Background:  The 1996 Telecommunications Act provided the FCC with power to require telephone companies to lease elements of their network to their competitors, at rates set by regulators as a way to foster competition. Exactly which elements was left to the FCC to decide, and for the past seven years the commission has struggled with the issue. During the Clinton years, a far-reaching list of such “unbundled network elements”, or “UNEs”, was drawn up – allowing competitors to lease virtually any or all of an incumbent telephone company’s, including switches, transport lines, and “local loop” lines to individual homes.

In 1999, the Supreme Court found the FCC had gone too far, pointing out that the regulated elements must, under the statue, be “necessary” to competitors, and without them, competition would be “impaired.” The rules went back to the FCC, which marginally changed the rules. In 2002, they were thrown out a second time, with an appeals court providing firm instructions to the FCC to reduce their scope. 

In response, the FCC reduced unbundling requirements facilities used for advanced, broadband services, but left the bulk of rules for standard “voice” telephone services in place, turning over the decision for other rules to state regulators to decide. 

Status:  The D.C. circuit court of appeals is now considering the legality of the latest rules, with a decision expected soon.

Discussion:  Rather than foster real competition, the rules undercut it. The UNE rules encourage a second-best kind of competition: among firms sharing the same infrastructure at artificially low rates. This kind of “competition” is dependent on, and pervasively controlled by, the rules set by government.  

Moreover, the rules discourage more robust competition: by encouraging potential rivals to focus on renting, rather than building their own, facilities. Just as harmful, they discourage incumbent telephone companies from investing in their networks, since the benefits are shared with their rivals.

Action item:  The appeals court may require specific deregulatory steps by the FCC. Even if it does not, the FCC should review its UNE rules, and substantially reduce their scope. Network access to competitors should be required only for those elements where the marketplace has demonstrable natural monopoly characteristics. Moreover, given the growth of wireless and Internet telephony, even those minimal requirements should be re-examined.

This brief was prepared by Heritage Research Fellow James L. Gattuso.

The "Regulation In Brief" is produced regularly by The Heritage Foundation, providing concise summaries of key regulatory issues, along with links to key background material on each issue. If you wish to be removed from the "Regulation In Brief" mailing list, please e-mail Margaret Hamlin at Margaret.Hamlin@heritage.org.

Return to the main regulation research page