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

Fortnightly Magazine - November 15 1999

mind - to encourage competition, not to protect competitors.

For example, certain affiliate relations standards for energy utilities require that pricing of retail competitive products or services equal or exceed some fully allocated cost to the incumbent to provide the product or service.[Fn.21] Such a rule would unduly impede the ability of the incumbent to compete and thereby lessen the vitality of the competition that the regulator is attempting to encourage.

It is not necessary to price a product to cover fully allocated costs in order to avoid cross-subsidization. Sound economic principles indicate that cross-subsidization will only result if an entity fails to cover its incremental, not its fully allocated costs.[Fn.22] Ironically, imposition of a fully distributed cost-based retail price floor would encourage competitors but deny customers the principal benefit from that competition (i.e., lower prices).

Epilogue: Did the FCC Learn Its Lesson?

On Sept. 15, the FCC adopted new rules on what network elements incumbents must make available to new entrants. Some of these new rules suggest that the agency has heard the Supreme Court's message in Iowa.

The FCC's new rules eliminate operator and directory assistance services from its pre-Iowa list of seven elements that must be made available, since competitors can and do provide such services for themselves and/or can acquire them from alternative sources.[Fn.23] In addition, except in limited circumstances, the FCC refused to add an obligation to provide high-speed Internet access and other data services (packet switches and digital subscriber line access multiplexers) to the required list of facilities required to be unbundled. On this issue, the FCC described its rationale as follows:

"Given the nascent nature of this market and the desire of the Commission to do nothing to discourage the rapid deployment of advanced services, the Commission declined to impose an obligation on incumbents to provide unbundled access to packet switching or DSLAMs at this time. ¼ [C]ompeting carriers are aggressively deploying such equipment in order to serve this emerging market sector."[Fn.24]

Nevertheless, the FCC's extension of obligations on incumbents to provide access to certain additional elements not on the original list of seven (e.g., subparts of loops and dark fiber) certainly indicates that it is not reluctant to impose new obligations on the incumbent, notwithstanding Iowa. Moreover, the FCC's unwillingness to eliminate switching from the list of requirements seems to us inconsistent with the Iowa decision, absent evidence that new entrants would be materially impaired without such access. The FCC recognized that new entrants are now providing switched-based alternative service in major metropolitan areas and, at least as the partial dissent of Commissioner Michael K. Powell notes, new entrants potentially can serve many other customers even beyond those areas.

It is clear, however, that the FCC's consideration of such requirements is far from over. The FCC has acknowledged an obligation to revisit the unbundling requirements in light of the fact that "rapid changes in technology, competition, and the economic conditions of the telecommunications market will require a reevaluation of the national unbundling rules periodically."[Fn.25] The obligation to reconsider such requirements, over time, suggests that