UNE Pricing: Facts and Fictions

An industry advocate says that the the regional Bell operating companies (RBOCs) are using five fallacious arguments to fight current competition rules.

by Walter G. Blackwell [December 2, 2002]

Walter G. Blackwell is the President of the Association of Communications Enterprises (ASCENT). Headquartered in Washington DC, ASCENT is a professional trade association, 501c(6), with more than 300 members. Blackwell joins ASCENT after a brief stint with a start up RFID technology company located in California. Prior to that he served for more than six years as President of The International Communications Industries Association (ICIA). Blackwell is a member of the American Society of Association Executives (ASAE) and the Greater Washington Society of Association Executives (GWSAE).

As an industry, we have made real progress in the nationwide availability of the UNE-Platform (UNE-P) at reasonable rates. Many states, in particular, have acted on RBOC challenges to UNE pricing and availability.

Not surprisingly, the RBOCs are proving they would rather keep potential rivals out of the market than let customers benefit from competition. They seek radical increases—more than 100 percent in some cases—in Unbundled Network Element rates, while trying to limit UNE availability at the federal and state levels. They see UNE-P as a real threat to their market dominance and want to severely minimize its value to competitors or kill it altogether.

Led by SBC, the RBOCs are conducting a campaign of misinformation in an attempt to raise competitors' prices for UNEs and the UNE-Platform, and eliminate this potential for meaningful local competition.

In analyzing the RBOCs' pleas to raise UNE rates, we have identified five fallacious themes. Then we have provided facts based on readily available public information, regulatory rulings and court decisions, to reveal the following RBOC fictions.

Fiction 1:
UNE rates are below cost and subsidize artificial competition

Facts: UNE rates have been established in accordance with the FCC's forward looking pricing methodology under the 1996 Telecommunications Act, upheld by the U.S. Supreme Court, and are consistent with data submitted in state proceedings. The Supreme Court ruled last May that the FCC's UNE pricing methodology is appropriate and not confiscatory, noting that incumbent claims of below cost pricing have been based on "patently misstated" data. The Court said that even "when we have dealt with historical costs as a rate setting basis, the cases have never assumed a sense of 'cost' as generous as the incumbents seem to claim."

Extensive reviews of RBOC UNE pricing have been undertaken by most state commissions following months, if not years, of extensive expert testimony. The RBOCs have had ample opportunity to make their case, and are trying once more to present "new" cost studies presumably demonstrating significantly changed conditions.

Fiction 2:
RBOCs are losing money on UNEs which will lead to the demise of RBOC networks and "financial ruin"

Facts: SBC/Ameritech, the most vocal RBOC in the UNE pricing debate, is making record profits. Ameritech posted a 25.52 percent rate of return in 2001, up from 20.6 percent in 1996, and 14.54 percent in 1990 when Ameritech maintained its local monopoly. In announcing its second quarter earnings, SBC touted to Wall Street analysts the fact that its wireline operating margin for the second quarter was 42.1 percent, up 50 basis points from the first quarter alone. SBC was listed as one of the thirty largest Fortune 500 companies in 2001. SBC's 15.8 percent profit margin (profits divided by revenues) was three times higher than any of the other top 30 Fortune companies who reported meager 4.6 percent returns. At the same time, SBC/Ameritech has been paying significant non-performance penalties, more than $33.6 million since June 2002

Fiction 3:
UNEs do not create incentives for competitors to serve underserved markets

Facts: UNEs make serving underserved markets possible for most smaller competitors. A recent Promoting Active Competition Everywhere (PACE) Coalition study revealed that, "In the 50 largest wire centers in Texas (where the average central office serves more than 100,000 access lines), the UNE [Platform] penetration [for competitors] is 8 percent, while … in the bottom tier of Texas' [central offices] that serve, on average only 485 lines, UNE [platform] penetration is even greater (over 20 percent)… In contrast, virtually all of the [facilities-based] lines in Texas can be found in the top three tiers, with no meaningful expansion into less dense areas." Competitors will enter market segments which can be economically served.

Fiction 4:
UNE Pricing does not promote facilities investment

Facts: The U.S. Supreme Court clearly showed the fallacy of this argument in the following opinion: "The basic assumption of the incumbents' no-stimulation argument is contrary to fact … [T]he entrants have presented figures showing that they have invested in new facilities to the tune of $55 billion since the passage of the Act…The FCC's statistics indicate substantial resort to pure and partial facilities-based competition among the three entry strategies: as of June 30, 2001, 33 percent of entrants were using their own facilities… it suffices to say that a regulatory scheme that can boast such substantial competitive capital spending over a 4-year period is not easily described as an unreasonable way to promote competitive investment in facilities."

The Supreme Court also found that UNE entry is a first step in long term facilities-based competition: "It is easy to see why … an 'incumbent local exchange carrier' … would have an almost insurmountable competitive advantage … through its control of this market … A newcomer could not compete with the incumbent carrier to provide local service without coming close to replicating the incumbent's entire existing network, the most costly and difficult part of which would be laying down the "last mile…"

Fiction 5:
RBOCs are losing subscribers due to UNE pricing

Facts: The RBOCs are experiencing something they have never experienced before—real competition. The Supreme Court said that "[through the 1996 Telecommunications Act] Congress passed a rate setting statute with the aim not just to balance interests between sellers and buyers, but to reorganize markets by rendering regulated utilities' monopolies vulnerable to interlopers… The approach was deliberate…"

Competition will be served best by the ready availability of UNEs and the UNE-Platform at stable and reasonable prices. We must continue to point out the fallacy of RBOC fictions and to preserve the hard-won gains in UNE pricing and availability, if Americans are to realize the benefits of meaningful competition, as the 1996 Act intended.

—End