Regulating for Competition in the US and EU Telecoms Markets 
Norton Rose, London
- 1. The Telecommunications Act of 1996
- 1.1 Interconnection Details
- 1.2 Right of Way, Universal Service and Standards
- 1.3 Baby Bell Provisions
- 1.4 Regulatory Forebearance
- 2. European Regulation
- 2.1 Full Competition Directive
- 2.2 Proposed Interconnection Directive
- 2.3 Proposed Competitive Environment Directive
- 2.4 Proposed Licensing Directive
- 3. Conclusion
The desirability of telecommunications competition has triumphed over the old natural monopoly model. However, regulation has not yet withered away. Indeed, at least in the short run, it appears that more regulation may be the order of the day. Emerging legislation in the United States and the European Union gives regulators powers to act as watchdogs over competition in the market. Rather than the free market, it appears that regulators, for the foreseeable future will determine many operational details of telecoms organisations.
This is a refereed article.
Date of Publication: 30 September 1996
Citation: Naftel, M (1996), 'Regulating for Competition in the US and EU Telecoms Markets', 1996 (3) The Journal of Information Law and Technology (JILT). <http://elj.warwick.ac.uk/elj/jilt/telecoms/3naftel/>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1996_3/naftel/>
The recently passed US Telecoms Act represents a comprehensive overhaul of the regulatory structure. The stated purpose of the Act is 'To promote competition and reduce regulation'. However, it would be an exaggeration to call it a deregulation act. The Federal Communications Commission (FCC) is required to engage in eighty-three separate rulemaking proceedings under the Act. This might be why the Act is sometimes referred to as the Telecommunications Competition Lawyers Full Employment Act.
A different regulatory framework is established on both the Federal and State level. There will be a movement away from rate of return regulation or price caps towards more steps designed to ensure the creation of conditions designed to ensure the emergence of effective competition. In effect, there will be close regulation to ensure deregulation. As it has been more than sixty years since the last major revision of US Federal telecoms regulation, it is to be hoped that we will not be locked in for a similar long period with this regulatory regime. Technological and therefore market changes occur rapidly and regulation should be able to adapt also.
The Act places a duty on incumbent telecoms organisations, primarily designated as local exchange carriers (LECs), to negotiate interconnection terms. This is also the case in emerging European legislation (Article 90 Full Competition Directive). The Act specifies a list of items that must be open to negotiation, 'in good faith', including resale, number portability, dialling parity, right-of-way, and reciprocal compensation. The incumbent LECs must allow physical collocation, with exception only for technical or space reasons. As most Central Offices today have a large amount of vacant space due to smaller switch components, this exemption will probably not be used often.
Negotiated agreements between incumbents and other service providers will be submitted to State commission authorities. Any party displeased with the results of negotiation can seek mediation from the State commission. A more formal arbitration proceeding from the State commission is to be available in response to requests made between the 135th and 160th day after the original request for negotiation. The State commission is to resolve the dispute within nine months of original interconnection request.
The State commissions are to impose interconnection charges based on items of cost to the LEC (but not rate-of-return cost), on the basis of nondiscrimination, and allow for a reasonable profit. The end result is to be a "just and reasonable" charge. The State commissions are to determine wholesale rates based on retail rates to subscribers less any costs attributable to marketing, billing or other items that the LEC might be expected to save by losing the retail portion of the call. State commissions must approve all interconnection agreements negotiated or arbitrated. The State commissions can reject a negotiated agreement, for limited reasons. If the State commission does not approve or reject a submitted negotiated agreement within ninety days of submission, it is deemed approved -thirty days for an arbitrated agreement. Judicial review of any decision of a State commission must be through a Federal District Court. The FCC can preempt State authority and decide interconnection terms if State commissions fail to act after ninety days notice. The Regional Bell Operating Companies (RBOCs), popularly known as the Baby Bells, are required to file general interconnection terms with the State commissions. The RBOC terms are to be reviewed by the State commissions and approved or rejected within sixty days of submission. The RBOCs are still under a duty to negotiate interconnection terms on request.
All State commission approved agreements, whether negotiated or arbitrated are to be publicly available. This will likely severely hamper the ability of the LECs to negotiate favourable agreements, as no competitive carrier will accept less than the most favourable terms imposed by a State commission.
The FCC has issued its very detailed and lengthy interconnection rules. These rules are being challenged by both LECs and State commissions on the grounds that they are too detailed to allow for commercial negotiation as intended by the Act and usurp the role of State regulators.
The Act specifies that 'any entity' can provide any interstate or intrastate telecoms service. This is on the surface a guarantee of full competition, but the State commissions can act to protect universal service, the security of the network and so forth.
States are given the right to charge fees for use of right-of- way to place telecom facilities. This must be done on a nondiscriminatory basis. This provision alone will likely add a significant new expense to many LECs who until now received a statutory State grant of free placement of their facilities along State highways. This may also become a new source of government revenue.
The details of how universal service issues are to be resolved are not given, but a Federal-State Joint Board is established to make recommendations. The FCC is to pass implementing rules within fifteen months of the Board's recommendations. The general principle is that customers in high cost areas shall have services available of the same advanced level and at 'reasonably comparable' rates as urban areas. All providers are to contribute to universal service. Schools, libraries, and certain health care facilities should have access to advanced services. All providers of interstate services will contribute to universal service. Designated carriers will be eligible to receive support from 'Federal universal service support'. States can adopt consistent procedures requiring support from intrastate carriers. There is an incentive for carriers to provide discounted service to educational institutions and libraries in that the amount of required universal support can be offset by the amount of the discount.
The FCC is given sweeping authority to oversee standards setting activity, identify and eliminate barriers to entry, promulgate rules to punish carriers who switch customers without their approval, and designate 'impartial entities' to administer the North American Numbering Plan (steps have already been taken to establish a National Numbering Council). The FCC will also pass rules requiring LECs to share certain infrastructure with competitors. This will include obligations on LECs to inform interconnecting competitors of technology and upgrade plans. This should make it difficult for LECs to compete on the basis of technological advances.
There are special provisions relating to the RBOCs, mainly concerning what they must accomplish before being allowed to provide long distance service in their home region. RBOCs can provide out of region inter-LATA  service immediately, but are restricted from providing in-region inter-LATA service until the FCC approves. An RBOC is required, before receiving FCC approval, to prove that it faces facilities-based competition in the State for which it is requesting long distance authority. This can be shown by entering into interconnection agreements in that State. Or, the RBOC can file and have approved its terms for interconnection, and if no telecoms company applies for interconnection (or applies but refuses to negotiate in good faith) within ten months after passage of the Act, long distance authority may be granted. A checklist is provided for elements of interconnection that must be offered by the RBOC, including: interconnection as specified under the Act, nondiscriminatory access to network elements, poles, conduits, rights-of-way, E911 service, number portability (interim and true, when available), directory listing, access to routing databases, local dialling parity, operator services, etc. The FCC is to consult with the US Department of Justice when any RBOC applies for in-region inter-LATA authority, but Justice has no real say in the matter. The FCC is likewise to consult with the State commission affected. Inter-LATA authority will also carry manufacturing rights - denied to the RBOCs since divestiture, but Bellcore cannot be used as a joint manufacturing arm of the RBOCs. There is however, a provision that states that Bellcore can continue to engage in activities that were lawful prior to passage of the Act. Bellcore's traditional standards setting activity (issuance of generic requirements) is to be opened to the public and the FCC is to set up a dispute resolution procedure. Suits for damages or cease and desist orders are allowed against RBOCs. The RBOCs are not allowed into alarm monitoring service for five years.
Cable TV companies are allowed to provide telephone service. They may not be required to obtain a local franchise to provide telephone service. However, they may not jointly offer telephone service with a LEC in that LEC's service area.
It would seem that this is a heavy hand of regulation by the FCC and the State commissions. Rather than letting the market decide, the Act spells out exactly how competition will occur. However, there is an interesting provision in Section 401 entitled Regulatory Forbearance. The FCC is given authority to forbear from applying any section of the Act if in its opinion the application is not necessary 'to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory', if continued regulation is not necessary to protect consumers, and forbearance is consistent with the public interest. In making this determination, the FCC is to weigh whether forbearance will enhance competition among service providers. Carriers may petition the FCC to exercise its right of forbearance and the Commission is given one year to consider the request. However, the FCC may not waive the requirements relating to interconnection for local competition or the provisions specifically relating to the RBOCs until they have been fully implemented. Perhaps this is a distant hope of the competitive promised land. It may be a vain hope. Judge Greene always had authority to modify the AT&T divestiture decree, but in practice he allowed very few changes. He was a zealous and jealous regulator. His attitude helped prompt this sweeping overhaul. Perhaps the FCC can learn from mistakes that Judge Greene might have made and do something uncharacteristic for regulators - let go.
Since the publication of the Telecommunications Green Paper in 1987, the European Commission has been pressing for a competitive European telecoms market and has succeeded in that a date of 1 January 1998 has been set for full competition, including basic voice telephony throughout Europe, with deferments for certain lesser-developed Member States. Europe is continuing to proceed on an incremental basis towards full competition, rather than the comprehensive approach taken by the US Telecoms Act. However, many of the regulatory approaches appear similar in the US and the EU, but the EU approach may appear less dogmatic than the US regime. Rather than specifying in great detail how competition is to be regulated, the emerging European directives speak in more general terms. This is partially because of the Community style of drafting. Terms such as 'transparent, nondiscriminatory, and proportional' appear frequently in EU legislation. There are also European political realities to consider. The climate is probably not right at this time for a powerful European telecoms regulatory body. The Commission might be able to accomplish much towards creation of a competitive telecoms market, but a lot will depend on regulatory enforcement, at least in the short run, at the national level.
As to the specific directives being adopted and proposed in Brussels, many terms and basic approaches are similar to the US Act. The Full Competition Article 90 Directive takes a similar approach to interconnection between service providers, though it must be observed that the European Commission will wield a lighter regulatory touch than the FCC. Perhaps this is because this is an Article 90 Directive, issued under the sole authority of the Commission.
The Member States are to require existing telecoms organisations to publish the terms and conditions for interconnection by 1 July 1997. Service providers are free to accept those terms or to negotiate their own interconnection arrangements. It is envisioned that the parties should first attempt to commercially negotiate terms of interconnection agreements, but if they are unable to reach agreement, the Member States are to adopt a decision setting the individual terms of interconnection. This procedure is to be adopted to become effective with the date of full competition, 1 January 1998, and extend for five years. The Commission may revisit interconnection issues if a harmonising directive is adopted.
And such a harmonising directive is in fact under consideration now. The Commission has proposed a directive on interconnection through the principles of Open Network Provision (ONP). Member States would be required to remove all restrictions on service providers negotiating interconnection agreements. Telecoms organisations would be required to negotiate interconnection agreements, subject to limited exceptions. Contributions to universal service may be imposed. Interconnection must be on a nondiscriminatory basis - equal conditions applied for similar service elements. Changes in interconnection arrangements must be notified six months in advance, and all interconnection agreements should be open for public inspection. Charges for interconnection are to be cost based, with two allowable elements - one time costs representing engineering costs to configure the network and usage charges. Bulk discounts are allowed, as are charges designed to help support universal service.
Broad conditions are set for Member States' regulatory goals. Security of the network, network integrity, guaranteeing interoperability and essential requirements such as scarcity of availability frequency may justify Member States' limiting certain interconnection rights. Sharing of rights-of-way and collocation is not required, but encouraged. Member States may impose collocation under their dispute resolution authority. Telephone numbers are to be allocated in a fair manner, but number portability is only required in major cities by 1 January 2003.
If service providers licensed by different Member States cannot agree on the terms of interconnection agreements, either party can refer the matter to the Member States involved. If not resolved in two months, both parties may, by agreement, refer the case to the European Commission for resolution. The European Parliament has gone further, recommending that a European Regulatory Authority be set up to promulgate uniform rules for granting of licences, terms of interconnection and so forth. The powers of this regulatory agency would include powers of investigation and the ability to settle interconnection disputes and possibly award damages.
There is another directive proposal for the purpose of adaption to a competitive environment in telecommunications. The introduction to this proposal makes the interesting statement that 'light-handed regulation is appropriate in a competitive market'. However, it also recognised that independent regulatory authority is crucial to ensure fair competition. Although there have been steps towards telecoms privatisation, the European Commission has expressed concern over the development of truly independent national regulators. While many regulatory details will for political and practical reasons need to be left to the Member States, a European regulatory framework is developing, first through the vehicle of the Article 90 directives, and now through the more detailed harmonising directives.
The competitive environment directive proposal attempts to extend the principles of ONP to leased lines, thereby encouraging alternative service providers. Special restrictions and accounting principles would be placed on telecoms organisations with market power - presumed to exist with a greater than 25% market share.
A common framework has also been proposed for the grant of telecoms service authorisations and individual licences. The proposed directive expresses a preference for as many service providers in the market as possible as a means of bringing the benefits of competition to the largest number of consumers. Therefore, the Member States are, whenever possible, to allow potential service providers to follow a declaration procedure granting general authorisation to offer services. However, there are areas involving allocation of scarce resources such as radio frequencies that might call for limiting the number of participants in the market. Only essential requirements of access to scarce resources or network security, integrity, data protection, or environmental concerns can justify restricting the number of licensees for a particular service. As technology develops, perhaps enabling radio spectrum to be shared by more providers, it is expected that technical justification for restrictions on the number of licensees will diminish.
Consistent with the principles of the single market, the proposed directive sets forth limited steps to promote a single-stop-shop for telecoms licences. A telecoms operator, wishing to provide service or infrastructure in more than one Member State, is to request the national authorities to coordinate the granting of authorisations. If the operator is not satisfied with the coordination, a notification may be made to a newly-established European Union Telecommunications Committee (EUTC). The EUTC can then reach a solution that is to be implemented by the involved Member States. If not implemented, the European Commission is to be informed, but it is unclear that any real enforcement powers exist.
Likewise, the proposal for a single-stop-shop for licences is rather vague. The Commission would establish, at one physical location, a clearinghouse that would forward requests for licences to the appropriate Member States, who would then be required to decide on the request within six weeks. This would not be a true single-stop-shop in that an applicant might still be subject to different substantive and procedural rules, within the general framework of the licensing directive. Perhaps the Commission only intended to set up the principle of a single-stop-shop at this time and make it a reality later.
As seen by the above summaries, Europe and the US are significantly altering their regulatory regimes in an attempt to ensure that telecoms competition occurs in a fair way. A regulatory consensus, at least in Europe and the US, appears to require dominant telcos to unbundle their networks and provide a checklist of interconnection items. Though commercial negotiation is to be the basis of interconnection, in practical terms there will likely be regulatory mandates for interconnection charges and terms, at least in the short run. This may be necessary to ensure the dominant telcos do not use their size and effective control over necessary network infrastructure to unfairly compete, but the regulators should also allow these companies to compete. Actions resulting in a disproportionate share of expenses being placed on incumbents would not be fair either. Most of the population are still customers of these organisations and their cost of service might rise if the dominant carriers are unfairly punished. Allowing the current telecoms organisations to compete fairly and fully might be the most effective way to protect the universal service customer. Competitive providers may not be interested in the basic residential customer on any wide scale for some time to come.
It is hoped that the new regulatory regimes will accomplish their purpose to promote fair competition. The success of the new regulation should be measured by the extent to which it can diminish with time.
While it might be ideal to see regulation be replaced with reliance on competition law, this may not be realistic. As cumbersome as regulation is, it is still much faster than a lawsuit under the Sherman Act or an investigation by the European Commission. By the time competition law reached a resolution, the market would likely have moved on and the injured party suffered irreparable harm. Rather than competition law, regulatory relief might come in the form of technological advances. If wireless technologies or perhaps the Internet make existing wireline networks redundant, it could no longer be contended that telecoms organisations possess facilities essential to compete. When that occurs, the time might be right to substitute competition law for regulation.
 Local Access Transport Areas (LATAs) were drawn at the time of the AT&T divestiture as a means of designating long distance traffic the RBOCs were forbidden to carry. The RBOCs could complete a call within a LATA's boundaries, but not to another LATA.