Michigan Nonincumbents
Chart 7

Telecom Act of 1996

The breakup of AT&T in 1984 unleashed products and services unforeseen by regulators or the courts. But the rapid pace of innovation also produced regulatory inconsistencies between various products and service providers, which Congress sought to remedy with passage of the Telecommunications Act of 1996.

Mindful of the benefits realized through long-distance competition, lawmakers declared an end to the monopoly franchise system governing local wireline calling.

The 1996 act set the conditions by which carriers would be allowed to provide local and long-distance services. Among the most significant provisions was the requirement that the Baby Bells and other “incumbent” local carriers provide network access to rivals at regulated rates. These rivals — referred to in the industry as “competitors” — included long-distance, cable and wireless firms. In return for providing access, the Bells were allowed to enter the long-distance market, offer cable services and manufacture equipment once regulators were satisfied that local competition had taken hold.

Another key element of the act was the phase-out of price controls on cable TV, which had inhibited competition and network investment. Also mandated were telecommunications subsidies to government-run schools, health care facilities and libraries.

Unbundled Network Elements

Congress conceived of forced access to local networks as necessary to jumpstart competition in local calling services. Lawmakers assumed that new entrants would need below-cost access to the network to gain a foothold in the market. They further expected that once new entrants gained market share, they would use their new revenues to build facilities to compete against the incumbent service providers.

Lawmakers established a baseline eligibility standard for this subsidized access. Subsidized access to the incumbents’ networks was not intended to be an ongoing entitlement. Eligibility was supposed to be based on whether a competitor would be “impaired” from competing if they were denied network access.

Section 251 of the 1996 act directs the FCC to “consider, at a minimum, whether … the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer.”

Congress delegated to the FCC the authority to determine which switches, lines and other facilities should be shared, and how various parts of the network (called “Unbundled Network Elements,” or UNE) would be priced. The agency issued the first set of access rules in 1999. Subsequently, regulators required incumbents to provide to rivals at deeply discounted rates all elements of the network “platform” (UNE-P) as a single package. This would allow competitors simply to resell the incumbents’ services without making any investment in facilities. See Chart 7 above.

Underlying this forced-access policy is the supposition that the landline network is public property by virtue of its former monopoly status. In fact, as noted by Heritage Foundation scholars James Gattuso and Norbert Michel, today’s networks are overwhelmingly the product of investment made long after legal monopolies and guaranteed rates of return were abolished.[22] According to data from Standard & Poor’s, investors have replaced the entire capital structure of U.S. telecom companies almost twice over since passage of the Telecommunications Act of 1996.[23]

TELRIC

The FCC established a pricing formula for various network elements, such as switches and loops, called “Total Element Long-Run Incremental Cost” (TELRIC). This formula, which effectively constitutes a form of price control, is based on the estimated cost of building and operating a hypothetical maximum-efficiency network. The actual rates are set by states in accordance with the formula.

The rates calculated by most states have varied wildly and have been shown to be economically unsustainable by a variety of economists. The rate formula as applied by regulators is very subjective and rarely factors in the contributions made by network shareholders to earnings, depreciation and amortization, taxes or debt service.