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CONTACT: Amy Smorodin
March 24, 2009
(202) 289-8928
"Functional Separation" Unsuitable for All Markets
Italian Regulatory Model Dependent on Competitive and Legal Framework

WASHINGTON D.C. - U.S. regulators would be ill-advised to abandon current de-regulatory policies encouraging facilities-based competition in communications markets and return to models developed for monopoly service markets.  In "Functional Separation, Italian Style," released today by The Progress & Freedom Foundation, Senior Fellow Barbara Esbin concludes "functional separation" should be viewed as an extraordinary remedy for persisting competitive problems and is inappropriate for effectively competitive markets.

In the paper, Esbin, Director of PFF's Center for Communications and Competition Policy, addresses recent discussions in Europe over the use of functional separation of wireline access networks to cure persistent problems involving access network discrimination by vertically integrated dominant providers.  The author contrasts the regulatory environment in markets that have implemented separation to the deregulation in the U.S. communications market, where policymakers have abandoned prior structural and non-structural Computer Inquiry safeguards.  "Continuation of Computer Inquiry mandates developed for narrowband, single-purpose networks was found to be inappropriate and unnecessary for today's converged broadband networks," she explains.  Moreover, the Federal Communications Commission concluded there was sufficient "actual and expected competition" to justify changing the regulatory regime.

The author also specifically examines Telecom Italia's recently announced "operational separation" of its wholesale access services and retail units.  She concludes the "voluntary" corporate restructuring, developed with the approval of Italy's communications regulatory body, AGCOM, is best viewed as a solution for the Italian communications market which is lacking a widely deployed competitive provider. The restructuring is meant to ease concerns particular to the Italian marketplace and can not necessarily be considered an ideal model for regulation in other markets.  Functional separation, Esbin explains, "is considered an extraordinary remedy, suitable only where conventional ex ante behavioral regulation has failed or is likely to fail and significant market power appears to be enduring."

Esbin concludes that in the U.S., reversion to "a functional separation regulatory model would require a sudden and extreme policy reversal that would render the telecommunications sector wholly unattractive to investors."  Instead, she urges policy makers to "focus on the dual challenges of bringing broadband deployment to areas presently unserved by any provider and preserving and expanding existing levels of competition by removing remaining disincentives to investment and making more spectrum available to wireless providers."

"Functional Separation, Italian Style," is available on the PFF website.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



The Progress & Freedom Foundation