Economics of Networks

Footnotes for "The Telecommunications Act of 1996 and its Impact"


1. Local exchange carriers that came from the Bell System (AT&T), Regional Bell Operating Companies ("RBOCs"), were not allowed to compete in the long distance market under the MFJ.

2. Origination and termination access charges are paid by long distance companies to local exchange carriers for originating or terminating long distance calls to LEC customers. Access charges have been set at high levels purportedly to subsidize Universal Service.

3. The telecommunications sector is regulated both by the Federal Government through the Federal Communications Commission ("FCC") and by all States, typically through a Public Utilities Commission ("PUC") or Public Service Commission. Usually a PUC also regulates electricity companies.

4. See Gabel and Weiman (1994) and Mueller (1997)

5. Source: FCC (1996).

6. These will be limited to four if the merger of MCI and WORLDCOM is approved by regulators and antitrust authorities. Frontier is the new name of Rochester Telephone. In mid 1998 Qwest entered the long distance market as a facilities-based competitor with a nationwide network. Level 3 and others have recently constructed fiberoptic networks and are expected to enter the long distance (data and voice) market by the end of 1998. Technological advances in the electronics of fiberoptic transmission have multiplied the transmission capacity of long distance networks.

7. Source: Hubbard and Lehr (1998).

8. See Federal Communications Commission (1995).

9. The claim of tacit collusion in the long distance proposed by MacAvoy (1995) and others has been effectively rebutted by Bernheim and Willig (1997), Hall (1997), Hubbard and Lehr (1994), and Mayo (1996). See also MCI (1997).


10. Termination pricing varies. Pacific Bell, under pressure from the California Public Utilities Commission, now has an access charge of $0.016 per minute, giving it a profit rate of 700%.

11. The anticompetitive effects would arise because of the monopoly control by an RBOC of essential "bottleneck" inputs for long distance services, such as terminating access of phone calls to customers that live in the local companies to long distance companies, and are essential bottleneck inputs for long distance service.

12. The Act states that prices for resold wholesale services will be set as follows: "a State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier." [252(d)(3)] Notice that, even if all avoided costs are appropriately identified and deducted from final prices, the ILEC is still able to collect the pre-entry retail profit from resold wholesale services.

13. The FCC and State Regulatory Commissions have interpreted these words to mean Total Element Long Run Incremental Cost ("TELRIC") which is the forward looking, long run, (minimized) economic cost of an unbundled element and includes the competitive return on capital.

14. For example, suppose the actual costs of the incumbent were $0.50 for component A and $0.40 for component B, and final service AB was originally sold at $1.20, with a profit of $0.30. The ECPR access fee for A is $0.80 (= 0.50 + 0.30 = 1.20 - 0.40). If costs are unobservable from the outside, the incumbent has an incentive to claim that the cost of its B component is lower (and consequently that its original profit rate is higher). For example, the incumbent can claim that the cost of B is $0.36, which is 10% lower than its actual cost of $0.40. This results in a profit of $0.34 (= 1.20 - 0.50 - 0.36), and an ECPR access fee of $0.84 (= 0.50 + 0.34 = 1.20 - 0.36). Facing this access fee, entrants that are equally efficient in the production of B as the incumbent, i.e., with cost of $0.40, are foreclosed from entering since they can only sell AB at $1.24 (= 0.84 + 0.40), while the entrant still sells at $1.20.

15. These were Colorado, Delaware, Florida, Georgia, Kentucky, Louisiana, Missouri, Montana, New Jersey, New Hampshire, New York, Oregon, Pennsylvania, Texas, and Wisconsin. Of the states that have adopted permanent prices for UNEs, 5 are in the Bell Atlantic/ NYNEX territory (Delaware, New Hampshire, New Jersey, New York, Pennsylvania). Also note that only 4 states have adopted permanent rates in arbitrations of entrants with GTE (Florida, Montana, Oregon, and Texas). For more details see Hubbard and Lehr (1998).

16. The "checklist" conditions are [section 271(c)(2)(B)]:

"(i) Interconnection in accordance with the requirements of sections 251(c)(2) and 252(d)(1).

(ii) Nondiscriminatory access to network elements in accordance with the requirements of sections 251(c)(3) and 252(d)(1).

(iii) Nondiscriminatory access to the poles, ducts, conduits, and rights-of-way owned or controlled by the Bell operating company at just and reasonable rates in accordance with the requirements of section 224.

(iv) Local loop transmission from the central office to the customer's premises, unbundled from local switching or other services.

(v) Local transport from the trunk side of a wireline local exchange carrier switch unbundled from switching or other services.

(vi) Local switching unbundled from transport, local loop transmission, or other services.

(vii) Nondiscriminatory access to--

(I) 911 and E911 services;

(II) directory assistance services to allow the other carrier's customers to obtain telephone numbers; and

(III) operator call completion services.

(viii) White pages directory listings for customers of the other carrier's telephone exchange service.

(ix) Until the date by which telecommunications numbering administration guidelines, plan, or rules are established, nondiscriminatory access to telephone numbers for assignment to the other carrier's telephone exchange service customers. After that date, compliance with such guidelines, plan, or rules.

(x) Nondiscriminatory access to databases and associated signaling necessary for call routing and completion.

(xi) Until the date by which the Commission issues regulations pursuant to section 251 to require number portability, interim telecommunications number portability through remote call forwarding, direct inward dialing trunks, or other comparable arrangements, with as little impairment of functioning, quality, reliability, and convenience as possible. After that date, full compliance with such regulations.

(xii) Nondiscriminatory access to such services or information as are necessary to allow the requesting carrier to implement local dialing parity in accordance with the requirements of section 251(b)(3).

(xiii) Reciprocal compensation arrangements in accordance with the requirements of section 252(d)(2).

(xiv) Telecommunications services are available for resale in accordance with the requirements of sections 251(c)(4) and 252(d)(3)."


17. See Economides (1998a,b).


18. For example, the ILEC can use its brand name and its associated customer recognition to create a significant strategic advantage for its long distance products. It is also likely that the ILEC will provide this advantage to its newly created division for free. Thus, the ILEC will be benefiting from its position as the incumbent provider of regulated services to market successfully its own competitive services. 

19. For example, in California, Pacific Bell has recently admitted that it has such plans. In a recent CPUC hearing to consider the Certificate of Public Convenience and Necessity ("CPCN") (see CPUC Docket No. 96-03-007) application of Pacific Bell Communications (a proposed subsidiary of Pacific Telesis that would provide local and long distance services), it became clear that Pacific Bell Communications was considering offering free basic service when the customer made toll calls of $50 per month (see Transcript of December 16, Hearing of the California Public Utilities Commission, pp. 989-990). Such a plan is a clear attempt at cross-subsidization. 

20. BellSouth New Zealand, (1995), page 2.

21. In other words, an IXC unaffiliated with the ILEC encounters all of the access charges it pays as a cost while the ILEC (or its affiliate) incurs some costs of access, but receives as profit the substantial difference between its access costs and its inflated access charges. No amount of imputation can bridge this gap between the cost profiles of the two firms.

22. See Bernheim and Willig (1996) for a description of the ways in which ILECs engage in such practices.

23. The FCC recognized this concern in its First Report and Order on the implementation of the 1996 Telecommunications Act: "We find that incumbent LECs have no economic incentive, independent of the incentives set forth in sections 271 and 274 of the 1996 Act, to provide potential competitors with opportunities to interconnect with and make use of the incumbent LEC's network and services, " and "The inequality of bargaining power between incumbents and new entrants militates in favor of rules that have the effect of equalizing bargaining power in part because many new entrants seek to enter national or regional markets." FCC First Report and Order, CC Docket No. 95-185, (1996), at  55.  

24. Joint Explanatory Statement of the Committee of Conference at 130-31.

25. See Eriksson, Kaserman, and Mayo (1995). The finding that higher long distance rates cause reductions in household penetration rates is also found in Hausman, Tardiff, and Belinfante (1993). 

26. this requirement was explicitly recognized by the FCC in its 96-182 NPRM (April 19, 1996) at 145, "Arguably, these principles can be interpreted as requiring competitively-neutral mechanisms for recovering universal service support, rather than recovering such support through rates for interconnection or unbundled network elements." 

27. The main regulatory instruments in New Zealand are

(i) The Commerce Act that generally prevents anti-competitive behavior;

(ii) The Disclosure Regulations that impose information disclosure on TCNZ as a dominant incumbent telecommunications provider.

These instruments are reinforced by commitments that TCNZ has made in the course of being privatized. These are

(i) The Kiwi share obligation under which TCNZ committed not to increase prices of local service to existing customers above the rate of inflation;

(ii) Various "undertakings," i.e., obligations not to restrict competition that are stated in letters exchanged between TCNZ and the New Zealand government in the process of privatization.

Although the Kiwi share obligations have been adhered to, the obligations arising from the "undertakings" have not been adhered to. 

28. Clear was partly owned by Bell Canada and MCI. Current shareholders include British Telecom, MCI, Television New Zealand and Todd Corporation New Zealand.

29. Greece, Ireland, and Portugal received a 3 year extension of the deadline.

30. In one of the major challenges, GTE and a number of RBOCs appealed (among others) the FCC (1996) rules on pricing guidelines to the 8th Circuit. The plaintiffs won the appeal; the FCC appealed to the Supreme Court, which accepted the case. A final outcome is expected by the end of 1998.

31. Recently, SBC announced its intention to buy Southern New England Telephone ("SNET") one of the few companies, which, as an independent (not part of AT&T at divestiture), was not bound by MFJ restrictions and has already entered into long distance.