Local Competition Policy and Economic Analysis at the FCC

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2 Local Competition Policy and Economic Analysis at the FCC David E. M. Sappington Former Chief Economist of the Federal Communications Commission Lanzillotti-McKethan Eminent Scholar, Department of Economics, University of Florida October 23, 2003

3 The Role of Economic Analysis How does economic analysis rank as a determinant of regulatory policy at the FCC? 3

4 Top Four Determinants of Policy Politics. Politics. The Law. Economic Analysis. 4

5 Politics Rules Decisions often are made along predictable party lines. Preconceived philosophies determine the outcomes of important proceedings. 5

6 Question Why doesn t economics play a more central role in formulating regulatory policy? 6

7 Why Does Politics Rule? There are no easy answers. < Economic analysis can always provide guiding principles, but it cannot always deliver unequivocal conclusions. < The devil is in the detail, and sufficient detail is not always available or readily constructed and analyzed in the relevant time framework. 7

8 Politics Rules Policymakers begin with preconceived notions about appropriate regulatory policy. If economic analysis cannot provide evidence that is sufficient to change initial beliefs, it may appear that policymakers are ignoring economic analysis. < This is the case even when economic analysis is considered carefully, but judged not to be sufficiently compelling as to warrant a change in initial beliefs. 8

9 Implication Politics will inevitably rule if the economic analysis that is available in the relevant time framework does not provide compelling evidence regarding the best way to achieve prescribed objectives. < If politics rules, the road to competition will be longer and less smooth than necessary. 9

10 Central Question How can one ensure that economic analysis provides compelling, timely evidence on an ongoing basis? 10

11 Ways to Secure Required Facts and Evidence 1. Undertake ongoing data collection and analysis. Regulatory commissions. Industry participants. 2. Study cross-state and cross-country variation. 11

12 Ways to Ensure Timely Analysis 3. Be proactive, not reactive. It is typically too late to begin to analyze questions when they are posed in NOIs and NPRMs. 12

13 Ways to Increase Industry Influence on Regulatory Policy Provide substantive, principled filings. < It is far easier and much less timeconsuming to recognize principled analysis and constructive recommendations than to devise them. 13

14 Value of Facts and Evidence Concrete facts and evidence can help to avoid the design of inappropriate policy based purely on politics, or on myths and popular conception. 14

15 Seven Myths Regarding Local Competition Policy Myths about policy design. Myths about policy implementation. Myths about policy effects. 15

16 Myths About Policy Design Myth 1. Fact 1. Competition policy means ensuring that many competitors operate and secure substantial market shares. Competition policy means reducing entry barriers and limiting undue market power. 16

17 Myths About Policy Design Myth 2. The goal of competition policy is to replace monopoly and regulation with unfettered competition. Fact 2. The goal of competition policy is to facilitate the operation of efficient competitors and to apply regulation selectively, as needed. 17

18 Myths About Policy Implementation Myth 3. Industry deregulation means a steady, persistent reduction in regulatory oversight. Fact 3. During the transition to (substantial) industry deregulation, some increase in regulatory and/or antitrust oversight may be necessary. 18

19 Myths About Policy Implementation Myth 4. Once a policy decision has been made, all attention should be focused on the next impending decision. Fact 4. It is important to continually assess the effects of past policy decisions. Careful assessments can provide invaluable guidance for future decisions. Shorten and smooth the long and winding road. 19

20 Myths About Policy Effects Myth 5. The dot.com crash has largely ended CLEC activity, particularly in residential markets. Fact 5. CLECs serve a substantial portion of both business and residential markets. 20

21 CLEC Market Shares In Residential and Business Markets (UNE-P and Resale) 12% CLEC Market Shares: Total US Residential and Business Market (UNE-P and Resale) 10% CLEC Market Share (%) 8% 6% 4% Business Residential 2% 0% Q Q Q Q Q Q Q Q Q

22 Myths About Policy Effects Myth 6. The nature of local competition is not changing over time. Fact 6. a. Resale has been declining steadily. b. UNE-P has been increasing steadily. c. UNE-L and facilities-based operations have been fairly steady over time. 22

23 CLEC Market Share of Local Access Lines by Entry Mode: Total US Market 20% CLEC Market Share of Local Access Lines by Entry Mode: Total US Market CLEC Market Share (%) 16% 12% 8% UNE-L Resale UNE-P Facilities 4% 0% Q Q Q Q Q Q Q Q Q

24 CLEC Market Share Linear Forecast: UNE-P Growth & Resale Decline Market Share of CLECs in US Market: Actual and 5-Year Forecast (% of Access Lines) 35% Facilities 30% UNE-L 25% UNE-P 20% 15% Resale 10% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q CLEC Market Share (% of Access Lines)

25 Myths About Policy Effects Myth 7. Competitive activity is developing at similar rates across the RBOC operating territories. Fact 7. Competitive activity varies substantially across RBOC territories. 25

26 Local Competition Varies Widely by RBOC Footprint 20% CLEC Market Share in RBOC Footprint (Includes Resale, UNE-P, UNE-L, and Facilities) CLEC Market Share (%) 16% 12% 8% BellSouth SBC Verizon Qwest 4% 0% Q Q Q Q Q Q Q Q Q

27 Possible Determinants of Observed Variation in Competitive Activity Pricing of network elements and other state policies. Demographic factors. Efficiency of incumbents operations. Efficiency of competitors operations. Incumbents actions toward competitors. 27

28 Going Beyond the Myths Dispelling myths and demonstrating facts is not sufficient to formulate good policy. We need to understand the causes of the facts. We need to understand how the facts would change if policy were changed. 28

29 Key Questions Will facilities-based activities increase if switches are removed from the list of UNEs in urban regions (perhaps after CLECs achieve specified thresholds)? Will substantial product differentiation emerge if CLECs rely less on ILEC switches? If so, will such differentiation enhance competition and consumer welfare? 29

30 Conclusions 1. An inability to provide compelling answers to key questions in a timely manner will allow politics to rule. 2. Ongoing data collection and systematic, early study of emerging issues can provide compelling answers to difficult questions in a timely manner. Shorten and smooth the long and winding road. 30

31 Conclusions 3. Ongoing empirical analysis of past policy decisions will allow objective assessment of the effects and merits of those decisions. 4. Ongoing, systematic study of past and future policy issues will allow policy to be based on facts and sound economic analysis, rather than on myths and politics. 31

32 Hope Future Determinants of Regulatory Policy: Politics. The Law. Economic Analysis. Politics. 32

33 Appendix: CLEC Market Share Forecasts by RBOC Footprint* *Note: Complete public data on facilities-based competition are not available, especially with regard to fiber transport and MAN facilities. Therefore, we believe that these estimates of facility-based competition are conservative. Further, FCC data on facilities-based competition are available for the U.S. market as a whole. We have simply distributed the national trend across RBOC footprints, but made no effort to identify RBOC-specific variation. Actual RBOC footprint-specific facility values may vary widely from the estimates presented here. Estimates of resale, UNE-P, and UNE-L, however, are based on RBOC footprint-specific values. 33

34 CLEC Market Share Forecast in U.S. Market by Entry Mode Market Share of CLECs in US Market: Actual and 5-Year Forecast (% of Access Lines) 35% Facilities 30% UNE-L 25% UNE-P 20% 15% Resale 10% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q CLEC Market Share (% of Access Lines)

35 CLEC Market Share Forecast in BellSouth Footprint: UNE-L Decline 40% Market Share of CLECs in BellSouth Footprint: Actual and 5-Year Forecast (% of Access Lines) CLEC Market Share (% of Access Lines) 35% 30% 25% 20% 15% 10% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q UNE-P Lines Percent of BellSouth Market UNE-L Percent of BellSouth Market Resale Percent of BellSouth Market CLEC Facilities-based Lines (Estimate) Percent of BellSouth Market 35

36 CLEC Market Share Forecast in Qwest Footprint: UNE-L Growth 20% Market Share of CLECs in Qwest Footprint: Actual and 5-Year Forecast (% of Access Lines) CLEC Market Share (% of Access Lines) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q UNE-P Lines Percent of Qwest Market UNE-L Percent of Qwest Market Resale Percent of Qwest Market CLEC Facilities-based Lines (Estimate) Percent of Qwest Market 36

37 CLEC Market Share Forecast in SBC Footprint: UNE-P Growth 50% Market Share of CLECs in SBC Footprint: Actual and 5-Year Forecast (% of Access Lines) CLEC Market Share (% of Access Lines) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q UNE-P Lines Percent of SBC Market UNE-L Percent of SBC Market Resale Percent of SBC Market CLEC Facilities-based Lines (Estimate) Percent of SBC Market 37

38 CLEC Market Share Forecast in Verizon Footprint: UNE-P and UNE-L Growth 30% Market Share of CLECs in Verizon Footprint: Actual and 5-Year Forecast (% of Access Lines) CLEC Market Share (% of Access Lines) 25% 20% 15% 10% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q UNE-P Lines Percent of Verizon Market UNE-L Percent of Verizon Market Resale Percent of Verizon Market CLEC Facilities-based Lines (Estimate) Percent of Verizon Market 38

39 Appendix: The Local Competition Puzzle 39

40 Local Competition Policy is Only a Piece of the Larger Competition Puzzle Sources of RBOC "Retail" Line Loss (000) Q Q Q Q Q Q Q Q Q Total Retail Line Loss Economy, Substitution, & Other Wholesale Lines nd Lines Source: UBS Warburg Wireline Postgame Analysis 3.0, May 14,

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