Pricing Unbundled Network Elements

I originally wrote this entry on August 23, 2004 and published it on blogs.sun.com.

I wrote earlier about the Telecom Act of 1996, focusing on its provisions regarding unbundled network elements.

Pricing of such elements has been a point of contention between the FCC, the local exchange carriers and their competitors. The FCC has required the incumbent carriers to provide their elements at a discount, while the carriers prefer a pricing model that emphasizes current costs of maintaining the network.

This past Friday (August 20, 2004), the FCC forze prices incumbents charge to competitors for six months.

Some say this has been done at the request of the administration, to prevent price hikes prior to the upcoming presidential elections. The 3-2 vote was on party lines. Anne Marie Squeo of the WSJ reports that

Bell officials have repeatedly said their interpretation of the March appeals-court ruling, which went in their favor, is that they no longer have to lease all the various parts of their networks at discounted prices to rivals. The companies contend that the wholesale rates don't cover their costs for maintaining the networks. Rivals, who repackage the Bells' service and sell it to residential and business customers, have taken more than 19.5 million customers from the Bells through such arrangements during recent years.

The differences over the 1996 telecom act are sure to conintue. If the network operators are not allowed to charge real prices, they will not have the incentive to upgrade their networks with new equipment and will have to resort to increasing prices on their own direct customers. Unreal low pricing for one segment will lead to unreal high pricing for another segment of the market. This is a situation FCC has to deal with. However, institutional politics behind its decisions makes matters no easier.