Letter from Rep. Billy Tauzin (R-LA) to FCC Chairman Michael Powell.
Date: June 11, 2002.
Re: USTA v. FCC, unbundling, local competition, line sharing, and the FCC's triennial review.
Source: House Commerce Committee.

June 11, 2002

The Honorable Michael Powell
Federal Communications Commission
445 12th Street, S.W.
Washington, DC 20554

Dear Chairman Powell:

As you are undoubtedly aware, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) recently remanded the so-called Local Competition Order[1] and Line Sharing Order[2] to the Federal Communications Commission (the Commission) for further consideration consistent with the court's opinion, including the vacation of the Line Sharing Order. I commend to you certain key aspects of the D.C. Circuit's opinion, which I hope will serve as the foundation for the triennial review of the Commission's regulations regarding the unbundling of network elements by incumbent local exchange carriers (ILECs).

The D.C. Circuit was clearly uncomfortable with the Commission's decision to create unbundling rules that applied on a uniform national basis, without regard to the level of competition or availability of alternative means of providing a particular service in types or classes of geographic areas or within a particular class of customers:

[T]he 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. 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.

As the Commission conducts its triennial review, the Commission must evaluate the rationale for requiring the unbundling of a network element based upon specific geographic and class-of-customer characteristics of individual markets across the nation. Uniform, national rules do not accurately reflect the state of competition and the unique economic characteristics of individual markets.

In this regard, the court faulted the Commission for failing to explain why unbundling was appropriate in markets in which ILECs are forced to overcharge urban/business subscribers in order to compensate for the losses incurred by subsidizing certain other consumers:

[W]here presumably ILECs must charge above cost (at least above average costs allocated in conventional regulatory fashion) in order to offset their losses in the subsidized markets, ... the gap in the Commission's reasoning is greatest. In finding that the CLECs' lack of access to each of the many elements "materially diminished" their ability to provide service, the Commission nowhere appears to have considered the advantage CLECs enjoy in being free of any duty to provide underpriced service to rural and/or residential customers and thus of any need to make up the difference elsewhere.

I hope that, in the triennial review, the Commission closely scrutinizes the prices that ILECs are compelled by regulatory fiat to charge subscribers before the Commission determines whether market conditions dictate that competitive local exchange carriers (CLECs) need unbundled access to ILEC facilities.

The D.C. Circuit appeared equally concerned with the impact of the Commission's unbundling rules on investment in telecommunications facilities. The court found that "[i]f parties who have not shared the risks are able to come in as equal partners on the successes, and avoid payment for the losers, the incentive to invest plainly declines." The court concluded that the Commission's unbundling rules, and the pricing at which those elements must be leased, provided a disincentive to CLEC investment in their own facilities:

Lack of access would not diminish the requester's ability at all if it could secure the function more cheaply on its own.  Thus, the closer the Commission's pricing principle is to the low end of what it may lawfully set, the greater the probability that lack of access would cause "material diminution."

The court further found that "[e]ach unbundling of an element imposes costs of its own, spreading the disincentive to invest in innovation and creating complex issues of managing shared facilities." It is critical that providing the maximum incentive for both ILECs and CLECs to invest in facilities drives the triennial review proceeding.

True competition will emanate from facilities-based deployment by all carriers.  Removing either an ILEC's or a CLEC's incentive to invest in its own facilities reduces the likelihood that our markets will experience facilities-based competition. Removing both an ILEC's and a CLEC's incentive to invest in new facilities virtually eliminates the possibility of achieving true facilities-based competition and increases the likelihood that any competition would be of the "wholly artificial" type feared by the D.C. Circuit.

Finally, the D.C. Circuit agreed with petitioners that the Commission's Line Sharing Order "completely failed to consider the relevance of competition in broadband services coming from cable (and to a less extent satellite)." The court clearly rejected the Commission's contention that permitting CLECs to unbundle the high-frequency portion of a copper loop was the only way that consumers would enjoy the benefit of competition among broadband providers:

[N]othing in the Act appears a license to the Commission to inflict on the economy the sort of costs noted by Justice Breyer under conditions where it had no reason to think doing so would bring on a significant enhancement of competition.  The Commission's naked disregard of the competitive context risks exactly that result.

As the court pointed out, cable companies not only compete with ILECs for broadband customers - cable companies dominate the broadband market. Faced with this overwhelming amount of competition, ILECs should not be subjected to an additional regulatory burden that their stronger competitors do not face. This requirement not only reduces the ILECs' incentive to invest in new facilities, the burden also prevents ILECs' from competing on an equal footing with cable companies and other broadband providers.

The triennial review presents an excellent opportunity for the Commission to rectify many of the problems with the Commission's unbundling rules identified by the D.C. Circuit. The Commission's unbundling rules must take into account the unique characteristics of markets that are differentiated by geography and economics. The unbundling rules should also maximize the incentives that both ILECs and CLECs have to invest in new facilities, especially facilities that can be used for advanced services. If the rules are crafted properly, we will witness an investment boom that will hopefully bring the telecommunications equipment sector out of its current slump.  However, if these rules do not create an unbundling policy that provides all carriers with the incentive to invest, I fear that the Commission will be perpetuating a policy that has limited broadband deployment and deprived consumers of the type of meaningful competition that only facilities-based carriers can provide.


W.J. "Billy" Tauzin

[1] Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Third Report and Order and Fourth Further Notice of Proposed Rulemaking, 15 FCC Rcd 3696 (1999).

[2] In the Matters of Deployment of Wireline Services Offering Advanced Telecommunications Capability and Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Third Report and Order in CC Docket No. 98-147 and Fourth Report and Order in CC Docket No. 96-98, 14 FCC Rcd 20912 (1999).