November 19, 2004

Unbundled Access to Network Elements

Key materials
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The Federal Communications Commission is revising its regulations to comply with the D.C. Circuit’s ruling in United States Telecom. Assn. v. Federal Communications Commission. A key issue of contention is whether to continue requiring incumbent local exchange carriers to lease competitors all network elements necessary to provide local phone service--the "unbundled network element platform"--at regulated rates.

The unbundled network element platform is a highly inefficient means to transfer wealth from incumbent local exchange carriers to consumers. Because local telephone service receives cross-subsidies funded by price increases on other services, policies that reduce the price of local phone service even further below cost require cross-subsidies to be higher than they would otherwise be. In other words, unbundled network element regulation causes long-distance access charges and federal Universal Service Fund contributions to be higher than they would otherwise need to be. This is a hitherto-unnoticed "opportunity cost" of unbundled network element regulation.

A Mercatus Center working paper estimated that a direct reduction in long-distance access charges or universal service contributions would have generated larger increases in consumer welfare than unbundled network element platform regulation. If the FCC had used these alternative policies to transfer the same amount of wealth from incumbents as platform regulation transferred, regulators could have increased consumer welfare by $3.3 billion and social welfare by $5 billion in 2003. The FCC could best promote consumer welfare by eliminating unbundled network element platform regulation and moving forward aggressively to reform intercarrier compensation and universal service funding.