018 Telco Act Structure 1996 Act Passed February 8, 1996 Kills off the Modified Final Judgment Basic Idea Instant competition by reducing state law entry barriers Limited, targeted entry while offering full-slate of services December 29, 2018

Telecommunications Act of 1996 (Pub. L Telecommunications Act of 1996 (Pub. L. 104-104 (110 Stat 56)) (Feb 8 1996) December 29, 2018

1996 Act’s Local Competition Framework 12/29/2018 1996 Act’s Local Competition Framework Three Key Changes Kills State Entry Barriers Feds preempt state entry barriers (47 USC 253(a)) Quarantine RBOCs Can’t enter long distance unless facilities-based local competitor exists (47 USC 271) December 29, 2018

1996 Act’s Local Competition Framework 12/29/2018 1996 Act’s Local Competition Framework Incumbent Local Exchange Carrier Access Rules (47 USC 251(c)) Interconnection Exchange and completion of telephone calls Unbundling More on this Resale Offer telecommunications services for resale at wholesale rates December 29, 2018

47 USC 251(c)(1): Negotiation Obligation December 29, 2018 47 USC 251(c)(1): Negotiation Obligation

47 USC 251(c)(2): Interconnection December 29, 2018 47 USC 251(c)(2): Interconnection

47 USC 251(c)(3): Unbundled Access December 29, 2018 47 USC 251(c)(3): Unbundled Access

December 29, 2018 47 USC 251(c)(4): Resale

47 USC 251(d)(1&2): Timing of Rules and Access Standards December 29, 2018

47 USC 153(45) [29]: Definition of “Network Element” December 29, 2018

47 USC 252(a)(1): Negotiated Prices w/State PUC Submission December 29, 2018

47 USC 252(b)(1): Mandatory Arbitration before State PUC December 29, 2018

47 USC 252(c): Arbitration Standards December 29, 2018

47 USC 252(d)(1): Pricing Standards for Interconnection and Network Elements December 29, 2018

47 USC 252(d)(3): Wholesale Price Standards December 29, 2018 47 USC 252(d)(3): Wholesale Price Standards

FCC 1st Report and Order (1996) December 29, 2018 FCC 1st Report and Order (1996)

FCC 1st Report and Order (1996), ¶ 282 (definition of “necessary”) December 29, 2018

FCC 1st Report and Order (1996), ¶ 283 (definition of “necessary”) December 29, 2018

FCC 1st Report and Order (1996), ¶ 283 (definition of “necessary”) December 29, 2018

FCC 1st Report and Order (1996), ¶ 285 (definition of “impair”) December 29, 2018

FCC 1st Report and Order (1996), ¶ 285 (definition of “impair”) December 29, 2018

Part 319 Unbundling Requirements December 29, 2018 Part 319 Unbundling Requirements

Defining Unbundled Network Elements 12/29/2018 Defining Unbundled Network Elements Rule 319 The network consists of seven pieces according to Rule 319: local loops; network interface devices; switching capability; interoffice transmission facilities; signaling networks and call-related databases; operator support systems functions; and operator services and directory assistance. December 29, 2018

Iowa Utilities, 525 US 366 (1999) Question Does the FCC’s interpretation of “necessary” and “impair” under Section 251(d)(2) survive Chevron deference? December 29, 2018

Necessary: Three Approaches 12/29/2018 Necessary: Three Approaches Essential Facilities as Physical Necessity Impossible physically to build new element Economic Necessity Yes, a new facility could be built, but it could not be sustained economically. Empty core situations December 29, 2018

Necessary: Three Approaches 12/29/2018 Necessary: Three Approaches Policy Necessity Yes, it could be sustained economically, but it would take many years, and that would delay local competition substantially December 29, 2018

FCC 3rd Report and Order (1999) December 29, 2018 FCC 3rd Report and Order (1999)

FCC 3rd Report and Order (1999) December 29, 2018 FCC 3rd Report and Order (1999)

FCC 3rd Report and Order (1999) (self-provisioning included per Sup Ct) December 29, 2018

FCC 3rd Report and Order (1999) (self-provisioning included per Sup Ct) December 29, 2018

Verizon, 535 US 467 (2002) Question Does the FCC’s interpretation of “cost” under Section 252(d)(1) survive Chevron deference? December 29, 2018

12/29/2018 UNE Pricing: 47 USC 252(d)(1) Determinations by a State commission of the just and reasonable rate for the interconnection of facilities and equipment for purposes of subsection (c)(2) of section 251 of this title, and the just and reasonable rate for network elements for purposes of subsection (c)(3) of such section-- December 29, 2018

UNE Pricing: 47 USC 252(d)(1) (A) shall be-- 12/29/2018 UNE Pricing: 47 USC 252(d)(1) (A) shall be-- (i) based on the cost (determined without reference to a rate-of-return or other ratebased proceeding) of providing the interconnection or network element (whichever is applicable), and (ii) nondiscriminatory, and (B) may include a reasonable profit. December 29, 2018

Sec. 252(d)(1) Rewrite I (A) shall be-- 12/29/2018 Sec. 252(d)(1) Rewrite I (A) shall be-- (i) based on the historical cost of providing the interconnection or network element (whichever is applicable), and (ii) nondiscriminatory December 29, 2018

Sec. 252(d)(1) Rewrite II (A) shall be-- 12/29/2018 Sec. 252(d)(1) Rewrite II (A) shall be-- (i) based on the replacement cost of providing the interconnection or network element (whichever is applicable), and (ii) nondiscriminatory December 29, 2018

FCC 1st Report and Order (1996), ¶ 618 (pricing framework) December 29, 2018

FCC 1st Report and Order (1996), ¶ 620 (buy vs FCC 1st Report and Order (1996), ¶ 620 (buy vs. build and forward-looking costs) December 29, 2018

FCC 1st Report and Order (1996) (pricing regulations) December 29, 2018 FCC 1st Report and Order (1996) (pricing regulations)

FCC 1st Report and Order (1996) (pricing regulations) December 29, 2018 FCC 1st Report and Order (1996) (pricing regulations)

FCC 1st Report and Order (1996) (pricing regulations) December 29, 2018 FCC 1st Report and Order (1996) (pricing regulations)

FCC 1st Report and Order (1996) (pricing regulations) December 29, 2018 FCC 1st Report and Order (1996) (pricing regulations)

FCC 1st Report and Order (1996) (pricing regulations) December 29, 2018 FCC 1st Report and Order (1996) (pricing regulations)

Buy v. Build Hypo Facts Question 12/29/2018 Buy v. Build Hypo Facts Cost $1000 to build facility yesterday Costs $500 to build same facility today Will cost $100 to build same facility tomorrow, if we build the facility today. Question What price should an entrant face to use the existing facility? December 29, 2018

Buy v. Build Hypo Framework 12/29/2018 Buy v. Build Hypo Framework This is learning by doing in the possible presence of spillovers. (See Tirole, The Theory of Industrial Organization, 329-330 (1988).) December 29, 2018

2nd Set Overturned in USTA I, 290 F3d 415 (DC Cir 2002) Says the Court re the FCC’s 2nd Set of Rules “As to almost every element, the Commission chose to adopt a uniform national rule, mandating the element's unbundling in every geographic market and customer class, without regard to the state of competitive impairment in any particular market.” December 29, 2018

Overturned in USTA I, 290 F3d 415 (DC Cir 2002) Says the Court “As a result, UNEs will be available to CLECs in many markets where there is no reasonable basis for thinking that competition is suffering from any impairment of a sort that might have the object of Congress's concern.” Issued on May 24, 2002 (Verizon out on May 13, 2002) December 29, 2018

December 29, 2018 FCC Report and Order (2003)

FCC Report and Order (2003), ¶ 1 December 29, 2018 FCC Report and Order (2003), ¶ 1

FCC Report and Order (2003), ¶ 2, 3 December 29, 2018 FCC Report and Order (2003), ¶ 2, 3

December 29, 2018 FCC Report and Order (2003

Overturned in USTA II, 359 F3d 554 (DC Cir 2004) Says the Court “We therefore vacate, as an unlawful subdelegation of the Commission’s § 251(d)(2) responsibilities, those portions of the Order that delegate to state commissions the authority to determine whether CLECs are impaired without December 29, 2018

Overturned in USTA II, 359 F3d 554 (DC Cir 2004) Says the Court “access to network elements, and in particular we vacate the Commission’s scheme for subdelegating mass market switching determinations.” December 29, 2018

December 29, 2018 FCC Order on Remand (2005)

December 29, 2018 FCC Order on Remand (2005)

Blessed in Covad, 450 F3d 528 (DC Cir 2006) Says the Court “The Federal Communications Commission has thrice attempted—unsuccessfully—to implement the “unbundling” provisions of the Telecommunications Act of 1996. This case involves a series of petitions for review of the FCC’s fourth attempt.” December 29, 2018

Blessed in Covad, 450 F3d 528 (DC Cir 2006) Says the Court “Because we conclude the Commission’s fourth try is a charm, we deny all of the petitions for review.” Act Passed: Feb 8, 1996 4th Set of Rules Accepted: June 16, 2006 December 29, 2018

Phone Facts Landlines Wireless http://www.fcc.gov/wcb/iatd/comp.html 12/29/2018 Phone Facts Landlines http://www.fcc.gov/wcb/iatd/comp.html Wireless Spectrum Chart http://www.ntia.doc.gov/files/ntia/publications/spectrum_wall_chart_aug2011.pdf December 29, 2018