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> **Federal Communications Commission**

**Office of Plans and Policy**

**445 12th Street, SW**

**Washington, DC 20554**

# 

# 

# 

# OPP Working Paper Series

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  36             The Potential Relevance to the United States of the
                 European Union's Newly Adopted Regulatory Framework for
                 Telecommunications

  -------------- --------------------------------------------------------

July 2002

> J. Scott Marcus

The Potential Relevance to the United States of the European Union's
Newly Adopted Regulatory Framework for Telecommunications

J. Scott Marcus\*

<smarcus@fcc.gov>

Federal Communications Commission

Office of Plans and Policy

Washington, DC 20554

July 4, 2002

OPP Working Paper No. 36

> The FCC Office of Plans and Policy's Working Paper Series presents
> staff analysis and research in various states. These papers are
> intended to stimulate discussion and critical comment within the FCC,
> as well as outside the agency, on issues in communications policy.
> Titles may include preliminary work and progress reports, as well as
> completed research. The analyses and conclusions in the Working Paper
> Series are those of the authors and do not necessarily reflect the
> view of other members of the Office of Plans and Policy, other
> Commission Staff, or any Commissioner. Given the preliminary character
> of some titles, it is advisable to check with the authors before
> quoting or referencing these working papers in other publications.

\*The author is deeply indebted to Donald K. Stockdale, Jr. of the
Office of Plans and Policy (OPP) of the FCC, and has borrowed
extensively from his work. Donald Abelson (FCC International Bureau
\[IB\]) provided invaluable guidance and support. Matthew Conway
(recently of the UK Department of Trade and Industry \[DTI\]) provided
an extensive and extraordinarily helpful review. The author is also
grateful for the helpful comments and suggestions of many other
colleagues on both sides of the Atlantic, including Patricia Cooper (FCC
IB), Sherille Ismail (FCC OPP), Peter Scott (European Commission), Paul
Verhoef (European Commission), Tracey Weisler (FCC IB), and Irene Wu
(FCC IB).

This document is available on the FCC's World Wide Web site at
<http://www.fcc.gov/opp>.

# 

# 

# 

# Abstract

Technological convergence poses daunting challenges to regulators
everywhere. It is difficult for a regulatory system based on statutory
definitions of networks and services to adapt with enough speed and
flexibility to changes driven by technology and the marketplace. The
European Union recently adopted an entirely new regulatory framework in
an effort to deal with convergence in a different way. It is too soon to
know how well the system will work in practice, but it represents a
promising experiment on a dramatically large scale. The FCC could
benefit from close study of both the theoretical underpinnings and the
actual implementation of the European system.

Contents

Abstract [ii](#abstract)

Convergence: A Challenge to the Regulator
[1](#convergence-a-challenge-to-the-regulator)

Convergence and the US Legal and Regulatory Framework
[3](#convergence-and-the-us-legal-and-regulatory-framework)

Legal Framework of Telecommunications Regulation
[3](#legal-framework-of-telecommunications-regulation)

The *Computer Inquiries* [4](#the-computer-inquiries)

The Regulatory Framework and the Internet
[7](#the-regulatory-framework-and-the-internet)

Antitrust Analysis in the US [7](#antitrust-analysis-in-the-us)

Investigative Authority and Access to Information
[9](#investigative-authority-and-access-to-information)

Deregulation [10](#deregulation)

Centralization versus Decentralization
[10](#centralization-versus-decentralization)

The New European Regulatory Framework
[12](#the-new-european-regulatory-framework)

Market Definition [13](#market-definition)

Significant Market Power (SMP) [14](#significant-market-power-smp)

Access Requirements [15](#access-requirements)

Investigative Authority and Access to Information
[16](#investigative-authority-and-access-to-information-1)

Deregulation [16](#deregulation-1)

Centralization versus Decentralization
[16](#centralization-versus-decentralization-1)

Benefits [17](#benefits)

Comparative Results [19](#comparative-results)

Computer Inquiries [19](#computer-inquiries)

Competitive Carrier Proceeding [19](#competitive-carrier-proceeding)

Streamlining the Regulation of AT&T
[21](#streamlining-the-regulation-of-att)

Obligations for Interconnection, Resale of Retail Services, Unbundled
Network Elements (UNEs), and Collocation
[22](#obligations-for-interconnection-resale-of-retail-services-unbundled-network-elements-unes-and-collocation)

Entry of Bell Operating Companies into Long Distance
[23](#entry-of-bell-operating-companies-into-long-distance)

Rates for Cable Service [24](#rates-for-cable-service)

Implementation Challenges [25](#implementation-challenges)

The Role of the European Commission versus that of the NRAs
[25](#the-role-of-the-european-commission-versus-that-of-the-nras)

Emerging or Nascent Services [25](#emerging-or-nascent-services)

Relevance to the United States [27](#relevance-to-the-united-states)

References [29](#references)

# Convergence: A Challenge to the Regulator

Not so long ago, specific services and the associated networks were
closely intertwined. Telecommunications networks delivered voice
telephony. Broadcast systems delivered radio and television. The
introduction of cable television and satellite transmission resulted in
only a marginal increase in complexity.

Today, one can no longer say that the service and the network are
inextricably intertwined. Voice telephony is delivered over wireline
telecommunications, wireless, cable and the Internet. Radio and
television programming are delivered over radio, cable and, to a limited
but growing degree, the Internet. Indeed, the Internet is fundamental to
the challenges of convergence, insofar as it totally decouples the
application from the underlying mechanisms of transmission.

Convergence poses vexing problems for the regulator. In the US, the
Communications Act of 1934[^1] (the statute governing telecommunications
regulation) provides for substantially different treatment for wireline,
mobile wireless, and cable-based services. To the extent that the Act
fails to account for present technical and market realities, notably
including the rapid growth of the Internet, there may be the risk of
irrational results, regulatory arbitrage, or distortions in the
development of technology or coverage.

Convergence is by no means confined to the United States. It is a global
phenomenon. Responses, however, have varied from region to region.

The European Union's telecommunications regulatory framework adopted in
March 2002 represents a bold and innovative response to the challenges
of convergence.[^2] It recognizes that much of telecommunications
regulation exists as a means of addressing potential and actual abuses
of market power. With that in mind, the EU attempts a comprehensive,
technology-neutral approach to regulation, which borrows concepts of
market definition and of market power from competition law.

This paper assesses potential strengths and weaknesses of the EU
approach, and considers its possible relevance to the very different
legal and regulatory framework in the United States.

The paper addresses the following questions, among others. First, why is
it that the two systems appear to frequently generate similar results?
When might the two systems generate different results, and why?

Perhaps most intriguing of all: *Why* do we regulate the things that we
regulate? What light does the new EU regulatory framework shed on this
question?

In this paper, we consider first the U.S. telecommunications regulatory
system, and then that of the European Union. We consider each system in
terms of its regulatory framework, its competition law framework, the
ability of regulators to obtain the information they need and to protect
sensitive third party data, the support for deregulation, and the
balance struck between centralization and decentralization. We then
evaluate specific outcomes of the U.S. regulatory system, and then pose
the question in each case as to whether the new EU system could
potentially generate similar outcomes. We proceed to review briefly
certain implementation challenges to the new EU system, and close by
considering the potential relevance of the new European framework to
regulatory practice in the United States.

# Convergence and the US Legal and Regulatory Framework

As previously noted, convergence has been widely recognized as
representing a regulatory challenge. Particularly vexing issues relate
to the regulatory treatment of broadband services over cable and
wireline media, and potentially of IP telephony.

For example, a recent report from the National Academy of Sciences
noted:

> The Telecommunications Act of 1996, which for the most part assumes
> the continued existence of a number of distinct services that run over
> distinct communications technologies and separate infrastructure, does
> not fully reflect the convergent nature of broadband (different
> communications infrastructures are able to deliver a similar set of
> services using a common platform, the Internet) ....[^3]

In this section, we consider the legal framework for telecommunications
regulation in the United States.[^4] We then proceed to consider merger
and competition law in the U.S., in order to gain a comparative sense of
how it relates to equivalent practice in Europe.

## Legal Framework of Telecommunications Regulation

Telecommunications in the U.S. is primarily governed by the
Communications Act of 1934[^5], which was substantially amended, most
notably by the Telecommunications Act of 1996.[^6]

Within the Act, Title I establishes the structure and jurisdiction of
the FCC, and also provides definitions used throughout the Act. Title II
addresses the regulation of Common Carriers, which represent the
traditional world of telephony. Title III concerns wireless services and
broadcast Radio and television, while Title VI addresses the regulation
of Cable Communications.

Title II contains a wide range of obligations applicable to
telecommunications common carriers. These provisions govern, for
instance, the prices they may charge for services[^7], obligations to
publish those prices in tariffs[^8], limitations on their ability to
discriminate[^9], and obligations to interconnect with other carriers
and to provide collocation and Unbundled Network Elements[^10]. Notably,
there is a prohibition against Bell Operating Companies (BOCs) offering
interLATA (long distance) services within their historic service areas
until they have demonstrated that they have sufficiently opened their
local markets to telecommunications competition within the state in
question.[^11]

These obligations are not applicable to wireless broadcasters or cable
operators (except to the extent that they offer telecommunications
services over their facilities). Broadcasters and cable operators are,
however, subject to a different set of rules, many of which relate to
the content that they carry, or to the spectrum over which wireless
services operate.[^12]

Under the Act, organizations that provide telecommunications services
are held to be common carriers and thus subject to Title II regulation.
*Telecommunications service* is defined as "the offering of
telecommunications for a fee directly to the public, or to such classes
of users as to be effectively available directly to the public,
regardless of the facilities used."[^13] *Telecommunications*, in turn,
is defined as "the transmission, between or among points specified by
the user, of information of the user\'s choosing, without change in the
form or content of the information as sent and received."[^14] The
definitional category turns on the *nature of the service that is
offered*, not necessarily on the technology over which it is
offered.[^15]

### The *Computer Inquiries*

The *Computer Inquiries* were a series of FCC regulatory proceedings
that addressed the perceived convergence between telecommunications and
computing.[^16] The Computer Inquiries strongly influenced the
Telecommunications Act of 1996; at the same time, certain of the orders
remain in effect today.

In *Computer I,* the Commission made two decisions that laid the
foundation for its regulatory approach to services provided by computer
data processing service providers. First, the Commission concluded that
the public interest would not be served by regulating such data
processing services, since the provision of such services was deemed to
be "essentially competitive."[^17] Second, while the Commission
determined that the participation of common carriers in the data
processing market would benefit consumers, it expressed concern that
common carriers might engage in unfair competition. The dangers of
unfair competition, the Commission explained, relate "primarily to the
alleged ability of common carriers to favor their own data processing
activities by discriminatory services, cross-subsidization, improper
pricing of common carrier services, and related anticompetitive
practices and activities."[^18] Accordingly, the Commission concluded
that there was a need for competitive safeguards, and it required common
carriers seeking to offer data services to do so through a structurally
separate affiliate.[^19] These safeguards were intended to ensure that
carriers would not "give any preferential treatment to their data
processing affiliates" and that competing data service providers would
therefore have nondiscriminatory access to the underlying communications
components used in providing their services.[^20]

The Commission continued its examination of these issues in the
*Computer II* proceeding, which it initiated in 1976.[^21] In *Computer
II*, the Commission reaffirmed its basic regulatory approach to the
provision of computer data services, but refined its analysis. In
particular, the Commission, attempting to define and distinguish
regulated telecommunications services and unregulated data services,
created the categories of *basic* services and *enhanced* services.[^22]
The Commission also specified in greater detail the extent of structural
separation required between the incumbent telephone provider and its
enhanced services affiliate.[^23]

In 1986, the Commission further extended this line of reasoning with its
*Computer III* decision.[^24] *Computer III* offered an alternative set
of competitive safeguards to protect competitive providers of enhanced
services. Specifically, the Commission gave AT&T and the BOCs that
sought to provide enhanced services the option of continuing to comply
with *Computer II's* strict separate subsidiary requirements, or
alternatively of complying with new "nonstructural safeguards."

Finally, in order to prevent any improper shifting of costs from
unregulated to regulated activities, the Commission, in its *Joint Cost*
proceeding,[^25] adopted new, and more detailed, accounting rules that
applied to all incumbent local exchange carriers and to dominant
interexchange carriers.[^26]

Thus, in the Computer Inquiries, the Commission reaffirmed its
commitment to its essential policy of regulating only the common carrier
*basic* transmission service, while exempting *enhanced* services (which
represented a blending of computation and communications) from common
carrier regulation. Enhanced services did not themselves *provide*
bottleneck facilities, but they *depended* on bottleneck facilities
controlled by the traditional carriers. The FCC therefore concluded that
enhanced services *per se* did not need to be regulated as basic
(telecommunications) services. The equipment necessary to implement
enhanced services was available on the open market. Barriers to entry
were potentially low. The FCC wisely chose to let market forces drive
the evolution of enhanced services, without regulatory interference.

At the same time, the Commission continued to emphasize the need for
competitive safeguards to ensure that common carriers did not use their
bottleneck facilities to compete unfairly against unaffiliated enhanced
service providers.

The Telecommunications Act of 1996 formalized and codified the
distinction between basic services (renamed *telecommunication
services*) and enhanced services (renamed *information services*). The
Act defines an information service as "the offering of a capability for
generating, acquiring, storing, transforming, processing, retrieving,
utilizing, or making available information via telecommunications, and
includes electronic publishing, but does not include any use of any such
capability for the management, control, or operation of a
telecommunications system or the management of a telecommunications
service."[^27]

### The Regulatory Framework and the Internet

The *Computer I, II* and *III* rulings and their embodiment in the
Telecommunications Act of 1996 represent the underpinnings of U.S.
deregulatory policy toward the Internet. On the one hand, they led to
the view that the Internet should be viewed as an enhanced service, and
that the Internet consequently should not itself be subject to
significant regulation. On the other hand, they sought to ensure that
the traditional carriers would not be permitted to withhold or to
discriminate in the provision of the building blocks essential to the
creation of the Internet.

In 1998, the FCC prepared a report to Congress on the likely impact of
the Internet, and of Internet telephony, on contributions to the
Universal Service Fund (USF).[^28] The USF is a mechanism whereby the
price of telecommunications service in areas of low teledensity (*e.g.*
rural areas) is subsidized in order to ensure that it is affordable to
all. A number of senators, notably including Senator Stevens of Alaska,
were concerned that unregulated Internet services, which were not
obliged to contribute to the USF, would ultimately undermine the
financial viability of the USF.

The Stevens Report confirmed that Internet access services should
continue to be viewed as information services, consistent with
longstanding FCC practice. It also analyzed IP telephony at length. In
doing so, it established many of the underpinnings of current regulatory
practice in the U.S. as regards converged services in general and the
Internet in particular.

It is noteworthy that a telecommunications bill enacted a scant six
years ago explicitly references the Internet in only two places -- in
section 230 (the "Communications Decency Act"), and in referencing the
support of advanced services to schools and libraries in section 254(h)
of the Act.[^29] This dramatically illustrates the pace at which the
technology and the marketplace have progressed in the intervening years.

## Antitrust Analysis in the US

In the U.S., the relationship between telecommunications regulation and
antitrust is complex.

The FCC, as the independent regulatory body for communications, has
statutory responsibility in a number of instances for determining the
permissible portion of a national or local market that a single entity
may own. It also has responsibility for restricting certain forms of
cross ownership (for instance, between broadcast television and
newspaper publishing in the same local market).

In the U.S., antitrust concerns sometimes arise as a result of the
conduct of a single firm. The American attitude to large corporations
has always been somewhat ambivalent -- we worry about the power that
large corporations wield, and yet at the same time we appreciate the
potential benefits associated with the economies of scale and scope that
they command. Consequently, it is not held to be a problem for a firm to
possess market power; rather, what is problematic is the *abuse* of that
market power.

Somewhat different antitrust issues may present themselves when two
companies attempt to merge, particularly when the merger would
dramatically expand their presence in a relevant market. One of two U.S.
agencies will take the lead in investigating any merger -- either the
Federal Trade Commission (FTC), or the Department of Justice (DoJ).[^30]
In either case, the relevant agency determines whether the merger would
constitute a violation of competition law.[^31] In parallel with this
evaluation, the FCC assesses the same merger using a very different
standard: Does it serve the public interest?[^32]

The DoJ/FTC Horizontal Merger Guidelines set forth the methodology that
these enforcement agencies will apply in analyzing horizontal mergers
(mergers between participants in the same industry).[^33] The guidelines
attempt to provide a rigorous economic methodology for evaluating the
prospective impact of a merger.

Under the Guidelines, one begins by defining relevant markets. A
relevant product market is defined as "...a product or group of products
such that a hypothetical profit maximizing firm that was the only
present and future seller of those products likely would impose at least
a 'small but significant and nontransitory increase in price'."[^34] In
applying this definition, the antitrust authorities employ a "smallest
market principle." That is, they begin by identifying a narrow group of
products that includes a product or products of the merging firms. They
then consider the effect of a "small but significant and nontransitory"
increase in price on a hypothetical monopolist that was the sole
supplier of that product or products. If the price increase would result
in such a large reduction in demand that the price increase would have
been unprofitable, then the next best substitute or substitutes would be
added to the relevant product group. The agency applies this procedure
iteratively until it has identified the narrowest group of products
where the price increase would be profitable. This group of products
would then constitute the relevant product market.[^35]

The agency then proceeds to identify participants in the relevant
product market[^36], and to determine the market shares of the market
participants (typically based on dollar sales or shipments). A shorthand
tool that is often used to assess the impact of a prospective merger is
the *Herfindal-Hirschman Index (HHI)*. "The HHI is calculated by summing
the squares of the individual market shares of all the
participants."[^37] In a perfectly monopolized market, the HHI would be
10,000; in a market with a vast number of tiny competitors, it would
approach zero. The HHI is thus a measure of *relative* *concentration*.
In a highly concentrated market (HHI greater than 1,800 after a merger),
a merger that results in an increase in the HHI of 100 or more is felt
*ceteris paribus* to "potentially raise significant competitive
concerns"[^38].

With this information in hand, the agency proceeds to analyze the likely
competitive effects of a proposed merger, considering all relevant
factors, including the likelihood of subsequent competitive entry, and
any beneficial efficiencies that might flow from the merger.

The DoJ or FTC will coordinate with the FCC insofar as possible (see
below) during a merger review; however, there is no assurance that
FTC/DoJ market definitions and competitive threats will be directly
reflected in FCC regulatory policy.

## Investigative Authority and Access to Information

In assessing a merger, one needs a great deal of information. Typically,
much of the relevant information is in the hands of the merging parties,
not initially in those of the competition authorities.

The Department of Justice is an investigative agency. When it needs
information relevant to a merger, it generally issues a *Civil
Investigative Demand (CID),* which has legal force similar to that of a
subpoena. Information received pursuant to a CID is maintained in strict
confidence, much as would be the case in a criminal prosecution.

The FCC is not an investigative agency, but rather an administrative
agency subject to the Administrative Procedure Act (APA)[^39].
Nonetheless, it has full statutory authority to use compulsory process
to obtain information when necessary.[^40] Furthermore, the parties to a
merger will tend to be motivated to respond in order to gain permission
to consummate the transaction.

In general, external documents received in connection with a "permit and
disclose" proceeding must be placed in the public record; however,
sensitive documents can be made subject to protective order.[^41] Under
the APA, all participating parties are in general entitled to see any
material submitted by any other party to proceeding; consequently, third
parties may be reluctant to provide information, especially where there
is threat of retaliation from the merging parties.

## Deregulation

A number of specific deregulatory initiatives are described later in
this paper. The primary statutory *mechanisms* for deregulation are the
FCC\'s *forbearance authority*, and the *Biennial Review*.

The Telecommunications Act of 1996 directs the FCC to *forbear*
(refrain) from applying any provision of the Act where analysis of the
relevant market leads the FCC to conclude that associated charges are
neither unreasonable nor discriminatory, and where forbearance does not
harm the consumers and is generally in the public interest.[^42] In
doing so, the FCC must specifically consider whether forbearance will
promote competitive market conditions.

The FCC is also required to conduct a Biennial Review of all of its
regulations issued pursuant to the Act to determine whether any are "no
longer necessary in the public interest as the result of meaningful
economic competition".[^43] The Biennial Review seeks to ensure that any
deregulatory opportunities will be examined not less frequently than at
two year intervals.

## Centralization versus Decentralization

The United States is a federal system. The Federal government has
responsibility for interstate communications, while the states have
responsibility for activities within their state. In the case of the
Internet, the FCC has taken the position that its traffic is interstate,
and thus not subject to state or local jurisdiction.

In practice, the relationship is complex. States regulate many aspects
of local telephone competition, including local interconnection
agreements. Local or municipal governments generally establish franchise
arrangements for cable operators. This division of authority is
sometimes problematic, but it also is sometimes a source of strength and
resiliency for the U.S. regulatory system, enabling support for local
preferences, and also providing a more flexible vehicle in some cases
for local experimentation with new and innovative regulatory models.

Convergence places special challenges on these complex
national/state/municipal interrelationships. First, it impacts the
players in somewhat different ways -- and their interests are not fully
aligned. Second, it slows the speed with which regulation can respond to
changes in the marketplace, because regulation must adapt in different
layers.

# The New European Regulatory Framework

The European Union has been playing a progressively larger role in the
regulation of telecommunications. In March 2002, the European Union
adopted a new regulatory framework that effectively standardizes the
regulatory framework for all EU member states.

An unusual confluence of factors appears to have motivated the EU to
take a fresh and daring look at telecommunications regulation. First, EU
regulations required a comprehensive regulatory review by the end of
1999. Second, the EU *per se* was not burdened with as long a history of
preexisting regulation as is the United States. Moreover, most EU Member
States have migrated only in the last few years from government
ownership of telecommunications, primarily on a monopoly basis, to
private ownership and competition. They are, in consequence, acutely
aware of the benefits of competitive free market mechanisms. They are
technologically sophisticated, and recognize the impact of convergence.
They also understand that, in the European context, even where there is
consensus for change, it can be time-consuming or challenging to
translate that consensus into legislation -- therefore, when they make a
change, it has to last for quite some time. Finally, there are ongoing
tensions within the European Union between a strong internal-market role
for the European Commission, the executive arm of the E.U., and freedom
for Member States to act as they wish. These tensions can be
particularly acute when a sector, such as telecommunications, is still
in the process of opening to competition for the first time. All of
these factors contributed to the willingness of the EU to make so
substantial a break with the past.

The Europeans recognized that the bulk of all telecommunications
regulation deals, in one way or another, with responses to market power.
In particular, they associate the possession of *Significant Market
Power (SMP)* with obligations that could include transparency[^44],
non-discrimination[^45], accounting separation[^46], access to and use
of specific network facilities (including Unbundled Network Elements
\[UNEs\], wholesale obligations, collocation, and interconnection)[^47],
price controls and cost accounting[^48], making necessary leased lines
available[^49], and carrier selection and pre-selection[^50].

The basic concept of the regulation is simple and straightforward. The
European Commission will begin by defining a series of relevant
telecommunications markets, and by providing a set of guidelines for
determining the presence or absence of market power, all based on
methodologies borrowed from competition law and economics. Within each
market, the National Regulatory Authority (NRA) in each member state
will determine whether one or more parties possess Significant Market
Power (SMP). If SMP exists, the NRA will impose appropriate obligations
from the set noted in the previous paragraph, taking into account the
specifics of the particular marketplace in question.[^51] These
obligations are imposed *ex ante*, based on the presence of SMP -- it is
not necessary to demonstrate that market power has been abused.
Conversely, if the NRA fails to find SMP, then any such obligations that
may already be in place must be rolled back.

In doing so, the EU seeks to move completely away from
technology-specific and service-specific legislation. This is a
significant and dramatic innovation.

We now consider each element of the framework in greater detail.

## Market Definition

In the new framework, it is the European Commission, the executive
branch of the European Union, that provides a Recommendation on Relevant
Product and Service Markets, "in accordance with the principles of
competition law."[^52] Annex I of the Framework Directive provides an
initial list of such markets.

National Regulatory Authorities then take the European Commission's
recommendation and define markets within their geographic territories.
They are to take "the utmost account" of the recommendation, but the
Framework Directive also envisions that NRA definitions might diverge
from those of the European Commission in some instances.

The European Commission may also adopt a Decision identifying
transnational markets, markets that span all or a substantial portion of
the EU.[^53] In these markets, additional procedures are required to
ensure that NRAs work in concert with one another.

The process for market definition is described in a document referred to
as "the Guidelines"[^54]. The Guidelines adopt a common framework for
National Regulatory Authorities (NRAs) and National Competition
Authorities (NCAs), with the recognition that this should ideally lead
to equivalent market definitions; however, the Guidelines recognize that
the European Commission or national competition authorities may in some
instances diverge from market definitions established by European
Commission or national regulators for good and valid reasons. They are
dealing with somewhat different issues.

European competition law is similar to that of the United States as
regards market definition. The economic procedure employed is based on a
hypothetical monopolist test, assuming a "small but significant, lasting
increase" of 5% to 10% in price of a product or service.[^55] The
relevant market then includes all products and services that are readily
substitutable for the services in question.[^56]

This market definition immediately addresses a number of fundamental
convergence issues, and technological neutrality is a direct
consequence. As the Guidelines note:

> Although the aspect of the end use of a product or service is closely
> related to its physical characteristics, different kind of products or
> services may be used for the same end. For instance, consumers may use
> dissimilar services such as cable and satellite connections for the
> same purpose, namely to access the Internet. In such a case, both
> services (cable and satellite access services) may be included in the
> same product market. Conversely, paging services and mobile telephony
> services, which may appear to be capable of offering the same service,
> that is, dispatching of two-way short messages, may be found to belong
> to distinct product markets in view of their different perceptions by
> consumers as regards their functionality and end use.[^57]

## Significant Market Power (SMP)

Per the Framework Directive, "\[a\]n undertaking shall be deemed to have
significant market power if, either individually or jointly with others,
it enjoys a position equivalent to dominance, that is to say a position
of economic strength affording it the power to behave to an appreciable
extent independently of competitors, customers and ultimately
consumers."[^58]

The Guidelines distinguish between determining market power *ex post*
and *ex ante*. In an *ex ante* world, the only meaningful measure of
market power is the ability "... of the undertaking concerned to raise
prices by restricting output without incurring a significant loss of
sales or revenues."[^59]

As a proxy for market power, the Guidelines suggest computing market
shares, typically based on sales volume or sales value. SMP is normally
viewed as being a factor only where the market share exceeds 40%. Where
the market share exceeds 50%, SMP is assumed to be present.[^60]

This notion of concentration is roughly equivalent to that of a highly
concentrated market, as described in the DoJ/FTC guidelines. A market
share of 40-50% would imply an HHI of at least 1,600 to 2,500, assuming
that all other market participants were extremely small. Note that an
HHI of 1,800 or greater implies a highly concentrated market to the DoJ.
Thus, the level of concentration at which the US and EU would consider a
market to be problematic are in the same general range.

The Guidelines also deal with market power in upstream or downstream
vertically related markets[^61], and with collective dominance.[^62]

## Access Requirements

As previously noted, the EU Framework requires NRAs to impose
appropriate remedies *ex ante* from the list of possible options[^63]
where one or more firms are found to have SMP, but to eliminate
restrictions absent SMP:

> Where a national regulatory authority concludes that the market is
> effectively competitive, it shall not impose or maintain any of the
> specific regulatory obligations referred to in paragraph 2 of this
> Article. In cases where sector specific regulatory obligations already
> exist, it shall withdraw such obligations placed on undertakings in
> that relevant market. An appropriate period of notice shall be given
> to parties affected by such a withdrawal of obligations.
>
> Where a national regulatory authority determines that a relevant
> market is not effectively competitive, it shall identify undertakings
> with significant market power on that market ... and the national
> regulatory authority shall on such undertakings impose appropriate
> specific regulatory obligations referred to in paragraph 2 of this
> Article or maintain or amend such obligations where they already
> exist.[^64]

## Investigative Authority and Access to Information

When the European Commission assesses a merger, it has full authority to
issue information requests with subpoena-like legal force, and it also
has the obligation to protect confidential information that it receives
pursuant to those requests. In these regards, its authority is similar
to that of the U.S. DoJ or FTC.

The new framework recognizes the need for regulators to obtain data on
which to base market definitions and determination of SMP. It accords
NRAs rights and responsibilities equivalent to those of NCAs:

> Member States shall ensure that undertakings providing electronic
> communications networks and services provide all the information,
> including financial information, necessary for national regulatory
> authorities to ensure conformity with the provisions of, or decisions
> made in accordance with, this Directive and the Specific Directives.
> These undertakings shall provide such information promptly on request
> and to the timescales and level of detail required by the national
> regulatory authority. The information requested by the national
> regulatory shall be proportionate to the performance of that task. The
> national regulatory authority shall give the reasons justifying its
> request for information.[^65]

The EU regulatory framework also establishes parameters whereby NRAs can
exchange the data that they thus obtain with NCAs, the European
Commission, and other NRAs, but only to the extent necessary and
proportionate to enable implementation of the Framework.[^66]

## Deregulation

Under the new Framework, regulation and deregulation are handled
symmetrically. Where SMP is present, appropriate remedies must be
applied. Where SMP is absent, those remedies may not be applied, and if
already present must be removed.

No specific timeframe is specified.

## Centralization versus Decentralization

If the U.S. is a federal system, the E.U. might be said to be more akin
to the U.S. under the Articles of Confederation, particularly in regard
to areas such as foreign policy, defense and internal security.[^67] The
European historical experience has differed from that of the United
States, and the European system is in consequence significantly less
centralized than that of the U.S. today in many respects.

The tensions of centralization and decentralization that have been
fought over in the U.S. for many decades are arguably even more intense
in the European context. In most respects, EU member states are
sovereign states. They work together in certain ways in order to achieve
specific goals, such as uniform competition policy or a single currency.

In establishing a common regulatory framework, it was necessary to
delicately balance the prerogatives of NRAs against the needs of the
single market, and the prerogatives of the European Commission in
maintaining that single market.

The balance that was struck preserves the ability, in general, of NRAs
to operate unilaterally, but with notice to the European Commission and
to other NRAs. The European Commission retains the ability to require
that a market definition or a designation of SMP be withdrawn where it
would create a barrier to the single European marketplace, or would be
incompatible with the EU policy objectives embodied in Article 8 of the
Framework Directive.[^68]

A particularly knotty case relates to transnational markets, markets
that span all or a substantial portion of the EU. "In the case of
transnational markets ..., the national regulatory authorities concerned
shall jointly conduct the market analysis taking the utmost account of
the Guidelines and decide on any imposition, maintenance, amendment or
withdrawal of regulatory obligations referred to in paragraph 2 of this
Article in a concerted fashion."[^69]

For there to be tension between centralization and decentralization in
the implementation of the new telecommunications regulatory framework in
the E.U. is perhaps not surprising -- similar tensions have existed in
many political systems, and in many eras.[^70]

## Benefits

There is much to be said for the new EU framework.

It attempts to address convergence by using fluid market definitions
instead of enshrining technology-based definitions within the law. It
thus offers the potential of regulating at a velocity that approaches
that of the changes in underlying technology and marketplace.

The notion of regulating in a completely technology-neutral fashion is
promising. If one service is substitutable for another, then it should
be subject to roughly the same regulatory constraints, irrespective of
the technologies used to deliver the services. This is a very elegant
and appealing concept; however, it does not sit well with regulatory
practice in the U.S., as we shall see.

At the same time, the proof of this pudding must lie in its eating --
and significant questions remain. We take up this topic later in the
paper.

# Comparative Results

It is impossible to say exactly how the new European framework will be
applied in practice, either by the European Commission or by the NRAs.
It is nonetheless an interesting thought exercise to consider how it
*might* be applied, and to compare the results to those of U.S.
regulatory practice in a number of specific instances.

It is perhaps not meaningful to ask, "What would the Europeans do?" More
meaningful is to ask, "Is this a plausible outcome in the context of the
European framework?"

The examples that follow are drawn from well-established precedent,
particularly in the area of traditional telecommunications services. We
necessarily refrain from commenting on matters currently before the
Commission.

## Computer Inquiries

We noted earlier that, in the Computer Inquiries, the FCC ruled that
enhanced services should not be regulated because they implicated no
bottleneck facilities, and did not entail a significant risk of
monopolization. This notion was carried forward in the
Telecommunications Act of 1996, with its introduction of the concept of
information services, and represents a key foundation block for
deregulatory U.S. policies toward the Internet.

This result would appear to be entirely consistent with the EU
regulatory framework. In the absence of SMP, none of the remedies for
SMP should be applied.

## Competitive Carrier Proceeding

In 1979, the FCC initiated the *Competitive Carrier* proceeding[^71] to
consider how its regulations should be modified for new firms entering
formerly monopoly markets. In a series of orders, the Commission
distinguished two kinds of carriers -- those with individual market
power (dominant carriers) and those without market power (nondominant
carriers).[^72] The Commission found AT&T's Long Lines Department, which
provided interstate long-distance services, to be dominant in the
interstate, long-distance market (including the long-distance private
line market). It also found AT&T's 23 local telephone companies as well
as independent, incumbent local telephone companies to be dominant,
because they "possess control of essential facilities."[^73] The
Commission further found that specialized common carriers and resale
carriers, both of which provided interstate, long-distance services in
competition with AT&T, to be nondominant.

The Commission determined that nondominant carriers were unable to
charge unreasonable rates or to engage in discriminatory practices that
would contravene the requirements of the Communications Act, both
because they lacked market power and because affected customers always
had the option of taking service from an incumbent dominant carrier
whose rates, terms, and conditions for interstate services remained
subject to close scrutiny by the Commission.[^74] Accordingly, the
Commission gradually relaxed its regulations of nondominant carriers.
Specifically, the Commission eliminated rate regulation for nondominant
carriers and presumed that tariffs filed by nondominant carriers were
reasonable and lawful. It also streamlined tariff filing requirements,
which, *inter alia*, had required dominant carriers to file tariffs with
notice periods of up to 120 days, and to submit cost support with their
tariffs. For nondominant carriers, in contrast, the Commission required
only that tariffs be filed on 14 days notice and did not require any
cost support. Finally, the Commission reduced existing Section 214
requirements, which required dominant carriers to file a request for
authorization before constructing new lines; under the Commission's
streamlined rules, nondominant carriers only had to file a simple,
semi-annual report on circuit additions, but did not have to obtain
prior authorization.[^75]

Again, these regulatory outcomes would appear to be entirely consistent
with European thinking. Retail tariff regulations flow from the
possession of SMP (which is roughly equivalent to U.S. concepts of
market dominance); in the absence of SMP, there should be neither rate
regulation nor the obligation to publish retail tariffs.[^76]

## Streamlining the Regulation of AT&T

As competition developed in the interstate, long-distance market, the
Commission initiated two proceedings to determine whether it should
streamline its regulation of AT&T, the sole dominant long-distance
carrier. In 1990, the Commission initiated the *Interstate Interexchange
Competition* proceeding to consider streamlining the regulation of
certain AT&T services.[^77] After analyzing the level of competition for
particular classes of long-distance service, the Commission found that
certain services provided by AT&T had become "substantially
competitive," and accordingly, it streamlined the regulation of those
services.[^78] Specifically, for services that it found to be subject to
substantial competition, the Commission removed those services from
price cap regulation (i.e., eliminated rate regulation), reduced the
notice period for tariff filings relating to those services; and
eliminated the cost-support requirement for those tariffed
services.[^79] In addition, the Commission permitted AT&T and other
interstate long-distance carriers to offer services pursuant to
individually negotiated contracts (i.e., to offer contract
tariffs).[^80]

Subsequently, AT&T filed a petition to be reclassified as a nondominant
carrier in the provision of interstate interexchange services. In 1995,
the Commission granted AT&T's motion, based on its finding that "AT&T
lacked individual market power in the interstate, domestic,
interexchange market."[^81] Thus, the Commission freed AT&T from price
cap regulation for all of its domestic, interstate, interexchange
services, subjected it to the same streamlined tariffing and Section 214
regulations that applied to its nondominant competitors, and eliminated
certain accounting and reporting requirements applicable only to
dominant carriers.[^82] In 1986, the Commission reclassified AT&T as
nondominant in the market for international services.[^83]

Once again, this seems to be altogether consistent with European
thinking. Once SMP has been alleviated, competitive safeguards are no
longer necessary and should be eliminated.

## Obligations for Interconnection, Resale of Retail Services, Unbundled Network Elements (UNEs), and Collocation

Section 251 of the Act provides for a very modest series of obligations
for local exchange carriers in general[^84] (including *competitive
local exchange carriers \[CLECs\]*), but an extensive series of
additional obligations for incumbent local exchange carriers
(ILECs)[^85]. Notable among these are obligations to provide:

> \(2\) INTERCONNECTION.\--The duty to provide, for the facilities and
> equipment of any requesting telecommunications carrier,
> interconnection with the local exchange carrier\'s network (A) for the
> transmission and routing of telephone exchange service and exchange
> access; (B) at any technically feasible point within the carrier\'s
> network; (C) that is at least equal in quality to that provided by the
> local exchange carrier to itself or to any subsidiary, affiliate, or
> any other party to which the carrier provides interconnection; and (D)
> on rates, terms, and conditions that are just, reasonable, and
> nondiscriminatory, ...
>
> \(3\) UNBUNDLED ACCESS.\--The duty to provide, to any requesting
> telecommunications carrier for the provision of a telecommunications
> service, nondiscriminatory access to network elements on an unbundled
> basis at any technically feasible point on rates, terms, and
> conditions that are just, reasonable, and nondiscriminatory ...
>
> \(4\) RESALE.\--The duty (A) to offer for resale at wholesale rates
> any telecommunications service that the carrier provides at retail to
> subscribers who are not telecommunications carriers; ...
>
> \(6\) COLLOCATION.\--The duty to provide, on rates, terms, and
> conditions that are just, reasonable, and nondiscriminatory, for
> physical collocation of equipment necessary for interconnection or
> access to unbundled network elements at the premises of the local
> exchange carrier, ...

If we assume *arguendo* that ILECs possess SMP, then this regulatory
outcome appears to be precisely analogous to that described in the
Access Directive. Article 12, "Obligations of access to, and use of,
specific network facilities", enumerates a number of obligations that
NRAs may impose upon undertakings that possess SMP, including
obligations:

> \(a\) to give third parties access to specified network elements
> and/or facilities, including unbundled access to the local loop; ...
>
> \(d\) to provide specified services on a wholesale basis for resale by
> third parties; ...
>
> \(f\) to provide co-location or other forms of facility sharing,
> including duct, building, or mast sharing; ...
>
> \(i\) to interconnect networks or network facilities.

A significant difference between the two regulatory systems, however,
entails the manner in which such constraints might be lifted if market
conditions were to change and if effective competition were to emerge.

Under the European framework, the NRA should in theory automatically
lift these obligations if market conditions were to change over time in
such a way that the undertaking in question no longer possessed SMP.

The equivalent mechanism in the U.S. would be for the FCC to forbear
from imposing portions of section 251(c). As previously noted, the Act
provides the FCC with authority to forbear from imposing any regulation
or any provision of the Act where the FCC determines that such
forbearance is in the public interest, is not necessary to protect
consumers, and is not needed to prevent discriminatory, unjust or
unreasonable charges or terms and conditions.[^86] In determining to
forbear, the Act explicitly asks the Commission to weigh the competitive
impact of forbearance.

As it happens, however, the Act specifically prohibits the FCC from
forbearing from applying requirements under sections 251(c) or 271 until
"... those requirements have been fully implemented".[^87] This might in
practice be somewhat circuitous, and perhaps less certain in its
execution than the European solution, but the net effect could
potentially be precisely analogous to that envisioned in the European
framework -- once SMP has been eliminated, the remedies to SMP must be
rolled back.

## Entry of Bell Operating Companies into Long Distance

One of the most significant sections of the Telecommunications Act of
1996 is Section 271. Section 271 prohibits Bell operating companies
(BOCs) or their affiliates from offering interLATA (i.e. long distance)
services in any in-region state[^88] until and unless the BOC in
question can demonstrate to the satisfaction of state and federal
authorities that it is providing access and interconnection to
competitors in that state. Section 271 includes a fourteen point
checklist of conditions that the BOC must demonstrably meet in order to
be granted authorization to provide interLATA services in that state.

This may not directly fit the European model, but it is consistent in
spirit with it. The EU framework does not envision a prohibition on a
carrier's ability to provide a vertically integrated service as one of
the listed regulatory remedies to SMP, ; indeed, Member States may only
prevent a carrier from providing networks and services for overriding
reasons of public policy, public security or public health.[^89] One
might view the BOCs as having possessed SMP in 1996 (which is not an
unreasonable assumption, considering that they were formed through a
consent decree). The notion, then, that a regulatory remedy to SMP
should be lifted once effective competition has been established is
entirely consistent with the European model.

## Rates for Cable Service

Video services are subject to different rules, but many of the
underlying principles are the same as those for common carriers. As one
conspicuous example, "\[i\]f the Commission finds that a cable system is
subject to effective competition, the rates for the provision of cable
service by such system shall not be subject to regulation by the
Commission or by a State or franchising authority..."[^90] This is
entirely consistent with the new EC framework, in that regulatory rate
setting is inappropriate in the absence of SMP.

# Implementation Challenges

The new European regulatory framework appears to be both comprehensive
and theoretically elegant. Implementation issues might nonetheless
significantly impact its practical effectiveness.

Are there aspects of implementation that are particularly worrisome?

## The Role of the European Commission versus that of the NRAs

As we have seen, the Framework represents delicate compromises between
granting new powers to the European Commission and preserving the
autonomy of the Member State NRAs. On balance, the new framework
increases centralization of the European Union insofar as
telecommunications regulation is concerned. One might reasonably expect
that the new framework will drive an increase in regulatory consistency
across the Member States[^91], but possibly at some loss in the ability
of the system as a whole to reflect diverse local needs or to enable
innovative experiments at the Member State level.

This tension between centralization and decentralization would appear to
represent a potentially significant "fault line" in the implementation
of the new regulatory framework. The ability of European Commission and
NRA regulators to apply the system in a sensitive and appropriate
manner, and to find workable day-to-day compromises, may play a large
role in determining the success of the new framework in practice.

The framework envisions possible differences in judgment among NRAs, and
between NRAs and the European Commission, and it includes mechanisms for
resolving those differences. It is difficult to predict how well those
mechanisms will work in practice. This is an area that bears close
watching.

## Emerging or Nascent Services

The definition of SMP is, by default, based on market share. In many
cases, emerging new services represent a challenge to the power of
entrenched incumbents, and thus represent an enhancement to competition.

There is, however, a risk in regard to new services. A provider of a new
service might initially -- thanks, perhaps, to first mover advantages --
possess a large market share of a tiny, emerging market. If this were to
be interpreted as SMP, there is a risk that the regulatory apparatus of
the state would be brought to bear in a way that impedes competitive
entry instead of fostering it.

The Guidelines recognize this, and note that emerging markets "should
not be subject to inappropriate ex-ante regulation. This is because
premature imposition of ex-ante regulation may unduly influence the
competitive conditions taking shape within a new and emerging market. At
the same time, foreclosure of such emerging markets by the leading
undertaking should be prevented."[^92]

In principle, this would appear to represent appropriate guidance. In
practice, it may be difficult for NRAs to determine whether the
imposition of ex ante regulation is appropriate or not, and it is
natural to wonder whether different NRAs will be able to apply this
guidance in a consistent way across the EU.

# Relevance to the United States

As we have just seen, in a great many cases the new European regulatory
framework might well tend to reach conclusions similar to those which we
reach in the United States. Given that the methodologies are radically
different, why should the results be so similar?

Biologists speak of *convergent evolution*. Two unrelated species may
evolve functionally equivalent organs in order to deal with similar
environmental stresses. The human eye is not the same as that of a fruit
fly, but they perform the same function.[^93]

Analogously, the new EU framework and the U.S. regulatory environment
tend to address similar issues in similar ways, not necessarily because
of equivalent methodologies, but rather because our policy objectives,
broadly stated, are similar. We are trying to solve roughly the same
problems.

There are, however, important distinctions to be drawn. In the U.S., our
laws and regulations contain specific regulatory *outcomes*, while the
EU Framework defines a *process* for reaching similar results.

If both methodologies potentially lead to roughly equivalent regulatory
outcomes, is there reason to prefer one methodology to the other?

The EU framework is extremely logical, and has as we have seen the
potential to generate good results. In addition, it has certain
advantages in comparison with the U.S. methodology:

-   In many instances, the notion of SMP more accurately expresses the
    need for regulation than does the U.S. equivalent regulatory
    category.

-   The notion that certain regulatory impositions should be imposed in
    the presence of SMP, and lifted in its absence, may express
    regulatory desiderata and the desired *timing* of regulation and
    deregulation more clearly and more simply than do equivalent U.S.
    statutes.

-   In leaving the determination of SMP, and of suitable remedies, to
    regulation rather than to statute, the European system may be able
    to respond to change more nimbly than that in the United States.

-   The European system arguably deals with technology convergence,
    which blurs regulatory categories, far more effectively than that of
    the U.S.

Thus, there would seem to be much to recommend the European framework.

Unfortunately, the European approach does not fit neatly into U.S.
regulatory practice. It is important to bear in mind that the Europeans
were able to initiate this monumental overhaul of their system because
they had far less relevant regulatory history to contend with than do we
in the U.S. They were thus able, with the benefit of experience, to
revisit and rewrite their regulation anew.

Our law and our history do not lend themselves to direct application of
the EU framework. The law, as we have seen, is based on regulatory
categories that imperfectly correspond to market power. More
significantly, the law embodies a complex history that reflects
innumerable social compacts. The Communications Act of 1934 was itself
an agglomeration of earlier practice. Title III, dealing with radio, was
added after the fact. The FCC subsequently established regulations for
cable television, which subsequently led to the Cable Television Act of
1992 and then to Title VI of the Act.

In the U.S. system, the balances between regulation and deregulation,
and between federal, state and local authority all entailed delicate
compromises. The European framework is elegant in its simplicity and
directness, but it does not capture those nuances.

There would also be certain practical difficulties in any direct
application of the European framework in this country. The EU framework
depends, as we have seen, on acquisition of sufficient data to enable
NRAs to unambiguously determine relevant markets and the possession of
SMP. In the U.S., however, the FCC is the national regulatory authority.
The FCC lacks the authority to get the information that it would, and
may also lack the ability to protect that information from public
disclosure.

Additional challenges exist. Europeans may tend to trust governments
more than they trust corporations. In the US, it is largely the reverse.
It is not clear that Americans would be willing to give regulators such
broad authority.

The EU telecommunications regulatory framework nonetheless provides a
convenient and natural way to think about the public policy implications
of many of the choices that confront the FCC. As we have seen, the EU
framework often provides a very simple and direct way of visualizing
regulatory outcomes. It could be a very useful exercise for the FCC to
use the European methodology as a means of visualizing and understanding
the public policy implications of the most challenging regulatory
decisions that we confront.

# References

Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996
Act), codified at 47 U.S.C. §§151 et seq. The 1996 Act amended the
Communications Act of 1934 (the Act).

U.S. Department of Justice and Federal Trade Commission, *Horizontal
Merger Guidelines*, 57 Fed. Reg. 41557 (April 2, 1992, as revised April
8, 1997), <http://www.ftc.gov/bc/docs/horizmer.htm>.

*Directive 2002/20.EC of the European Parliament and of the Council of 7
March 2002 on a common regulatory framework for electronic
communications networks and services (Framework Directive)*, Official
Journal of the European Communities, L 108, April 24, 2002.

*Directive 2002/19/EC of the European Parliament and of the Council of 7
March 2002 on access to, and interconnection of, electronic
communications networks and associated facilities (Access Directive)*,
Official Journal of the European Communities, L 108, April 24, 2002.

*Directive 2002/22/EC of the European Parliament and of the Council of 7
March 2002 on universal service and users' rights relating to electronic
communications networks and services (Universal Service Directive)*,
Official Journal of the European Communities, L 108, April 24, 2002.

*Commission Working Document on Proposed New Regulatory Framework for
Electronic Communications Networks and Services, Draft Guidelines on
market analysis and the calculation of significant market power*,
Brussels, March, 3, 2001.

Federal-State Joint Board on Universal Service, CC Docket No. 96-45,
*Report to Congress* ("Universal Service Report"), 13 FCC Rcd 11501,
11516-17 33 (1998)

*Computer I,* Final Decision and Order, 28 FCC 2d 267.

*In the Matter of Amendment of Section 64.702 of the Commission's Rules
and Regulations (Second Computer Inquiry)*, Notice of Inquiry and
Proposed Rulemaking, 61 FCC 2d 103 (1976).

*In the Matter of Amendment of Section 64.702 of the Commission's Rules
and Regulations,* Report and Order, (*Computer III*), 104 FCC 2d 958
(1986), *vacated* *California v. FCC*, 905 F.2d 1217 (9^th^ Cir. 1990).

*Broadband: Bringing Home the Bits*, Computer Science and
Telecommunications Board, National Academy of Sciences, January, 2002.

[^1]: 48 Stat. 1064 (1934) (codified as amended at 47 U.S.C. §§151 *et
    seq*.), hereinafter *the Act*.

[^2]: Indeed, the framework is in large part a response to convergence
    challenges raised in the "Green Paper" of 1997. "Regulation needs to
    be transparent, clear and proportional and distinguish between
    transport (transmission of signals) and content. This implies a more
    horizontal approach to regulation with a homogenous treatment of all
    transport network infrastructure and associated services,
    irrespective of the nature of the services carried." See
    <http://europa.eu.int/ISPO/convergencegp/ip164en.html>.

[^3]: *Broadband: Bringing Home the Bits*, Computer Science and
    Telecommunications Board, National Academy of Sciences, January,
    2002, pg. 32.

[^4]: In this section, we deal with telecommunications regulation in its
    present form. For a treatment of the history of telecommunications
    regulation in this country, as it relates to competition and
    deregulation, see Donald K. Stockdale, "The Regulation, Deregulation
    and Nonregulation of Telecommunications and the Internet in the
    United States" (unpublished manuscript, 2001). Portions of what
    follows appeared in that paper in a different form.

[^5]: 48 Stat. 1064 (1934) (codified as amended at 47 U.S.C. §§151 *et
    seq*.), hereinafter *the Act*.

[^6]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (1996 Act), codified at 47 U.S.C. §§ 151 *et seq*. (Hereinafter, all
    citations to the 1996 Act will be to the 1996 Act as it is codified
    in the United States Code.)

[^7]: 47 U.S.C. §201.

[^8]: 47 U.S.C. §203.

[^9]: 47 U.S.C. §202.

[^10]: 47 U.S.C. §251.

[^11]: 47 U.S.C. § 271.

[^12]: 47 U.S.C. §§ 301-396 and 601-653. Particularly noteworthy are
    "must carry" rules for cable (§ 612). Sherille Ismail suggests that
    differences in "must carry" regulatory treatment of cable compared
    to that of broadcast or DBS satellite may result, at least in part,
    from differences among these three in their degree of monopsony
    market power in the programming market. ("Achieving Regulatory
    Parity in Communications Policy", forthcoming)

[^13]: 47 U.S.C. § 3.

[^14]: Ibid.

[^15]: See also the *Universal Service Report*, often referred to as the
    *Stevens Report*, at 59: "This functional approach is consistent
    with Congress\'s direction that the classification of a provider
    should not depend on the type of facilities used. A
    telecommunications service is a telecommunications service
    regardless of whether it is provided using wireline, wireless,
    cable, satellite, or some other infrastructure. Its classification
    depends rather on the nature of the service being offered to
    customers..."

[^16]: *In the Matter of Regulatory and Policy Problems Presented by the
    Interdependence of Computer and Communications Services and
    Facilities, (hereinafter Computer I Inquiry)*, 7 FCC 2d 11 (1966).
    See generally Huber, P., Kellogg, M., & Thorne, J. (1999), at
    1086-1103; and Oxman, J. (1999).

[^17]: The Commission specifically found "that there is ample evidence
    that data processing services of all kinds are becoming available .
    . . and that there are no natural or economic barriers to free entry
    into the market for these services." *Computer I,* Tentative
    Decision, 28 FCC 2d 291, at para. 20 (1970)

[^18]: *Computer I,* Final Decision and Order, 28 FCC 2d 267, at para.
    12 (1971).

[^19]: *Id.*, at paras. 12 *et seq.*

[^20]: *Id.,*at para. 21.

[^21]: *In the Matter of Amendment of Section 64.702 of the Commission's
    Rules and Regulations (Second Computer Inquiry),*(hereinafter
    *Computer II*), Notice of Inquiry and Proposed Rulemaking, 61 FCC 2d
    103 (1976).

[^22]: The Commission defined the term "basic" service, which referred
    to traditional common carrier telecommunications offerings as "the
    offering of transmission capacity for the movement of information."
    *Computer II*, Final Decision, (*Computer II Final Decision),* 77
    FCC 2d 584, at para. 93 (1980). The Commission defined "enhanced
    services" as:

    > ... services, offered over common carrier transmission facilities
    > used in interstate communications, which employ computer
    > processing applications that act on the format, content, code,
    > protocol, or similar aspects of the subscriber's transmitted
    > information; provide the subscriber additional, different or
    > restructured information; or involve subscriber interaction with
    > stored information. (46 C.F.R. § 64.702(a)).

[^23]: *Computer II Final Decision*, 77 FCC 2d at paras. 190-266.

[^24]: *In the Matter of Amendment of Section 64.702 of the Commission's
    Rules and Regulations,* Report and Order, (*Computer III*), 104 FCC
    2d 958 (1986), *vacated* *California v. FCC*, 905 F.2d 1217 (9^th^
    Cir. 1990).

[^25]: *Separation of Costs of Regulated Telephone Service from Costs of
    Nonregulated Activities*, Report and Order, (*Joint Cost Order*), 2
    FCC Rcd 1298 (1987), *on recons.*, 2 FCC Rcd 6283 (1984) (*Joint
    Cost Reconsideration Order*); *on further recons.*, 3 FCC Rcd 6701
    (1988) (*Joint Cost Further Reconsideration Order*).

[^26]: In *Computer III,* the Commission also aimposed new rules
    governing disclosure of network changes and the handling of customer
    proprietary network information. *Computer III Order,* 104 FCC 2d,
    at paras. 241-65.

[^27]: 47 U.S.C. §3(20).

[^28]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report to Congress *("Stevens Report"*), 13 FCC Rcd 11501,
    11516-17 (1998), FCC document 98067.pdf.

[^29]: This brief reference appears in 47 U.S.C. § 271. In addition,
    U.S.C. § 254 refers to "advanced services", while section 706 of the
    1996 Act refers to broadband as "advanced telecommunications
    capability" -- arguably, there are many *implicit* references to the
    Internet.

[^30]: In recent years, for instance, the Department of Justice analyzed
    the WorldCom/MCI merger and the attempted WorldCom/Sprint merger,
    while the Federal Trade Commission analyzed the AOL/Time Warner
    merger. Note that the FTC has no jurisdiction over common carriers.

[^31]: The competition law provisions applicable to mergers are
    contained in section 1 of the Sherman Act and section 7 of the
    Clayton Act.

[^32]: 47 U.S.C. sections 214, 310 and 314.

[^33]: U.S. Department of Justice and Federal Trade Commission,
    *Horizontal Merger Guidelines*, 57 Fed. Reg. 41557 (April 2, 1992,
    as revised April 8, 1997), http://www.ftc.gov/bc/docs/horizmer.htm.

[^34]: DoJ/FTC Merger Guidelines §1.1, "Market Definition"..

[^35]: Ibid.

[^36]: Ibid., §1.3, "Identification of Firms that Participate in the
    Relevant Market." The Guidelines necessarily consider the
    possibility of supply response.

[^37]: Ibid. §1.5, "Concentration and Market Shares".

[^38]: Ibid.

[^39]: 5 U.S.C. §551 *et seq.*

[^40]: 47 U.S.C. 409(e): "... the Commission shall have the power to
    require by subpena (sic) the attendance and testimony of witnesses
    and the production of all books, papers, schedules of charges,
    contracts, agreements, and documents relating to any matter under
    investigation."

[^41]: A more complex question relates to requests for sensitive
    information made pursuant to the *Freedom of Information Act
    (FOIA)*.

[^42]: 47 U.S.C. § 160.

[^43]: 47 U.S.C. § 161.

[^44]: *Directive 2002/19/EC of the European Parliament and of the
    Council of 7 March 2002 on access to, and interconnection of,
    electronic communications networks and associated facilities (Access
    Directive)*, Official Journal of the European Communities, L 108,
    April 24, 2002, Article 9.

[^45]: Ibid., article 10.

[^46]: Ibid., article 11.

[^47]: Ibid., article 12.

[^48]: Ibid., article 13.

[^49]: *Directive 2002/22/EC of the European Parliament and of the
    Council of 7 March 2002 on universal service and users' rights
    relating to electronic communications networks and services
    (Universal Service Directive)*, Official Journal of the European
    Communities, L 108, April 24, 2002, Article 18.

[^50]: Ibid., article 19.

[^51]: There is no automatic presumption that any obligation will be
    appropriate. If a competition authority is about to act, for
    example, regulatory action may well be inappropriate.

[^52]: *Directive 2002/20.EC of the European Parliament and of the
    Council of 7 March 2002 on a common regulatory framework for
    electronic communications networks and services (Framework
    Directive)*, Official Journal of the European Communities, L 108,
    April 24, 2002, Article 15.

[^53]: A preliminary draft Recommendation exists: "On relevant Product
    and Service Markets within the electronic communications sector
    susceptible to ex ante regulation in accordance with Directive
    2002/../EC of the European Parliament and of the Council on a common
    regulatory framework for electronic communication networks and
    services."

[^54]: *Commission Working Document on Proposed New Regulatory Framework
    for Electronic Communications Networks and Services, Draft
    Guidelines on market analysis and the calculation of significant
    market power*, Brussels, March, 3, 2001.

[^55]: Guidelines, at 31.

[^56]: Ibid., at 35. "According to settled case-law, the relevant
    product/service market comprises all those products or services that
    are sufficiently interchangeable or substitutable, not only in terms
    of their objective characteristics, by virtue of which they are
    particularly suitable for satisfying the constant needs of
    consumers, but also in terms of the conditions of competition and/or
    the structure of supply and demand on the market in question.
    Products or services which are only to a small, or relative degree
    interchangeable with each other do not form part of the same
    market."

[^57]: Ibid., at 36.

[^58]: Framework Directive, Article 14, at 2.

[^59]: Guidelines, at 65.

[^60]: Ibid., at 67.

[^61]: Ibid., at 74-76.

[^62]: Ibid., at 77-79. The concept of collective dominance has become
    well established in European case law. By contrast, collective
    dominance is rarely raised as a concern in the U.S. unless there is
    actual evidence of collusion.

[^63]: Framework Directive, Article 16, at 2.

[^64]: Ibid., at 3-4.

[^65]: Framework Directive, Article 5, at 1.

[^66]: Ibid., at 2.

[^67]: Cf. Guido Tabellini, "The Assignment of Tasks in an Evolving
    European Union", Centre for European Policy Studies, January 2002,
    pages 4-6.

[^68]: Framework Directive, Article 7.

[^69]: Framework Directive, Article 16, at 5.

[^70]: Indeed, this is a classic problem in social sciences. Tabellini,
    op. cit., applies established theory to the EU environment, noting
    trade-offs between the ability to cope with heterogeneity of local
    preferences and to exploit local information, versus the impact of
    "spill-over effects" on specific public goods. He notes the need to
    "avoid excessive centralisation". He also draws a key distinction
    between the "bureaucratic accountability" that arguably
    characterizes Europe today, versus "democratic accountability."

[^71]: *Policy and Rules Concerning Rates for Competitive Common Carrier
    Services and Facilities Authorizations Therefor*, CC Docket No.
    79-252, Notice of Inquiry and Proposed Rulemaking, 77 FCC 2d 308
    (1979); First Report and Order, 85 FCC 2d 1 (1980) (*First Report
    and Order*); Further Notice of Proposed Rulemaking, 84 FCC 2d 445
    (1981) (*Further Notice of Proposed Rulemaking)*; Second Further
    Notice of Proposed Rulemaking, FCC 82-187, 47 Fed. Reg. 17,308
    (1982); Second Report and Order, 91 FCC 2d 59 (1982) (*Second Report
    and Order*); Order on Reconsideration, 93 FCC 2d 54 (1983); Third
    Report and Order, 48 Fed. Reg. 46,791 (1983) (*Third Report and
    Order*); Fourth Report and Order, 95 FCC 2d 554 (1983) (*Fourth
    Report and Order*); *vacated*, *AT&T v. FCC*, 978 F.2d 727 (D.C.
    Cir. 1992), *cert. denied*, *MCI Telecommunications Corp. v. AT&T*,
    113 S.Ct. 3020 (1993); Fifth Report and Order, 98 FCC 2d 1191 (1984)
    (*Fifth Report and Order*); Sixth Report and Order, 99 FCC 2d 1020
    (1985), *vacated MCI Telecommunications Corp. v. FCC*, 765 F.2d 1186
    (D.C. Cir. 1985) (collectively referred to as the *Competitive
    Carrier* proceeding).

[^72]: The Commission defined market power as "the ability to raise
    prices by restricting output" and as "the ability to raise and
    maintain prices above the competitive level without driving away so
    many customers as to make the increase unprofitable." *See
    Competitive Carrier Fourth Report and Order*, 95 FCC 2d at 558,
    para. 7.

[^73]: *Competitive Carrier First Report and Order*, 85 FCC 2d at 22-24.
    The Commission specifically noted that it would "treat control of
    bottleneck facilities as prima facie evidence of market power
    requiring detailed regulatory scrutiny. *Id.*, at 21. The Commission
    also found Western Union, domestic satellite carriers, and
    miscellaneous common carriers that relay video signals to be
    dominant in various relevant markets. *Id.,* at 24-28. It
    acknowledged, however, that market developments were likely to erode
    the market power of these carriers over time.

[^74]: *Id.*, at 31.

[^75]: *Competitive Carrier First Report and Order*, 85 FCC 2d at 31-37,
    39-44. Subsequently, the Commission announced a policy of permissive
    "forbearance," under which it would forbear from applying the tariff
    filing requirements of Section 203 and the entry, exit, and
    construction authorization requirements of Section 214 to
    nondominant carriers. *See Competitive Carrier Second Report and
    Order*, 91 FCC 2d at 73; *Competitive Carrier Fourth Report and
    Order*, 95 FCC 2d at 557; *Competitive Carrier Fifth Report and
    Order*, 98 FCC 2d at 1193, 1209. In 1985, the Commission decided to
    shift from "permissive" to "mandatory" forbearance, thus requiring
    detariffing by all nondominant carriers. *Competitive Carrier, Sixth
    Report and Order*, 99 FCC 2d at 1030-32. Federal Court of Appeals
    reversed this finding, holding that the Commission lacked statutory
    authority to prohibit the filing of tariffs, and in a subsequent
    appeal, the court further found that the Commission lacked the
    authority to allow permissive detariffing. *See MCI v. FCC*, 765
    F.2d 1186 (D.C. Cir. 1985); *AT&T v. FCC,* 1993 WL 260778 (D.C. Cir.
    1993), *aff'd* *MCI v. AT&T*, 512 U.S. 218 (1994).

[^76]: Universal Service Directive, article 17.

[^77]: *Competition in the Interstate Interexchange Marketplace*, Notice
    of Proposed Rulemaking, 5 FCC Rcd 2627 (1990); Report and Order, 6
    FCC Rcd 5880 (1991) (*First Interstate Interexchange Competition
    Order*); Memorandum Opinion and Order, 6 FCC Rcd 7569 (1991);
    Memorandum Opinion and Order, 7 FCC Rcd 2677 (1992); Memorandum
    Opinion and Order on Reconsideration, 8 FCC Rcd 2659 (1993); Second
    Report and Order, 8 FCC Rcd 3668 (1993) (*Second Interstate
    Interexchange Competition Order*); Memorandum Opinion and Order, 8
    FCC Rcd 5046 (1993); Memorandum Opinion and Order on
    Reconsideration, 10 FCC Rcd 4562 (1995) (collectively referred to as
    the *Interstate Interexchange Competition* proceeding).

[^78]: In the *First Interstate Interexchange Competition Order,* the
    Commission found that services provided to large- and medium-size
    business customers had become "substantially competitive, while in
    the *Second Interstate Interexchange Competition Order*, the
    Commission found that, with the introduction of 800 number
    portability, the market for 800 services (except for 800 directory
    assistance where AT&T had a monopoly) had become substantially
    competitive. *See First Interstate Interexchange Competition Order*,
    6 FCC Rcd at 5911, para. 188; *Second Interstate Interexchange
    Competition Order*, 8 FCC Rcd at 3668, para. 1.

[^79]: *See First Interstate Interexchange Competition Order*, 6 FCC Rcd
    at 5894, para. 74.

[^80]: *Id*., at 5897, at para. 91.

[^81]: Motion of AT&T Corp. to Be Reclassified as a Nondominant Carrier,
    Order, 11 FCC Rcd 3271, para. 1, 3356, para. 164 (1995).

[^82]: *Id.,* at 3281, para. 12.

[^83]: *Motion of AT&T to Be Declared Non-dominant for International
    Service,* 11 FCC Rcd 17,963 (1996).

[^84]: 47 U.S.C. 251(a) and 251(b).

[^85]: 47 U.S.C. 251(c).

[^86]: 47 U.S.C. § 160.

[^87]: 47 U.S.C. § 160(d).

[^88]: An in-region state is any of the states allocated to that Bell
    operating company under AT&T Consent Decree of August 24, 1982. 47
    U.S.C. 271(i)(1).

[^89]: Authorisation Directive, Article 3, at 1.

[^90]: 47 U.S.C. § 543(a)(2).

[^91]: Indeed, this is an explicit objective for the NRAs. Framework
    Directive, Article 8, at 3, especially (d).

[^92]: "Draft Guidelines on market analysis and the assessment of
    significant market power under the Community regulatory framework
    for electronic communications networks and services", Brussels,
    21.02.2002, para. 32.

[^93]: See, for instance, Richard Dawkins, *Climbing Mount Improbable*,
    W.W. Norton & Company, New York, 1996, pages 19-22.