Local loop unbundling
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Local loop unbundling (LLU) is the process of allowing telecommunications operators to use the twisted-pair telephone connections from the telephone exchange's central office to the customer premises. This local loop is owned by the incumbent local exchange carrier (ILEC).
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Policy background
Unlike most other economic liberalisation measures, LLU involves more, not less, regulation. It is considered an application of the "essential facilities" doctrine found in U.S. and, arguably, EC antitrust law.
LLU is generally opposed by the ILECs, which in most cases used to be state monopoly enterprises before the telecommunications sector was liberalised. They argue that LLU amounts to a regulatory taking, that they are forced to provide competitors with essential business inputs, that LLU stifles infrastructure-based competition and technical innovation because new entrants prefer to 'parasitise' the incumbent's network instead of building their own and that the regulatory interference required to make LLU work (e.g. to set the price) is detrimental to the market.
New entrants, on the other hand, argue that, since they cannot economically duplicate the incumbent's local loop, they cannot actually provide certain services, such as ADSL, without LLU, thus allowing the incumbent to monopolise the respective market and stifle innovation. They point out that alternative access technologies, such as Wireless local loop (WLL) have proven uncompetitive and/or impractical, and that under current pricing models, the incumbent is guaranteed a fair price for the use of his facilities, including an appropriate return on investment. Finally, they argue that the ILECs generally did not construct their local loop in a competitive, risk-fraught environment, but under state monopoly protection and using taxpayer money, which means - according to the new entrants - that ILECs ought not to be entitled to continue to extract monopoly rents from the local loop.
Most developed nations, including the USA and the EU Member States, have introduced regulatory frameworks providing for LLU. Given the above-mentioned problems, regulators face the challenging task of regulating a market that is changing very rapidly, without stifling any type of innovation, and without improperly disadvantaging any competitor.
Unbundling developments around the world
U.K.
As of February 2002, the collapse of the alternative telco market in Britain has had adverse consequences for Oftel's strategy for telecoms deregulation in the UK, and leaves British Telecom (BT) as the unchallenged dominant operator in ADSL connections, as well as traditional fixed-line telephony. As of 31 January 2005, 31,000 local loop connections have been 'unbundled' from BT operation under local loop unbundling, short of a target of 50,000. Ofcom hopes that 250,000 local loop connections will be unbundled by June 2005 and 1 million by June 2006.
U.S.
The Federal Communications Commission (FCC) requires that ILECs lease local loops to competitors at a certain pre-set wholesale price.
New Zealand
The Commerce Commission recommended against local loop unbundling in late 2003 as Telecom New Zealand offered a market-led solution. In May 2004 this was confirmed by the government, despite the intense "call4change" (http://www.call4change.co.nz) campaign by some of Telecom's competitors.
New Zealand is one of the few OECD countries that have examined and then rejected local loop unbundling.
Switzerland
Switzerland is one of a very few OECD nations that not presently provides for unbundling, because the Swiss Federal Supreme Court held in 2001 that the 1996 Swiss Telecommunications Act does not require it. The Government has enacted an ordinance providing for unbundling in 2003, and an amendment to the Act is underway in Parliament. Unbundling requests under the 2003 ordinance continue to be tied up before the Supreme Court.
Hong Kong
At the meeting of the Executive Council on 6 July 2004, the Council ADVISED and the Chief Executive ORDERED that the regulatory intervention under the current Type II interconnection (Hong Kong/Traditional Chinese:第 二 類 互 連) policy applicable to telephone exchanges for individual buildings covered by such exchanges should be withdrawn, subject to conditions documented in http://www.ofta.gov.hk/tas/interconnect/ta20040706.pdf.
WTO
Some provisions of WTO telecommunications law can be read to require unbundling:
- Sect. 5(a) of the GATS Annex on Telecommunications (1) (http://www.wto.org/english/docs_e/legal_e/26-gats_02_e.htm#articleXXIX) requires WTO Members to guarantee service suppliers "access to and use of public telecommunications transport networks ... for the supply of a service". New entrants argue that without LLU they cannot supply services such as ADSL.
- Sect. 2.2(b) of the 1998 Reference Paper (2) (http://www.wto.org/english/tratop_e/serv_e/telecom_e/tel23_e.htm), to which some Members have subscribed, requires "sufficiently unbundled interconnection" with major providers. However, the Paper's definition of interconnection appears to exclude LLU.
- Sect. 1 of the Reference Paper requires Members to maintain "appropriate measures ... for the purpose of preventing [major] suppliers ... from engaging in or continuing anti-competitive practices." New entrants argue that such practices include not giving competitors access to facilities essential to market entry, such as the local loop.
The question has not been settled before a WTO judicial body, and, at any rate, these obligations only apply where the respective WTO Member has committed itself to open its basic telecommunications market to competition. About 80 (mostly developed) Members have done so since 1998.
References
- OECD, Developments in Local Loop Unbundling (http://www.oecd.org/dataoecd/25/24/6869228.pdf)
- EU telecommunications liberalization framework (http://europa.eu.int/comm/competition/liberalization/legislation/#telecom)