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The Baby and the Bathwater: Utility Competition, But at What Price?

Fortnightly Magazine - November 15 1999

the Act compels incumbent local exchange carriers (ILECs) to make proprietary elements of their networks available to competitors, but only where such access is "necessary" and the failure to provide it would "impair" a new entrant seeking to provide service.

The FCC was given the task of determining precisely what network elements the ILECs should make available - i.e., deciding how to apply the "necessary" and "impair" standards. Initially, the FCC set a low threshold. It explained that the "necessary" standard could be met even where the requested element could be obtained from an alternative source. Competitors could meet the "impair" standard where the incumbent's failure to provide access would even marginally decrease the quality or increase the cost of the service the entrant seeks to offer.[Fn.4]

In Iowa, the Supreme Court criticized the FCC's take on the issue as too lenient to new entrants. It said the FCC's interpretation probably would allow a competitor to gain access to any network element it wanted, since no new entrant likely would request any inconsequential element. In other words, no entrant likely would ever request access to a network element which, if missing, would not "impair" the entrant's ability to compete in the FCC's weak sense of the word.[Fn.5] The Supreme Court thus vacated the FCC's Rule 319, which had identified seven network elements that were required to be made available to new entrants. Instead, it directed the commission to reevaluate the standard it uses to determine which network elements incumbent local phone companies must unbundle.

How should we view the Supreme Court's opinion?

On one level, the decision makes a straightforward statutory interpretation. The Court saw the FCC's interpretation as inconsistent with the ordinary and fair meaning of the terms "necessary" and "impair."[Fn.6] However, in language that provides some guidance for regulators, the court went on to suggest an approach for limiting network element availability in accordance with the act.

As the Court majority noted, the appellants had suggested that the act's "necessary" and "impair" language codified "something akin" to the "essential facilities"' doctrine of antitrust theory: the opening up of only those "bottleneck" elements unavailable elsewhere in the marketplace. And though the Court stopped short of formally adopting that doctrine, it agreed that the FCC must employ "some limiting standard, rationally related to the goals of the Act."[Fn.7]

In his concurring opinion, Justice Breyer also cited the essential facilities doctrine. He suggested that "given the Act's basic purpose," network elements should not be unbundled without "a convincing explanation of why facilities should be shared ¼ where a new entrant could compete effectively without the facility or where practical alternatives to that facility are available."[Fn.8]

Intertwined with the Court's statutory analysis are deeper concerns that the FCC's overly "open" view of networks could distort markets. In the Court's view, the FCC rule could have led to (1) excessive and unjustifiable regulatory costs; (2) disincentives for ILECs to invest in and improve their networks and, paradoxically (3) less, rather than more, competition.

The FCC view had implied that "the more the incumbent unbundles, the