Summation and Brainstorming

1. Summation and Brainstorming October 2, 2004 Thomas M. Koutsky RESIDENT SCHOLAR

2. Summation • Competition is a process, not a result • Price, product differentiation, quality, innovation • Competition for “what” (market definition)? • Policy can affect the process • Sunk costs and scale economies matter • Effect is to limit entry in a real, tangible way • Federalism matters • Experimentation minimizes consequences of bad policy; increases the odds of finding the right policy • Possible result is lower cost of entry?

3. Implications for Policy • Some things are out of your control…but you can make things better • Different competition frameworks may lead to markedly different policies • Willig: “Get policy right so the market can make the right choices” • Federalism helps determine the right policies

4. “Intermodal”: He said… “It’s not going to displace the wireline network. It’s certainly going to be a big product, but it’s never going to be the substitute. Reliability is one reason.” Edward E. Whitacre Jr., SBC CEO Business Week, “A Wireless World,” (Oct. 20, 2003)

5. …He said… “Wireless substitution is now a fact… Duane Ackerman, BellSouth CEO Wall Street Journal, B1 (Nov. 15, 2001)

6. …He said… “Wireless substitution is now a fact… That’s OK. We tend to own both.” Duane Ackerman, BellSouth CEO Wall Street Journal, B1 (Nov. 15, 2001)

7. Are Networks “Converging”? Each Network Type has strengths, weaknesses and specialties

8. A Lawyer’s Assessment • If consumers demand different “services”… • And if certain networks are better suited to particular services than others… • And if there can only be so much entry in this network-type industry because of sunk costs/scale economies… • Then relying only on intermodal competition will reward network companies for closing their particular network , and… • Instead of competing against core markets of other providers, firms will differentiate their offerings based on those services • Final Result: monopoly profits, consumers worse off and trapped

9. Promoting Entry: The Challenge Ahead “We played by the rules and did exactly what they told us to do – millions of dollars to buy UNEs and sell service, build OSS – all to be told that ‘this is no longer for sale’.” “We were duped. In 1996, wireline competition was a visible and viable market to enter – $120 billion in revenues and basic rules in place. It was working. But they turned their back on us because of special interest politics.” “I don’t know of any ‘safe harbor’ state anymore. Are there any? It seems the PSCs have given up the ghost. Tell me if you know of any.”

10. What USTA II didn’t do… • Sections 251, 252 and 271 are still the law – ILECs have obligations to provide access to their networks • State law still applies – USTA II court ruled preemption premature • Interconnection Agreements are contracts and remain enforceable • VZ and SBC UNE Merger Conditions still in place • D.C. Circuit did not make an “impairment” determination Judge Williams: “We don’t have the authority to do that.” USTA v. FCC, D.C. Circuit Nos. 00-1012, 00-1015, Transcript of Oral Argument, Jan. 28, 2004 at 11.

11. Interconnection Agreements • Contracts are written for “what-if” scenarios • Section 251(c)(3): ILECs obligated to provide UNEs “in accordance with the terms and conditions of the [interconnection] agreement” • Section 251 process: negotiation by parties and submit all “open issues” to state commission for rapid arbitration • State commissions have authority to “resolve” any “open issue” presented to it in a section 251 arbitration • State commissions have authority to make “determinations” under section 251 IAs – interpreted by federal courts as giving states power to enforce IAs

12. Judge Edwards: …[w]hat’s the remedy? Mr. Kellogg: The remedy is to remand to the FCC to vacate the decision or the parts of the decision that we challenge… Judge Edwards: Where does that leave your clients, in your view, with rrespect to the precise matters that are at issue…? [D]o they remain in limbo? That is, do they remain as they are now? Do you assume impairment, no impairment, what? What are you imagining? Mr. Kellogg: Well, it’s a difficult question, Your Honor, because – Judge Edwards: That’s why I’m raising it. Mr. Kellogg: -- we are subject, we are subject to a number of agreements in the states, and the states will continue to require us to provide elements pursuant to those agreements. Judge Edwards: Right. Jan. 28, 2004 Trans. at 7-8.

13. Section 271 “In demonstrating compliance with each item on the competitive checklist, a BOC must demonstrate that it has a concrete and specific legal obligation to furnish the item upon request pursuant to state-approved interconnection agreements that set forth prices and other terms and conditions for each checklist item…” • Section 271 obligations are implemented through the Section 251-252 process • Section 271(c)(1), (2)(A): “checklist” is to be implemented through a 251 agreement or SGAT “that have been approved under section 252”

14. State Law Sources • Statutory Authority Michigan Telecommunications Act: ILEC cannot “discriminate against another provider by refusing or delaying access service to the local exchange” MCL 484.2305 • Voluntary price cap plans Did the ILEC promise to “unbundle” in exchange for retail pricing flexibility? • Merger conditions • Enter into a “Global Settlement” (like Pennsylvania) • Universal service programs • Quality of service regulation Qwest v. Scott, 2004 WL 1872443 (8th Cir.): States can regulate quality of special access service even if circuit >10% interstate

15. Open Entry Policies Can I attract new wholesale entrants? • Copper retirement policies – should the ILEC be permitted to rip up copper loops when it deploys fiber? • Rights-of-way management • Pole Attachments • Section 224(c)(1) gives states ability to preempt federal pole attachment policies! • Building access policies • Municipal entry • Open up educational, institutional networks • Universal service policies: higher subsidies for wholesale-only network providers (retail providers have additional “upstream” revenue sources) • “Incentive Divestiture”

16. Antitrust? Some are Trying… Excerpts from Z-Tel Communications, Inc. v. SBC Communications, Inc., Order on Defendant’s Motion to Dismiss, 5:03-CV-229 (E.D. Tex. Aug. 6, 2004) • “[A]ntitrust liability is live and well in the context of regulated telecommunications.” (p. 19) • “The crux of [Z-Tel’s false advertising] allegations are that Defendant refers to itself ‘as a real phone company’ while mockingly referring to Plaintiff in public advertising as a ‘flashy’ imposter. . . . Advertising that created barriers to entry may constitute exclusionary conduct” that violates Section 2.” (pp. 21, 25) • “Under the Telecommunications Act, state regulatory bodies are charged with making the initial ‘determination’ of any disputes between parties regarding the interpretation and enforcement of interconnection agreements. . . . [S]tate regulatory agencies have the principal role in determining claims that arise under the Act.” (pp. 61-62) • “The gestalt of Plaintiff’s allegations is that `Defendant seeks to force competitors to expend time and resources contesting Defendant’s noncompliance with the orders of state utility commissions’. . . . [T]here is no doubt that under § 251(c) of the 1996 Act, the incumbent local exchange carrier bears, inter alia, the duty to negotiate interconnection agreements with any new carrier so requesting. . . [E]ven if Defendant is correct that no antitrust liability may attach for failing to allow interconnection, it is an entirely different matter if Defendant has ‘initiated and maintained baseless regulatory proceedings’ relating to its 1996 Act duties.” (pp. 22, 30)

17. Contact Information Thomas M. Koutsky Resident Fellow, Phoenix Center tom@phoenix-center.org 703-395-7117