| Big battles are being fought in Washington over the Telecommuncations Act of 1996. The Act was intended to encourage competition, but instead it has artificially distorted rates of return that have destroyed the incentives for both telecommunications companies and outside investors to invest the capital necessary for growth. It has also created a tidal wave of litigation, legal rulings and overturns, reinterpretations and moratoriums as companies fight about the interpretation of the Act on existing and new technologies. The uncertainty has sidelined all capital investments into telecommunications infrastructure as the companies wait for a revised and clarified regulations. This review is extremely important. The telecommunications sector has been a major contributor to the growth and productivity of the U.S. economy. I believe that as long as telecommunications are crippled, the U.S. economy will remain weak.
There is a massive literature concerning the impact of telecommunications regulations on the economy. Economists have taken a wide variety of approaches to assess the impacts of changes in regulations on investment, growth, job creation, and consumer welfare. The following is a brief review of seventeen studies that have particular relevance to the issues currently before the FCC and congress.
Assessing the Impact of Regulation on Deployment of Fiber to the Home
Cambridge Strategic Management Group (2002)
This study uses an accounting approach with individual company survey data. They find that TELRIC based pricing both raises the cost and reduces the revenue to ILECs that may be considering the deployment of Fiber to the Home (FTTH). They calculate the reduction in the percentage of households for which it would be profitable to make this deployment under different regulatory regimes. They estimate that ILECs might spend an additional $39 billion over 10 years if they were sure they would not have to make their lines available to competitors at unprofitable rates.
Unbundling Policies Discourage CLEC Facilities-Based Investment?
R.W. Crandall, A.T. Ingraham and H.J. Singer
Topics in Economic Analysis & Policy (2004)
This study uses a factor demand approach to model CLEC investment decisions in order to test the “stepping stone” theory that low UNE rates encourage CLEC investment. They use cross-state regressions to estimate the output-constant elasticity of substitution between facility-based investment and UNE leasing. They find that “facilities-based line growth relative to UNE growth was faster in states where the cost of UNE’s was higher relative to the cost of facilities-based lines.” Their estimates, based upon a number of different specifications, indicate that each one percent increase in the price of leasing a UNE line, relative to the cost of adding a facilities-based line, is associated with an increase of facilities-based lines, relative to leased lines, between 0.5% and 1.6%.
They conclude that “the best argument for maintaining the current unbundling regime—namely, that low UNE rates encourage CLECs to rent at first, and then build facilities once they have some market experience—is not supported by the data.” Based on their estimates Eisenach and Lenard have estimated that CLECs have deferred between $1.9 and $3.5 billion in capital spending.
The $500 Billion Opportunity: The Potential Economic Benefit of Widespread Diffusion of Broadband Internet Access. Down to the Wire: Studies in the Diffusion and Regulation of Telecommunications Technologies
R.W. Crandall and C. L. Jackson
Nova Science Press (2003)
This study attempts to estimate the eventual economic benefits of broadband technology. The authors use two approaches. First, they estimate the addition to consumer welfare, or consumer surplus, which would accompany ubiquitous high-speed access available for $40 per month per household. Second, they identify specific benefits that high-speed access can ultimately provide consumers, such as reduced shopping time, improved entertainment choices, enhanced telephone services, and improved health care. Using estimates of the price elasticity of demand for broadband services of -1.0 and -1.5 the authors estimate total consumer benefits between $297 billion per year and $460 billion per year, comparable in size to the range of estimates of $272 billion per year to $520 billion per year for the alternative estimates of the consumer benefits deriving from specific activities. Accelerating the adoption of broadband could increase the present value of consumer benefits by a further $500 billion. The Effect of Ubiquitous Broadband Absorption on Investment, Jobs, and the U.S. Economy
R.W. Crandall and C. L. Jackson, et al,
CRITERION ECONOMICS NEW MILLENNIUM RESEARCH COUNCIL (2003)
The purpose of this study is to estimate the impact of universal broadband adoption on consumers and on investment, employment, and economic growth. The authors conclude that ubiquitous (95% of households) adoption of current generation (DSL and cable modem) technologies would generate $63.6 billion in capital expenditures ($0.97 billion per year on residential DSL and $2.38 billion per year on residential cable broadband for a total of $3.35 billion per year) over the next 19 years. This would result in a cumulative increase in GDP of $179.7 billion and an additional 61,000 jobs. The impact of more advanced technologies, such as fiber to the home, would generate an additional net $82.8 billion in capital spending ($4.34 billion per year) for a total of $146.4 billion in new capital spending over 19 years, which would result in a total of 140,000 new jobs. More rapid adoption would increase capital spending by $164.7 billion over ten years, and increase employment by 540,000 jobs by 2010. The authors estimate that broadband adoption could generate up to 664,000 jobs in upstream consumer industries, such as education, health care and consumer electronics, which would bring total job creation up to 1.2 million. Finally, the authors estimate that universal broadband could generate between $72 billion and $300 billion per year in benefits to consumers by 2021, at which time they assume broadband service to be ubiquitous. This compares to their estimates of consumers surplus in 2001-2002 of between $6.5 billion and $9.5 billion per year. An Accurate Scorecard of the Telecommunications Act of 1996: Rejoinder to the Phoenix Center Study No. 7
R.W. Crandall and H. J. Singer
CRITERION ECONOMICS (2003)
This study provides a critique of a Phoenix Center study, The Positive Effects of Competition on Employment in the Telecommunications Industry, Policy Bulletin No. 7 (2003), which argued that the 1996 Telecommunications Act added 92,000 wireline telecommunications jobs and reviews evidence on the impact of the 1996 Act on capital spending, employment, and productivity in the telecommunications sector. Crandall and Singer conclude that CLECs have not added to output, that the growth of CLECs has not brought about a reduction in prices, and that telecommunications sector productivity growth has actually declined from 5.5% per year between 1990 and 1996 to 4.9% per year between 1996 and 2001. The authors review the literature on the determinants of ILEC investment. They conclude that each additional line lost by an RBOC to a leased line reduces RBOC revenues by an average of $18.50, earnings by $15.50, and operating cash flow by $10.00, all on a per month basis. They report regression results based on data from 1996 to 2002 which suggest that RBOC capital spending decreases by $0.81 for each dollar decline in operating cash flow. This implies each line switched from an RBOC to a leased line results in a reduction in capital spending of $8.11 per year. Using BEA multiplier estimates, they conclude that each one million lines transferred from an RBOC to leased lines reduces employment by 1,300 jobs. Based on the roughly 10 million UNE-P lines in December, 2002, this implies 13,000 lost jobs to the economy. As a result, the authors conclude, much of the $60 billion invested by CLECs has been wasted. Telecom Deregulation and the Economy: The Impact of "UNE-P" on Jobs, Investment and Growth
J.A. Eisenach and T. M. Lenard
THE PROGRESS AND FREEDOM FOUNDATION V10 (2003)
This study surveys the existing literature on the effects of UNE regulations on telecommunications capital investment, and concludes that the reform of current regulations would increase investment of ILECs, CLECS, and cable operators in telecommunications network assets by between $5.37 billion and $12.74 billion per year. They then estimate the impact of increased investment on output, and jobs, concluding that UNE reform would increase GDP by between $71.5 billion and $169.5 billion and increase employment by between 470,000 and 1,115,000 jobs over five years, without considering any additional benefits the increased capital spending would have on productivity growth or equity values. Economic Implications of the FCC's UNE Decision: An Event Analysis Study
J.A. Eisenach and P. Lowengrub, et al
CAPANALYSIS GROUP, LLC (2003)
This study conducts an analysis of the impact of three separate regulatory events on the market values of companies in the telecommunications sector: the announcement by FCC Chairman Powell on January 29, 2002 that the FCC would hold a vote concerning new unbundling rules, which was interpreted by investors as increasing the probability that UNE-P rules would be relaxed; the FCC announcement on February 10, 2003 that the vote would be delayed, which was interpreted as a reversal of the earlier announcement; and the FCC vote on February 20, 2003 to approve new unbundling requirements, which dramatically decreased incentives for both incumbents and CLECs to invest in new facilities. (See: Federal Communications Commission Press Release. FCC Adopts New Rules for Network Unbundling Obligations of Incumbent Local Phone Carriers, 2003). The authors conclude that the cumulative effects of the FCC announcements reduced the market value of the incumbent phone carriers by 12%, or $19.2 billion, indicating the new rules were interpreted by the market as a disincentive to invest, which would reduce the present value of their future capital expenditures by approximately $16.3 billion. Regulatory Behavior and Competitive Entry
James Eisner and Dale E. Lehman
14th Annual Western Conference, Center for Research in Regulated Industries (June 28, 2001)
This study looks at the effect of UNE prices on CLEC facilities-based entry. The authors conclude that each one dollar increase in the statewide average UNE rate results in 3741 new CLEC facilities-based lines. UNE Prices and Telecommunications Investment
J. Haring and M. L. Rettle, et al
STRATEGIC POLICY RESEARCH (2002)
This study uses regression analysis of cross-section data to estimate the significance of factors determining RBOC investment. They find that every dollar added to the price that RBOCs can charge for leasing a loop adds 18 dollars to net plant and equipment of the ILECs. Spending to achieve this level would come to $30 billion over three years. The Disincentives for ILEC Broadband Investment Afforded by Unbundling Requirements
John Haring and Jeffrey Rohlfs
STRATEGIC POLICY RESEARCH (July 16, 2002)
The authors argue that the effect of unbundling requirements is to expropriate a valuable real option from ILECs and bestow it on competitors. The reason is that unbundling policies inherently diminish the upside potential of risky investments but do not afford comparable protection on the downside. Thereby unbundling requirements substantially reduce the expected returns from such investments, a phenomenon known as the 'real option effect.' Given the loss of this real option, ILECs infrastructure investments to support mass DSL deployment are generally unprofitable and unlikely to be made. They use the example of SBC's Project Pronto, a $6 billion planned investment to bring DSL to a 13-state market. Based on SBC's experience with Pronto Project, which was aborted in late 2001 due to new unbundling regulations imposed by state regulators, the authors estimate that unbundling requirements are likely to deter $20 billion or more of ILEC investment for mass DSL deployment. The Court's Divide
D. Lehman
REVIEW OF NETWORK ECONOMICS (2002)
Lehman reports that initial UNE rates averaged $5, or 25%, below actual, embedded costs. The author also estimates a cross-section regression model to show the impact of UNE rates on investment in high-speed networks by both ILECs and cable companies. He indicates that each dollar increase in the UNE rate will yield 5,048 new high-speed lines. Mandatory Unbundling, UNE-P, and the Cost of Equity: Does TELRIC Pricing Increase Risk for Incumbent Local Exchange Carriers?
A.T. Ingraham and J. G. Sidak
CRITERION ECONOMICS (2003)
This study tests the Jorde-Sidak-Teece hypotheses that mandatory unbundling at TELRIC prices harms ILEC investment because it increases the ILEC's cost of equity capital by increasing risk and volatility of returns. Using daily returns between January 1996 and December 2002, they estimate that the regional Bell companies experienced significantly higher stock price volatility during recessions than during expansions, resulting in an increase in the equity costs of capital for the four RBOCs of between 0.39% and 4.13%. They further test an implication of the hypothesis that the stock prices of the regional Bell companies experienced positive abnormal returns following a front page story in the Wall Street Journal on January 6, 2003 indicating that FCC Chairman Michael Powell would effectively end UNE-P by dramatically reducing the number of elements that ILECs must offer to lease to competitors on an unbundled basis at TELRIC prices. The authors conclude that the 8.4% increase ($18.8 billion) in the market value of the four regional Bell companies, and the 8.3% increase ($1.5 billion) in the market value of an index of telecommunications equipment stocks on the day of the announcement represent statistically significant positive abnormal returns. They conclude that mandatory unbundling at TELRIC prices has decreased the ILEC's incentives to invest in their own networks. Mandatory Unbundling and Irreversible Investment in Telecom Network
R. Pindyck
NBER WORKING PAPER w10287 (February 2004)
This study examines the effect of the network sharing arrangements mandated by the Telecommunications Act of 1996 on ILEC investment incentives. Robert Pindyck states that the sharing rules, though intended to promote competition, in fact reduce incentives to build new networks or upgrade existing ones due to the investments' irreversible sunk costs. Entrants do not bear these sunk costs because of the flexibility and extensive nature of the sharing opportunities, creating an asymmetric allocation of risk and return that is not accounted for in the current pricing system. Because the incumbents' network investments are readily available to competitors at rates that do not fully compensate the incumbents for the opportunity costs of their investments, these sharing rules significantly lower investment incentives. Pindyck applies option value calculations to several scenarios of TELRIC pricing to illustrate the disincentives that result from the current regulations. He concludes that current network sharing rules ignore the impact of the irreversibility of capital investment and reduce incentives to invest, negatively impacting the welfare of consumers of telecommunications services. Taxing High-Speed Services: A Quantification of the Effects on the DSL Industry and Universal Service
S. Pociask
NEW MILLENNIUM RESEARCH COUNCIL (2004)
This study estimates the impact of increasing broadband taxes by 10.9%, from 6% to 16.9%, on the transport services used by DSL providers to service their customers. After reviewing the literature, the author uses an estimate of the price elasticity of DSL demand of -1.5 to estimate that the assumed tax increase would decrease DSL revenue by $2.5 billion and after-tax DSL revenue by $10.3 billion over five years. Based on an industry average of $223,000 of revenues per employee, this implies a loss of 11,900 telecommunications industry jobs, including 7,600 union jobs, in the fifth year after the tax increase, without considering the resulting reduction in industry capital spending and further loss of jobs in other industries which would be occasioned by these reductions. Building a Nationwide Broadband Network: Speeding Job Growth
S. Pociask
TELENOMIC RESEARCH (2002)
This study estimates the impact of building a nationwide broadband network on the U.S. economy. The author concludes that building a new nationwide network would generate $270 billion, or $35.2 billion per year, in additional investment spending over an eight year period. The additional investment would expand employment by a total of 1.2 million jobs; including 166,000 jobs in the telecommunications sector, 71,700 jobs in the telecommunications equipment and customer premise equipment manufacturing industries, and 974,000 indirect jobs in other industries. Macroeconomic Effects of Telecommunications Deregulation
A. Sinai
DECISION ECONOMICS, INC.,( 2004)
This study analyzes the potential impact of the FCC Triennial Review (February 2003) and the U.S. Circuit Appeals Court decision (March 2004) on RBOC and CLEC investments. Together, the FCC Review and the Appeals Court decision resulted in the elimination of the unbundling rules in the Telecommunications Act of 1996. Assuming these changes to be permanent, the authors estimated the impact on growth, capital spending, and jobs. They conclude that these policy changes will increase real GDP by $14.8 billion annually, add an additional $6.8 billion per year in capital expenditures from 2004 to 2008, add an average of 91,000 additional jobs from 2004 to 2008, and decrease the Federal budget deficit through increased tax receipts. |
