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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) Implementation of the ) CC Docket No. 96-98 Local Competition Provisions ) of the Telecommunications Act of 1996 ) THIRD REPORT AND ORDER AND FOURTH FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: September 15, 1999 Released: November 5, 1999 Comment Date: January 12, 2000 Reply Date: February 11, 2000 By the Commission: Commissioner Ness issuing a statement; Commissioner Furchtgott- Roth concurring in part, dissenting in part and issuing a statement; Commissioner Powell dissenting in part and issuing a statement. TABLE OF CONTENTS Paragraph I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . .1 II. EXECUTIVE SUMMARY . . . . . 16 III. BACKGROUND. . . . . . .17 IV. FRAMEWORK FOR DECIDING WHAT NETWORK ELEMENTS MUST BE UNBUNDLED PURSUANT TO SECTION 251. . . . . . . . . . . . . . . 22 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . 22 B. The "Necessary" and "Impair" Standards of Section 251(d)(2) . . . . . . .30 1. Application of the "necessary" and "impair" standards to proprietary and non- proprietary elements under Section 251(d)(2) . . . . . . . .30 a. Background . . . . . . 30 b. Discussion . . . . . . 32 2. Definition of "Proprietary in Nature". . . . . . . . . .33 a. Background . . . . . . 33 b. Discussion . . . . . . 35 3. The "Necessary" Standard of Section 251(d)(2)(A) . . . . . . 42 a. Background . . . . . . 42 b. Discussion . . . . . . 45 4. The "Impair" Standard of Section 251(d)(2)(b). . . . . .49 a. Background . . . . . . 49 b. Discussion . . . . . . 52 C. Adoption of a National List of Unbundled Network Elements . . . . .118 1. Background . . . . . . . . . . . . . . . . . . . . . . 118 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 121 a. Legal Authority. . . . . . 122 b. Goals of the Act . . . . . 125 D. Modification of the National List . . . . . . . . . . . .145 1. Background . . . . . . . . . . . . . . . . . . . . . . 145 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 149 a. Modification of the National List by the Commission. . . . . .149 b. Modification of the National List by the States. . . . . 154 V. APPLICATION OF THE STANDARD TO INDIVIDUAL NETWORK ELEMENTS. . . . . .163 A. Loops . . . . . . . . . . . . . . . . . . . . . . . . . .163 1. Background . . . . . . . . . . . . . . . . . . . . . . 163 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 166 a. Definition . . . . . .167 b. Proprietary Concerns Associated with the Loop. . . . . . 181 c. Unbundling Analysis for the Loop in General. . . . . . . 182 B. The Subloop . . . . . . . . . . . . . . . . . . . . . . .203 1. Background . . . . . . . . . . . . . . . . . . . . . . 203 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 206 a. Definition of the Subloop. . . . . . 207 b. Proprietary Concerns Associated with Subloops. . . . . . 209 c. Unbundling Analysis for Subloops . . . . .210 d. Technical Feasibility. . . . . .221 C. Network Interface Devices (NIDs). . . . . . . . . . . . .231 1. Background . . . . . . . . . . . . . . . . . . . . . . 231 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 233 a. Definition of the NID. . . . . .234 b. Proprietary Concerns Associated with the NID . . . . . . 237 c. Unbundling Analysis . . . . . .238 D. Local Switching . . . . . . . . . . . . . . . . . . . . .242 1. Local Circuit Switching. . . . . . . . . . . . . . . . 242 a. Background . . . . . .242 b. Discussion . . . . . .245 2. Packet Switching . . . . . . . . . . . . . . . . . . . 301 a. Background . . . . . .301 b. Discussion . . . . . .303 E. Interoffice Transmission Facilities . . . . . . . . . . .319 1. Background . . . . . . . . . . . . . . . . . . . . . . 319 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 322 a. Dedicated Transport. . . . . . .323 b. Shared Transport . . . . . 370 F. Signaling Networks and Call-Related Databases . . . . . .381 1. Signaling Networks . . . . . . . . . . . . . . . . . . 381 a. Background . . . . . .381 b. Discussion . . . . . .384 2. Call-Related Databases . . . . . . . . . . . . . . . . 401 a. Background . . . . . .401 b. Discussion . . . . . .403 G. Operations Support Systems. . . . . . . . . . . . . . . .422 1. Background . . . . . . . . . . . . . . . . . . . . . . 422 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 425 a. Definition of OSS. . . . . 426 b. Proprietary Concerns Associated with OSS . . . . . .433 c. Unbundling Analysis for OSS. . . . . 434 H. Operator Services and Directory Assistance. . . . . . . .439 1. Background . . . . . . . . . . . . . . . . . . . . . . 439 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 442 a. Definition of Operator Services and Directory Assistance . . . . . 444 b. Proprietary Concerns Associated with OS/DA . . . . .446 c. Unbundling Analysis. . . . . . .447 VI. MISCELLANEOUS ISSUES. . . . . . 466 A. Section 271-Related Issues. . . . . . . . . . . . . . . .466 1. Background . . . . . . . . . . . . . . . . . . . . . . 466 2. Discussion . . . . . . . . . . . . . . . . . . . . . . 469 B. Combinations of Unbundled Loops and Transport Network Elements. . . . . 475 1. Enhanced Extended Link . . . . . . . . . . . . . . . . 476 a. Background . . . . . .476 b. Discussion . . . . . .479 2. Use of unbundled network elements to provide exchange access services. . . . . .484 a. Background . . . . . .484 b. Discussion . . . . . .485 C. Nondiscrimination Obligations of Incumbent LECs . . . . .491 VII. FOURTH FURTHER NOTICE OF PROPOSED RULEMAKING. . . . . . .493 A. Background. . . . . . . . . . . . . . . . . . . . . . . .493 B. Discussion. . . . . . . . . . . . . . . . . . . . . . . .495 VIII. PROCEDURAL ISSUES . . . . .498 A. Final Regulatory Flexibility Analysis . . . . . . . . . .498 1. Need for, and Objectives of, the Third Report and Order. . . . . 499 2. Summary of Significant Issues Raised by the Public Comments in Response to the IRFA. . . . . . 500 3. Description and Estimate of the Number of Small Entities to which Rules will Apply . . . . . . 501 4. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements . . . . . . . . . . . . . . . . . . . . . . . 506 5. Steps Taken to Minimize the Economic Impact of this Order on Small Entities, and Alternatives Considered. . . . . . . . . . . . . . . . . . 507 6. Report to Congress . . . . . . . . . . . . . . . . . . 510 B. Initial Regulatory Flexibility Analysis (IRFA). . . . . .511 1. Need for, and Objectives of, the Proposed Rules. . . . 512 2. Legal Basis. . . . . . . . . . . . . . . . . . . . . . 514 3. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply . . . . . . . . . . . . . . . . . . . . . . . . 515 4. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements . . . . . . . . . . . . . . . . . . . . . . . 518 5. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered. . . . . . . . . . . . . . . . . . 519 6. Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules . . . . . .520 IX. ORDERING CLAUSES. . . . . .521 APPENDIX A -- LIST OF COMMENTERS Appendix B -- top 50 metropolitan statistical areas APPENDIX C -- final rules APPENDIX D -- current unbundled network elements I. INTRODUCTION 1. In this proceeding, we respond to the Supreme Court's January 1999 decision that directs us to reevaluate the unbundling obligations of section 251 of the Telecommunications Act of 1996 (1996 Act). The Supreme Court's decision removed many of the uncertainties surrounding the requirements of section 251 by upholding the majority of the Commission's rules implementing that section of the Act, including the Commission's jurisdiction to implement sections 251 and 252 of the Act, the Commission's definitions of network elements, and the Commission's rule requiring incumbent local exchange carriers (LECs) to offer combinations of unbundled network elements that are already combined. The Court has directed us, however, to revise the standards under which the unbundling obligations of section 251(c)(3) are determined. Specifically, the Court has required us to give some substance to the "necessary" and "impair" standards in section 251(d)(2), and to develop a limiting standard that is "rationally related to the goals of the Act." In addition, as we develop the "necessary" and "impair" standards, the Court has required us to consider the availability of alternative network elements outside the incumbent's network. 2. In passing the 1996 Act, Congress overhauled many aspects of federal regulation of telecommunications services by establishing a pro-competitive and deregulatory framework designed to benefit "all Americans by opening all telecommunications markets to competition." Two of the fundamental goals of the 1996 Act are to open the local exchange and exchange access markets to competition and to promote innovation and investment by all participants in the telecommunications marketplace. Congress sought to foster this competition by fundamentally changing the conditions and incentives for market entry and by attempting to open any remaining local service bottlenecks. As a result, the provisions of the 1996 Act set the stage for a new competitive paradigm in which carriers in previously segmented markets are able to compete in a dynamic and integrated telecommunications market that promises lower prices and more innovative services to consumers. 3. Central to the new statutory scheme is section 251 of the Act, which seeks generally to reduce inherent economic and operational advantages possessed by incumbent local exchange carriers. Toward this end, section 251 imposes specific market- opening mechanisms, such as mandatory interconnection, unbundling, and resale requirements on incumbent LECs, in order to break the incumbents' control over local facilities. Congress directed the Commission to implement the provisions of section 251, and to specifically determine which network elements should be unbundled pursuant to section 251(c)(3). 4. Pursuant to our statutory mandate and the directives of the Supreme Court, we reevaluate the unbundling obligations of incumbent LECs, pursuant to sections 251(c)(3) and 251(d)(2). The new standards and framework we adopt in this Order for determining which network elements incumbent LECs must make available on an unbundled basis will remove the uncertainties surrounding the incumbents' unbundling obligations since passage of the Act. More importantly, however, they will define the competitive landscape of telecommunications markets for the foreseeable future. 5. The standards and unbundling obligations that we adopt in this Order are designed to create incentives for both incumbent and competitive LECs to innovate and invest in technologies and services that will benefit consumers through increased choices of telecommunications services and lower prices. We recognize that there will be a continuing need for all three of the arrangements Congress set forth in section 251 to remain available to competitors so that they can serve different types of customers in different geographic areas. We continue to believe that the ability of requesting carriers to use unbundled network elements, including various combinations of unbundled network elements, is integral to achieving Congress' objective of promoting rapid competition to all consumers in the local telecommunications market. Moreover, in some areas, we believe that the greatest benefits may be achieved through facilities-based competition, and that the ability of requesting carriers to use unbundled network elements, including various combinations of unbundled network elements, is a necessary precondition to the subsequent deployment of self-provisioned network facilities. 6. Although Congress did not express explicitly a preference for one particular competitive arrangement, it recognized implicitly that the purchase of unbundled network elements would, at least in some situations, serve as a transitional arrangement until fledgling competitors could develop a customer base and complete the construction of their own networks. In particular, Congress stated: "[I]t is unlikely that competitors will have a fully redundant network in place when they initially offer local service because the investment necessary is so significant. Some facilities and capabilities . . . will likely need to be obtained from the incumbent [LEC] as network elements pursuant to new section 251." Implicit in this recognition, and in section 271's requirement that the Bell Operating Companies (BOCs) provide access and interconnection to their network facilities in accordance with the requirements in the competitive checklist, is Congress's expectation that new competitors would use unbundled elements from the incumbent LEC until it was practical and economically feasible to construct their own networks. 7. We fully expect that over time competitors will prefer to deploy their own facilities in markets where it is economically feasible to do so, because it is only through owning and operating their own facilities that competitors have control over the competitive and operational characteristics of their service, and have the incentive to invest and innovate in new technologies that will distinguish their services from those of the incumbent. Unbundling rules that encourage competitors to deploy their own facilities in the long run will provide incentives for both incumbents and competitors to invest and innovate, and will allow the Commission and the states to reduce regulation once effective facilities-based competition develops. Accordingly, the unbundling rules we adopt in this proceeding seek to promote the development of facilities-based competition. 8. We believe that the "necessary" and "impair" standards we adopt below address the Supreme Court's mandate and implement the statutory language and goals of the Act. The standards we adopt take into consideration alternatives outside the incumbent LEC's network, and whether those alternatives are actually available to the requesting carrier as a practical, economic, and operational matter. We consider not only the direct costs, but also other costs and impediments associated with using alternative elements that may constitute barriers to entry. We believe the Commission must assess these factors to determine the availability of alternatives, and whether access to the incumbent's network element thereby satisfies the "necessary" and "impair" standards of section 251(d)(2). 9. The unbundling standards we adopt in this Order also seek to encourage the rapid introduction of competition in all markets, including residential and small business markets. They seeks to create incentives for both incumbents and requesting carriers to invest and innovate in new technologies by establishing a mechanism by which regulatory obligations to provide access to network elements will be reduced as alternatives to the incumbent LECs' network elements become available in the future. In addition, the standards provide reasonable certainty regarding the availability of unbundled elements, thereby allowing requesting carriers to attract investment capital and move forward with implementing national and regional business plans that will allow them to serve the greatest number of consumers 10. To date, we have seen the development of facilities-based competition among providers of particular services in certain sectors of the market. For example, as discussed in more detail below, competitors have deployed their own fiber rings and approximately 700 circuit switches to provide local exchange and exchange access services primarily to medium and large business customers in high-density metropolitan areas. In addition, the record in this proceeding suggests that a growing number of carriers are deploying packet switches to provide data services in a number of markets, particularly for end users with substantial telecommunications needs. 11. Other local markets, however, particularly the residential and small business markets, and geographic markets outside of major metropolitan areas, have seen minimal competition. This may be due to the uncertainty surrounding the ability of competitive LECs to use reasonably priced unbundled network elements to serve these areas as a result of litigation concerning the Commission's unbundling rules. Because unbundled network elements have not been made fully available to requesting carriers as the Commission expected in 1996, we do not yet know the extent to which competition will develop once all of the unbundling rules are actually implemented by incumbent LECs. 12. Only recently have incumbent LECs provided access to combinations of unbundled loops, switches, and transport elements, often referred to as "the platform." Since these combinations of unbundled network elements have become available in certain areas, competitive LECs have started offering service in the residential mass market in those areas. For example, in January of this year, Bell Atlantic, as part of an agreement with the New York Public Service Commission, began offering the unbundled network element platform out of particular end offices in New York City. As a result, MCI WorldCom had acquired upwards of 60,000 new local residential customers in New York as of June 1999. AT&T also plans to serve local residential customers over the platform in Texas. 13. For effective competition to develop as envisioned by Congress, competitors must have access to incumbent LEC facilities in a manner that allows them to provide the services that they seek to offer, as contemplated in section 251(d)(2) of the Act. Despite the development of competition in some markets, incumbents still control the vast majority of the facilities that comprise the local telecommunications network, giving them advantages of economies of scale and scope not enjoyed by competitive LECs. Because competitors do not yet enjoy the same economies of scale, scope and ubiquity as the incumbent, they may be impaired if they do not have access, at least initially, to certain network elements supplied by the incumbent LEC. For example, without access to unbundled network elements, a competitive LEC may choose not to enter a particular market because the cost and delays associated with deploying its own facilities would be too high given the revenues obtainable from that market and the relative attractiveness of other potential new markets. Similarly, a competitive LEC may decline to enter a market because certain of their facilities are subject to economies of scale and scope such that the competitor would need a larger market share than it is likely to have initially. In such cases, competitors may choose to enter a certain market if they can obtain access to particular unbundled network elements on sufficiently favorable terms that such scale economies are overcome, and other potential markets no longer appear more attractive. 14. The standards and rules we adopt in this Order seek to build on industry experience and technological changes that have occurred in the telecommunications marketplace since the 1996 Act was enacted three years ago. Today, both incumbent LECs and requesting carriers are at the early stages of deploying innovative technologies to meet the ever-increasing demand for high-speed, high- capacity advanced services. To encourage competition among carriers to develop and deploy new advanced services, the marketplace for these services must be conducive to investment, innovation, and meeting the needs of consumers. Accordingly, our unbundling rules are designed to facilitate the rapid and efficient deployment of all telecommunications services, including advanced services. Specifically, unbundling rules that are based on a preference for development of facilities-based competition in the long run will provide incentives for both incumbents and competitors to invest and innovate, and should allow the Commission to reduce regulation once true facilities-based competition develops. 15. The unbundling standards we adopt in this order also are designed to be administratively practical and respond to changes in the marketplace as alternatives to the incumbent LECs' network elements become available. We are committed to reviewing the unbundling obligations in three years, and as the marketplace changes with the development of new technologies and increased facilities-based competition, we will modify the list of unbundled elements, as warranted. XVI. EXECUTIVE SUMMARY Section 251(d)(2)'s "Necessary" and "Impair" Standards. Section 251(d)(2)(A)'s "necessary" standard is a stricter standard that applies to proprietary network elements. Section 251(d)(2)(B)'s "impair" standard applies to non-proprietary network elements. Applying a stricter standard to proprietary network elements is consistent with Congress' intention to spur innovation and investment by both incumbent and competitive LECs. In applying these standards, we look first to what is occurring in the marketplace today. · Necessary. A proprietary network element is "necessary" within the meaning of section 251(d)(2)(A) if, taking into consideration the availability of alternative elements outside the incumbent's network, including self-provisioning by a requesting carrier or acquiring an alternative from a third party supplier, lack of access to that element would, as a practical, economic, and operational matter, preclude a requesting carrier from providing the services it seeks to offer. There are limited circumstances under which we may unbundle proprietary information or functionalities even if those elements are not strictly "necessary," as long as the "impair" standard is met. These circumstances are: (1) where an incumbent LEC, for the primary purpose of causing a particular network to be evaluated under the stricter "necessary" standard in order to avoid its unbundling obligation, implements only a minor modification to the network element to make the element proprietary; (2) where an incumbent LEC cannot demonstrate that the information or functionality that it claims is proprietary differentiates its services from its competitors' services, or is otherwise competitively significant; or (3) where lack of access to the proprietary element would jeopardize the goal of the 1996 Act to bring rapid competition to the greatest number of consumers. · Impair. The incumbent LECs' failure to provide access to a non-proprietary network element "impairs" a requesting carrier within the meaning of section 251(d)(2)(B) if, taking into consideration the availability of alternative elements outside the incumbent's network, including self-provisioning by a requesting carrier or acquiring an alternative from a third-party supplier, lack of access to that element materially diminishes a requesting carrier's ability to provide the services it seeks to offer. In order to evaluate whether there are alternatives actually available to the requesting carrier as a practical, economic, and operational matter, we look at the totality of the circumstances associated with using an alternative. In particular, our "impair" analysis considers the cost, timeliness, quality, ubiquity, and operational issues associated with use of the alternative. Goals of the Act. We also interpret the obligations imposed in section 251(d)(2) within the larger statutory framework of the 1996 Act. Congress apparently contemplated that we would consider additional factors by directing the Commission, in section 251(d)(2), to "consider at a minimum" the "necessary" and "impair" standards. The Supreme Court decision requires us to apply a limiting standard "rationally related to the goals of the Act." Accordingly, in addition to the factors set forth above, we may consider the following factors: · Rapid Introduction of Competition in All Markets. We may consider whether the availability of an unbundled network element is likely to encourage requesting carriers to enter the local market in order to serve the greatest number of consumers as rapidly as possible. We also note that Congress required Bell Operating Companies to demonstrate that they are providing loops, switching, transport, signaling and databases, and operator services/directory assistance in order to obtain in-region, interLATA approval. While the section 271 checklist does not determine definitively which elements all incumbent LECs are required to unbundle pursuant to section 251, it sheds some light on what Congress believed was required to open local markets to competition. Accordingly, we believe that we may consider whether requiring all incumbent LECs to unbundle these same elements would promote the rapid introduction of competition on a nationwide basis. · Promotion of Facilities-Based Competition, Investment, and Innovation. We may consider the extent to which the unbundling obligations we adopt will encourage the development of facilities-based competition by competitive LECs, and innovation and investment by both incumbent LECs and competitive LECs, especially for the provision of advanced services. · Reduced Regulation. We may consider the extent to which we can encourage investment and innovation by reducing regulatory obligations to provide access to network elements, as alternatives to the incumbent LECs' network elements become available in the future. · Certainty in the Market. We may consider how the unbundling obligations we adopt can provide the uniformity and predictability that new entrants and fledgling competitors need to develop national and regional business plans. We also consider whether the rules we adopt provide financial markets with reasonable certainty so that carriers can attract the capital they need to execute their business plans to serve the greatest number of consumers. · Administrative Practicality. We may consider whether the unbundling obligations we adopt are administratively practical to apply. Modification of the National List. · The Order recognizes that rapid changes in technology, competition, and the economic conditions of the telecommunications market will require a reevaluation of the national unbundling rules periodically. In order to encourage a reasonable period of certainty in the market, the Commission expects to reexamine the national list of unbundled network elements in three years. · Section 251(d)(3) permits state commissions to require incumbent LECs to unbundle additional elements as long as the obligations are consistent with the requirements of section 251 and the national policy framework instituted in this Order. · Removal of elements from the national list on a state-by-state basis would not be consistent with section 251 and the goals of the Act. Network Elements that Must be Unbundled. Applying the above factors, the Order concludes that the following network elements must be unbundled: · Loops. Incumbent local exchange carriers (LECs) must offer unbundled access to loops, including high-capacity lines, xDSL-capable loops, dark fiber, and inside wire owned by the incumbent LEC. The unbundling of the high frequency portion of the loop is being considered in another proceeding. · Subloops. Incumbent LECs must offer unbundled access to subloops, or portions of the loop, at any accessible point. Such points include, for example, a pole or pedestal, the network interface device, the minimum point of entry to the customer premises, and the feeder distribution interface located in, for example, a utility room, a remote terminal, or a controlled environment vault. The Order establishes a rebuttable presumption that incumbent LECs must offer unbundled access to subloops at any accessible terminal in their outside loop plant. · To the extent there is not currently a single point of interconnection that can be feasibly accessed by a requesting carrier, we encourage parties to cooperate in any reconfiguration of the network necessary to create one. If parties are unable to negotiate a reconfigured single point of interconnection at multi-unit premises, we require the incumbent to construct a single point of interconnection that will be fully accessible and suitable for use by multiple carriers. · Network Interface Device (NID). Incumbent LECs must offer unbundled access to NIDs. The NID includes any potential means of interconnection with customer premises inside wiring at the point where the carrier's local loop facilities end, such as at a cross connect device used to connect the loop to customer-controlled inside wiring. This includes all features, functions, and capabilities of the facilities used to connect the loop to premises wiring, regardless of the specific mechanical design. · Circuit Switching. Incumbent LECs must offer unbundled access to local circuit switching, except for local circuit switching used to serve end users with four or more lines in access density zone 1 in the top 50 Metropolitan Statistical Areas (MSAs), provided that the incumbent LEC provides non-discriminatory, cost- based access to the enhanced extended link throughout zone 1. (An enhanced extended link (EEL) consists of a combination of an unbundled loop, multiplexing/concentrating equipment, and dedicated transport. The EEL allows new entrants to serve customers without having to collocate in every central office in the incumbent's territory.) Local circuit switching includes the basic function of connecting lines and trunks on the line-side and port-side of the switch. The definition of the local switching element encompasses all of the features, functionalities, and capabilities of the switch. · Packet Switching. Incumbent LECs must offer unbundled access to packet switching only in limited circumstances in which the incumbent has placed digital loop carrier systems in the feeder section of the loop or has its Digital Subscriber Line Access Multiplexer (DSLAM) in a remote terminal. The incumbent will be relieved of this obligation, however, if it permits a requesting carrier to collocate its DSLAM in the incumbent's remote terminal on the same terms and conditions that apply to its own DSLAM. Packet switching is defined as the function of routing individual data message units based on address or other routing information contained in the data units, including the necessary electronics (e.g., DSLAMs). · Interoffice Transmission Facilities. Incumbent LECs must offer unbundled access to dedicated interoffice transmission facilities, or transport, including dark fiber. Dedicated interoffice transmission facilities are defined as incumbent LEC transmission facilities dedicated to a particular customer or carrier that provide telecommunications between wire centers owned by the incumbent LECs or requesting telecommunications carriers, or between switches owned by incumbent LECs or requesting telecommunications carriers. State commissions are free to establish reasonable limits governing access to dark fiber if incumbent LECs can show that they need to maintain fiber reserves. · Incumbent LECs must also offer unbundled access to shared transport where unbundled local circuit switching is provided. Shared transport is defined as transmission facilities shared by more than one carrier, including the incumbent LEC, between end office switches, between end office switches and tandem switches, and between tandem switches in the incumbent LEC's network. · Signaling and Call-Related Databases. Incumbent LECs must offer unbundled access to signaling links and signaling transfer points (STPs) in conjunction with unbundled switching, and on a stand-alone basis. The signaling network element includes, but is not limited to, signaling links and STPs. Incumbent LECs must also offer unbundled access to call-related databases, including, but not limited to, the Line Information database (LIDB), Toll Free Calling database, Number Portability database, Calling Name (CNAM) database, Operator Services/Directory Assistance databases, Advanced Intelligent Network (AIN) databases, and the AIN platform and architecture. We do not require incumbent LECs to unbundle access to certain AIN software that qualify for proprietary treatment. · Operations Support Systems (OSS). Incumbent LECs must offer unbundled access to their operations support systems. OSS consists of pre-ordering, ordering, provisioning, maintenance and repair, and billing functions supported by an incumbent LEC's databases and information. The OSS element includes access to all loop qualification information contained in any of the incumbent LEC's databases or other records, including information on whether a particular loop is capable of providing advanced services. Network Elements that Need Not be Unbundled. The following network elements need not be unbundled: · Operator Services and Directory Assistance (OS/DA). Incumbent LECs are not required to unbundle their OS/DA services pursuant to section 251(c)(3), except in the limited circumstance where an incumbent LEC does not provide customized routing to a requesting carrier to allow it to route traffic to alternative OS/DA providers. Operator services are any automatic or live assistance to a consumer to arrange for billing or completion of a telephone call. Directory assistance is a service that allows subscribers to retrieve telephone numbers of other subscribers. Incumbent LECs, however, remain obligated under the non-discrimination requirements of section 251(b)(3) to comply with the reasonable request of a carrier that purchases the incumbents' OS/DA services to rebrand or unbrand those services, and to provide directory assistance listing updates in daily electronic batch files. · Shared Transport where Circuit Switching is not Unbundled. Incumbent LECs are not required to unbundle shared transport where they are not required to offer unbundled local circuit switching, as described above. · Packet Switching. Incumbent LECs are not required to unbundle packet switching, except in a limited circumstance. Competitive LECs are actively deploying packet switches to serve high-volume customers, and are not impaired in their ability to offer service to such customers without access to the incumbent LEC's facilities. Competitive LECs are impaired, however, in their ability to provide services to small-volume users without access to unbundled packet switching. Nonetheless, we consider the other goals of the Act in making our unbundling determination, and conclude that given the nascent nature of the advanced services market and the Act's goal to provide incentives to all carriers to invest and innovate, incumbent LECs are generally not required to unbundle packet switching. Section 271-Related Issues. · If a network element on the section 271 competitive checklist is not required to be unbundled pursuant to section 251(c)(3) (i.e., local circuit switching and shared transport in certain circumstances), Bell Operating Companies are not required to offer unbundled access to any such checklist items in compliance with the Commission's pricing rules. While the applicable price, terms, and conditions for that element are subject to section 201(b) and 202(a) of the Act, it would be counterproductive to mandate that incumbents offer elements at forward looking prices when the market price, rather than a regulated rate, should prevail in circumstances when an element is not unbundled. Combinations of Network Elements. · Given the pendency of litigation in the Court of Appeals for the Eighth Circuit, the Order declines to define the enhanced extended link as a separate network element, nor does it address whether an incumbent LEC must combine network elements that are not already combined in the network. Further Notice of Proposed Rulemaking: Use of Unbundled Network Elements to Provide Exchange Access Service. · The Further Notice seeks comment on whether there is any basis in the statute or our rules under which incumbent LECs could decline to provide entrance facilities (the link between an interexchange carrier's point of presence and an incumbent's switch or serving wire center) at unbundled network element prices. · The Further Notice also invites parties to refresh the record on whether requesting carriers may use unbundled dedicated or shared transport facilities in conjunction with unbundled switching to originate or terminate interstate toll traffic to customers to whom the requesting carrier does not provide local exchange service. XXVI. BACKGROUND 27. On August 8, 1996, the Commission adopted the Local Competition First Report and Order, implementing the local competition provisions of the 1996 Act. In that order, the Commission established rules governing the obligations of incumbent LECs to open their local networks to competition pursuant to the requirements of section 251 of the 1996 Act. Among other things, the order adopted rules implementing the network unbundling requirements of sections 251(c)(3) and 251(d)(2) of the 1996 Act. Section 251(c)(3) imposes a duty on all incumbent LECs to provide to competitors access to network elements on an unbundled basis. Section 251(d)(2) provides that, in determining which network elements should be unbundled under section 251(c)(3), the Commission shall consider, "at a minimum, whether -- (A) access to such network elements as are proprietary in nature is necessary; and (B) the failure to provide access to such network element would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer." 28. In the Local Competition First Report and Order, the Commission applied its interpretation of the "necessary" and "impair" standards of section 251(d)(2) to the unbundling requirements of section 251(c)(3). Specifically, the Commission defined "necessary" to mean "an element is a prerequisite for competition," and it defined "impair" to mean "to make or cause to become worse; diminish in value." The Commission also determined that a requesting carrier's ability to offer service is "impaired" or "diminished in value" if "the quality of the service the entrant can offer, absent access to the requested element, declines" or if "the cost of providing the service rises." 29. After addressing the "necessary" and "impair" standards, the Commission adopted rule 51.319, which sets forth the network elements that incumbent LECs were required to make available to requesting carriers on an unbundled basis. Section 51.319 of the Commission's rules required incumbent LECs to offer unbundled access to the following network elements: (1) local loops; (2) network interface devices; (3) local switching; (4) interoffice transmission facilities; (5) signaling networks and call-related databases; (6) operations support systems; and (7) operator services and directory assistance. Section 51.317 of the Commission's rules allowed states to impose additional unbundling requirements pursuant to the Commission's interpretation of section 251(d)(2). 30. Following adoption of the Local Competition First Report and Order, incumbent LECs and state commissions filed various challenges to the Commission's rules; these appeals were consolidated in the Eighth Circuit. The Eighth Circuit, among other holdings, rejected the incumbent LECs' argument that, in determining which elements were subject to the unbundling requirements, the Commission had not properly applied the "necessary" and "impair" standards of section 251(d)(2). Accordingly, the Eighth Circuit upheld section 51.319. The Supreme Court granted several parties' requests to review the Eighth Circuit's decision. 31. In its January 25, 1999 opinion, the Supreme Court reversed the Eighth Circuit's decision on this issue, stated that section 51.319 should be vacated, and remanded the matter for further proceedings. While the Court affirmed that the Commission has jurisdiction to implement the local competition provisions of the 1996 Act, including the unbundling requirements in section 251, it concluded that the Commission had not adequately considered the "necessary" and "impair" standards of section 251(d)(2). The Court found, among other things, that the Commission, in deciding which elements must be unbundled, did not adequately take into consideration the "availability of elements outside the incumbent's network." The Court also faulted the Commission's "assumption that any increase in cost (or decrease in quality) imposed by a denial of a network element renders access to that element 'necessary,' and causes the failure to provide that element to 'impair' the entrant's ability to furnish its desired services. . ." In addition, the Court criticized the Commission's interpretation of section 251(d)(2) because it "allows entrants, rather than the Commission, to determine" whether the requirements of that section are satisfied. On April 16, 1999, we released a Second Further Notice in this docket seeking comment on the appropriate unbundling standard, and which network elements should be unbundled. XXXII. FRAMEWORK FOR DECIDING WHAT NETWORK ELEMENTS MUST BE UNBUNDLED PURSUANT TO SECTION 251 A. Overview 33. In this section, we discuss our framework for determining whether a particular network element should be unbundled. We interpret the terms "necessary," "impair," and "proprietary" in section 251(d)(2) in a manner that gives substance to those terms. We then discuss how we will evaluate alternative elements that are available through self-provisioning or from third-party suppliers. In considering whether to unbundle a particular network element, we look first to what is occurring in the marketplace today. For some network elements, we are beginning to see competitors using alternatives in discrete situations. In order to determine whether these alternative sources of network elements are actually available as a practical, economic, and operational matter, so that incumbents should be free of any unbundling obligations for that element, we look at several factors, including cost, ubiquity, quality, timeliness, and operational impediments. 34. We acknowledge that given the complexity associated with a competitive LEC's decision to enter a certain market, it is extremely difficult to identify one particular factor that is dispositive of whether or not a competitor will seek to offer a particular service in any given market. For example, even where a competitive LEC's costs to provide a service may be comparable to the incumbent's costs to provide a similar service, the competitive LEC, because it cannot enter all markets simultaneously, may choose not to enter a particular market at a particular time because there are other markets that are relatively more profitable to serve. The competitive LEC might also be dissuaded from entering a market because of subsidy distortions or other regulatory factors. Conversely, notwithstanding the fact that a competitive LEC's infrastructure costs in a particular market may be materially different from the incumbent LECs' costs, the competitive LEC may still choose to enter that market if it can provide more services over its network infrastructure, or offer marketing, service, or technical innovations for which customers will pay a premium. 35. Although we may not be able to identify with precision a competitor's incentives, or lack of incentives to enter a particular market, we nonetheless find that evidence demonstrating the lack of competition in certain areas of the country and among certain classes of customers is a strong indicator that there may exist economic and other types of barriers that may, at a minimum, impair a competitor's ability to compete vis-…-vis the incumbent. Accordingly, based on evidence provided in the record, we use our administrative judgment to identify several factors, including cost, ubiquity, quality, timeliness, and operational impediments, that we find particularly helpful in explaining whether a competitor's ability to provide the service it seeks to offer is impaired without access to a particular unbundled network element. Based on the actual state of competition, we look at these factors and their relationship to alternative sources of network elements to determine whether the alternatives are actually available as a practical, economic, and operational matter. 36. In particular, we examine both the direct and other costs a carrier incurs to substitute the alternative network element for the incumbent LEC's network element. We also consider whether self-provisioning or purchasing a network element from a third- party supplier would prevent a requesting carrier from entering the market within a reasonable time, or from expanding its operations to meet promptly the demand of its customers. In addition to costs and delays, we consider whether using alternative sources of network elements introduces quality differences or operational or technical impediments that may impair a requesting carrier's ability to provide the services that it seeks to offer. Specifically, we assess whether use of an alternative source of the network element would cause a requesting carrier's customers to experience degraded service. 37. We also consider the extent to which a requesting carrier can compete for customers on a wide-spread basis using alternative sources of the elements outside the incumbent's network. In some cases, to compete effectively with the incumbent LEC for the same customers, competitive LECs must be able to attain similar economies of scale that can only be achieved by serving a broad base of customers within a geographic area. Although theoretically, all or part, of an incumbent LEC's network can be replicated at some cost, as a practical matter, replication of elements in a ubiquitous manner may impair a requesting carrier's ability to compete vis-…-vis the incumbent. If the competitive LEC must deploy multiple facilities in order to be able to bring competition to a broad base of customers within a geographic area, the costs and delays associated with deploying facilities will likely be magnified, and could "materially diminish" that competitor's ability to provide the services that it seeks to offer. 38. We find that the language of section 251(d)(2) and the Supreme Court decision suggest that we should consider, in addition to the "necessary" and "impair" standards, the overall goals of the 1996 Act. Section 251(d)(2) states that the Commission shall "consider, at a minimum," the "necessary" and "impair" standards, thus leaving the Commission free to consider other relevant factors. In addition, the Supreme Court decision requires us to apply a limiting standard "rationally related to the goals of the Act." Moreover, as a policy matter, we believe that we may consider additional factors to ensure that the unbundling requirements promote the goals of the Act. 39. Accordingly, we may consider, in addition to the "necessary" and "impair" standards, whether the unbundling obligations we adopt are likely to: (1) encourage competitive LECs to rapidly enter the local market and serve the greatest number of consumers; (2) advance the development of facilities-based competition by competitive LECs, and encourage investment and innovation in new technologies and new services by both incumbent and competitive LECs; (3) reduce regulation of unbundled network elements as alternatives to the incumbent LECs' network elements become available in the future, (4) provide certainty in the marketplace that will allow new entrants and fledgling competitors to develop national and regional business plans and bring the benefits of competition to the greatest number of consumers; and (5) be administratively practical to apply. We conclude that these important policy goals can only be furthered by adoption of a national list of unbundled elements that takes into consideration, where appropriate, discrete geographic and product market variations that create exceptions to the incumbent LECs' general duty to unbundle the elements on the list. 40. We do not assign any particular weight to the factors we identify above. Rather, we consider the relationship among the various factors to determine whether an incumbent LEC's network element should be unbundled. Indeed, there may be circumstances in which there is significant evidence that competitors are impaired without unbundled access to a particular element, but requiring incumbent LECs to unbundle that element would be inconsistent with the goals of the Act. A. The "Necessary" and "Impair" Standards of Section 251(d)(2) 1. Application of the "necessary" and "impair" standards to proprietary and non-proprietary elements under Section 251(d)(2) a. Background 41. In the Local Competition First Report and Order, the Commission concluded that section 251(d)(2) establishes separate standards that apply to proprietary and non- proprietary network elements. Specifically, the Commission determined that the "necessary" standard of section 251(d)(2)(A) applies to proprietary elements, and that the "impair" standard in section 251(d)(2)(B) applies to non-proprietary elements. In the Notice, we sought comment on this interpretation of section 251(d)(2). In particular, we asked parties to comment on the difference between the "necessary" and "impair" standards. Noting that the Act employs two different terms, we asked if the Commission must apply different criteria to determine whether a network element meets these standards. 42. Only a couple of commenters dispute the Commission's previous decision to apply the "necessary" standard to proprietary elements and the "impair" standard to non- proprietary elements. In particular, Sprint argues that the "necessary" and "impair" standards apply only to proprietary elements and thus, all non-proprietary elements must be unbundled. a. Discussion 43. We find no reason to change our framework for analyzing network elements under section 251(d)(2). In subpart (A) of section 251(d)(2), "necessary' modifies elements that are "proprietary in nature" while in subpart (B), "impair" modifies all other network elements. We agree with the majority of commenters that the "necessary" standard of section 251(d)(2)(A) is a higher standard that applies to proprietary network elements or to proprietary functions within an element. We believe that our conclusion that section 251(d)(2) establishes a higher standard for proprietary network elements than for non-proprietary elements is consistent with both the language of the statute and the goals of the 1996 Act to encourage incumbent LECs and competitive LECs to innovate and invest in new technologies. Specifically, incumbent LECs will have an on-going incentive to innovate if we ensure that their investment in the proprietary portions of their network is protected. While competitive LECs will have access to the incumbent LEC's proprietary network elements where necessary, they will not have unlimited access to those elements. We believe that this balanced approach provides competitive LECs with an incentive to innovate and invest in new technologies that will differentiate their services from the incumbents' services. We note that applying the "necessary" standard to proprietary elements, and the "impair" standard to non-proprietary elements is also consistent with the Commission's previous interpretation of this section that was implicitly adopted by the Supreme Court. 1. Definition of "Proprietary in Nature" a. Background 44. Section 251(d)(2)(A) states that "[i]n determining what network elements should be made available for purposes of subsection (c)(3), the Commission shall consider, at a minimum, whether . . . . access to such network elements as are proprietary in nature is necessary." In the Local Competition First Report and Order, the Commission referred to proprietary network elements as including, for example, "those elements with proprietary protocols or elements containing proprietary information." The Commission found in the Local Competition First Report and Order that for most network elements subject to the unbundling obligations of section 51.319, parties had not identified any proprietary concerns. For those network elements where parties did identify proprietary concerns, the Commission found that access to those network elements was "necessary." 45. In the Notice, we sought comment on whether we should consider network elements as non-proprietary if the interfaces, functions, features and capabilities of the elements sought by the requesting carrier are defined by recognized standard-setting bodies (e.g. ITU, ANSI, or IEEE), are defined by Bellcore requirements, or otherwise are widely available from vendors. We further requested comment on whether the term "proprietary" should be limited to information, software, or technology that can be protected by patents, copyright or trade secret laws. There is general agreement among the parties that the Commission should define proprietary, under section 251(d)(2)(A), consistent with intellectual property categories. Several competitive LECs maintain that we must define the term "proprietary" narrowly so as not to create incentives for incumbent LECs to attempt to deny access to unbundled network elements on proprietary grounds. a. Discussion 46. In this Order, we adopt a limited definition of the phrase "proprietary in nature" that tracks the intellectual property categories of patent, copyright, and trade secrets. The majority of parties addressing this issue support using intellectual property law as a basis for defining "proprietary in nature." We agree, and find that the intellectual property laws governing patent, copyright and trade secrets find a common purpose in Congress' intention to protect proprietary interests under section 251(d)(2). The intellectual property laws are designed to protect the incentives of authors and inventors to innovate. Similarly, Congress recognized that an incumbent LEC's incentive to innovate could be adversely affected by requiring incumbent LECs to unbundle proprietary portions of network elements to requesting carrier-competitors. Congress therefore required the Commission to consider whether unbundling in such instances is "necessary." 47. We find that if an incumbent LEC can demonstrate that it has invested resources (time, material, or personnel) to develop proprietary information or network elements that are protected by patent, copyright, or trade secret law, the product of such an investment is "proprietary in nature" within the meaning of section 251(d)(2)(A). This definition is consistent with the 1996 Act's policy of preserving the incumbent LECs' innovation incentives. It is also consistent with the Commission's conclusion, in the Local Competition First Report and Order, that in some instances it will be "necessary" for new entrants to obtain access to proprietary elements. Finally, our decision to define interests that are "proprietary in nature" along established intellectual property categories is consistent with the Department of Justice and Federal Trade Commission Guidelines for the Licensing of Intellectual Property. 48. Our definition excludes elements that are based on widely accepted industry documents or on standards commonly used by a standards-setting body (e.g. ITU, ANSI, IEEE) or by vendors. There are few innovation incentives associated with elements that are based on well-recognized standards that are widely available in the market, and we therefore are not required to scrutinize such elements under the higher "necessary" standard. 49. Section 251(d)(2) directs the Commission to "consider, at a minimum" whether access to proprietary elements is necessary. As discussed below, this discretionary language permits us to consider other factors, in addition to the "necessary" standard, in making our unbundling determination. We find that there are several circumstances which, if they exist with regard to information or functionalities that the incumbent LEC claims are proprietary, will permit us to order unbundling of the proprietary information or functionalities even if unbundled access to the element is not strictly "necessary," as long as the "impair" standard is met. The first circumstance is where an incumbent LEC, for the primary purpose of causing a particular network to be evaluated under the stricter "necessary" standard in order to avoid its unbundling obligation, implements only a minor modification to the network element to make the element "proprietary in nature." Denying a requesting carrier access to the element in this circumstance would not encourage innovation and investment by the incumbent LEC, which is one of the goals of the 1996 Act, and would reduce consumer benefits by failing to facilitate rapid deployment of competitive services. The second circumstance is where an incumbent LEC cannot demonstrate that the information or functionality that it claims is proprietary differentiates its services from its competitors' services, or is otherwise competitively significant. Information or functionalities that do not distinguish an incumbent LEC's service from that of its competitors are unlikely to be the focus of an incumbent LEC's efforts to innovate, and therefore do not require the high level of protection normally afforded to proprietary elements under the "necessary" standard. The third circumstance is where we find that lack of access to the proprietary element would jeopardize the goal of the 1996 Act to bring rapid competition to the greatest number of customers. In such a circumstance, we may find that the incumbent LEC's asserted proprietary interest is outweighed by the benefits of facilitating more rapid deployment of competition for the greatest number of consumers. Given the significance of the incumbent LECs' proprietary interests, and our commitment to do nothing to discourage innovation and investment by all carriers, we do not envision, outside of these limited circumstances, unbundling a proprietary network element unless the "necessary" standard is satisfied. Moreover, we cannot imagine a situation where we would order unbundling of a proprietary element unless the "impair" standard has been met. 50. We agree with those commenters that argue that "proprietary in nature" applies only to the proprietary interests of the incumbent LEC and not to proprietary interests of third parties. Limiting the definition of "proprietary" to interests held by the incumbent LEC is consistent with section 251(d)(2)(A)'s goal of preserving the incumbent LECs' incentives to innovate. Moreover, sections 251(c) and 251(d)(2), by their terms, apply only to the proprietary interests of those parties subject to the Act's unbundling obligations -- incumbent LECs. Thus, section 251(d)(2) only indirectly affects, if at all, the innovation incentives of third parties. 51. Finally, we reject CompTel's argument that we should limit the application of proprietary network elements to those circumstances in which the incumbent LEC "discloses" proprietary information. CompTel argues that if unbundling merely provides a requesting carrier with the "use" of a proprietary methodology, but does not "disclose" or access the proprietary information itself, the element is not proprietary. We find that the "use" or "disclosure" rationale does not promote the goal of the Act to encourage investment and innovation, and thus is at odds with our decision to define "proprietary" along intellectual property categories. 52. Pursuant to patent law, patent holders trade monopoly rights in their inventions in exchange for a requirement that they disclose the technical details underlying the patent. Patent holders thus recover their investments by obtaining a monopoly on the "use" of their protected intellectual property. We agree with Ameritech that limiting the definition of "proprietary" to requests that would reveal proprietary information would turn intellectual property law and incentives to innovate on their head; "instead of granting exclusivity in exchange for disclosure, it would withhold exclusivity unless needed to avoid disclosure." Similarly, under copyright laws, an illegal copy or "use" of a protected work can damage an author's incentive to produce the work. We note, however, that the disclosure of sensitive customer information contained in unbundled network element must be consistent with the requirements of section 222. 1. The "Necessary" Standard of Section 251(d)(2)(A) a. Background 53. In the Local Competition First Report and Order, the Commission defined a "necessary" network element as one that is a "prerequisite" to competition. The Commission stated that "in some instances it will be 'necessary' for requesting carriers to obtain access to proprietary elements (e.g., elements with proprietary protocols or elements containing proprietary information) because without such elements, the ability of requesting carriers to compete would be significantly impaired or thwarted." It also acknowledged that prohibiting incumbents from refusing access to proprietary elements could reduce their incentives to offer innovative services. The Commission did not identify any proprietary elements subject to unbundling in the Local Competition First Report and Order, except that it acknowledged the claims of several parties that access to the incumbent LECs' advanced intelligent network (AIN) may raise proprietary concerns. It nevertheless concluded that access to AIN is "necessary" within the meaning of section 251(d)(2)(A). 54. In the Notice, the Commission sought comment on the definition of "necessary" for the purpose of determining proprietary network elements that must be unbundled pursuant to the requirements of section 251(d)(2)(A), as well as on what factors or criteria the Commission should apply in determining whether access to a network element is "necessary." 55. Several competitive LECs assert that in determining whether unbundling of a proprietary network element is "necessary," the Commission must evaluate whether the requesting carrier can obtain comparable functionality from an alternative network element. They maintain that if the requesting carrier would experience a material loss in functionality without the network element that that the incumbent LEC claims is proprietary, then the incumbent LEC's network element is "necessary" within the meaning of section 251(d)(2)(A). The incumbent LECs assert generally that both the "necessary" and "impair" standards require an analysis of whether lack of access to their networks elements, taking into consideration alternatives outside the incumbent's network, would deny an efficient competitor a meaningful opportunity to compete. These commenters argue that the "necessary" standard requires the Commission to accept a higher degree of proof that alternatives to the element are not available. a. Discussion 56. We conclude that a proprietary network element is "necessary" within the meaning of section 251(d)(2)(A) if, taking into consideration the availability of alternative elements outside the incumbent's network, including self-provisioning by a requesting carrier or acquiring an alternative from a third-party supplier, lack of access to that element would, as a practical, economic, and operational matter, preclude a requesting carrier from providing the services it seeks to offer. We agree with NTIA that the proper focus of the "necessary" standard is whether access to the incumbent LEC's proprietary element is absolutely required for the competitor's provision of its intended service. We find, therefore, that an incumbent LEC must provide access to a proprietary element, if withholding access to the element would prevent a competitor from providing the service it seeks to offer. In other words, we conclude that an incumbent LEC's proprietary network element would only be available to a competitor if the competitor is unable to offer service, without access to the element, because no practical, economic, and operational alternative is available, either by self-provisioning or from other sources. 57. The standard we assign to the term "necessary," as used in section 251(d)(2)(A), is consistent with the Supreme Court's decision because it considers alternatives available outside the incumbent's network and gives substance to the meaning of "necessary." Moreover, insofar as the standard focuses on the competitor's ability to furnish a desired service, and not merely on whether profits are increased by using the incumbent's network, the standard is also consistent with the Court's instruction that we must "apply some limiting standard, rationally related to the goals of the Act." 58. This "necessary" standard differs from the "impair" standard we adopt below because a "necessary" element would, if withheld, prevent a carrier from offering service, while an element subject to the "impair" standard would, if withheld, merely limit a carrier's ability to provide the services it seeks to offer. We therefore disagree with the standards proposed by ALTS and other competitive LECs that access to a proprietary element is "necessary" if the entrant would experience a material loss in functionality without access to the element. A standard based on a test of "material loss" in functionality requires only that the competitive LEC's ability to compete be materially affected in some way, as opposed to precluded, and ignores the higher degree of protection normally afforded intellectual property rights. The incumbent LECs argue that the "necessary" standard is a higher standard that is intended to preserve their incentive to invest in proprietary protocols, and that access to a proprietary element is "necessary" only if lack of access to that element would deny an efficient competitor a meaningful opportunity to compete. We agree with the incumbent LECs' concerns regarding the preservation of their investment incentives. We believe that our standard, by requiring that a requesting carrier be precluded as a practical, economic, and operational matter from providing service without access to the proprietary information, sufficiently protects the incumbents' proprietary property from nonessential access by competitors. 59. We reject, however, the incumbent LECs' proposal to base the "necessary" standard on the requirements of an efficient competitor. As we explain below in our discussion of the "impair" standard, we do not affirmatively base our unbundling standard on an efficient competitor because we conclude that the marketplace is better able than regulators to distinguish efficient competitors from inefficient competitors. We also note that GTE and SBC state that few, if any, network elements are entirely proprietary in nature. Other commenters point out that most network equipment and services are non-proprietary because of the need for interoperability of networks. We therefore expect that the "necessary" standard will be invoked only when there is a serious question of whether access to the element will infringe upon the incumbent's intellectual property. 1. The "Impair" Standard of Section 251(d)(2)(b) a. Background 60. In the Local Competition First Report and Order, the Commission adopted a dictionary definition of the term "impair" that means "to make or cause to become worse; diminish in value." The Commission stated that "generally . . . an entrant's ability to offer a telecommunications service is 'diminished in value' if the quality of the service the entrant can offer, absent access to the requested element, declines and/or the cost of providing the service rises." In particular, the Commission interpreted the "impair" standard as requiring an evaluation of whether the failure of an incumbent to provide access to a network element would decrease the quality, or increase the financial or administrative cost of the service a requesting carrier seeks to offer. 61. In the Notice, we sought comment on the meaning of the term "impair," and asked whether we should adopt a standard under which we examine whether the new entrant's ability to offer a telecommunications service in a competitive manner is materially diminished in value. We also sought comment on the factors or criteria we should adopt to determine whether failure to provide access to the incumbent LEC's network elements would impair an entrant's ability to provide service within the meaning of section 251(d)(2). 62. The incumbent LECs argue generally that a requesting carrier is impaired if, after taking into account the availability of elements from alternative sources outside the incumbent's network, lack of access to the requested element would deny a competitor a meaningful opportunity to compete. This standard is similar to the standard the incumbent LECs propose for the "necessary" standard under section 251(d)(2)(A). GTE argues that failure to provide access to a network element would impair a requesting carrier's ability to provide service only where the element is essential to competition, and there is convincing evidence that the carrier cannot compete effectively using an alternative network element. Several incumbent also maintain that we must consider all available alternatives, including those available from other suppliers and through self-provisioning by the requesting carrier. The Texas PUC proposes that a competitor is impaired if, looking at the marketplace as a whole, lack of access to the incumbent's network element causes it to incur an increase in cost such that the competitor does not have a meaningful opportunity to compete. The competitive LECs and the Illinois Commerce Commission propose a standard by which a carrier would be impaired if, after taking into account the availability of elements from alternative sources outside the incumbent's network, lack of access to the requested element would materially diminish the requesting carrier's ability to provide service. The difference between the standard proposed by the competitive LECs and the standard proposed by the incumbent LECs is essentially the difference between whether lack of access to an unbundled network element "denies" or "materially diminishes" the ability of a competitor to provide the services it seeks to offer. Many competitive LECs also assert that the incumbent LECs' failure to provide access to an element would impair a requesting carrier's ability to provide service where there is no competitive wholesale market for the requested element. a. Discussion (i) The "Impair" analysis 63. We conclude that the failure to provide access to a network element would "impair" the ability of a requesting carrier to provide the services it seeks to offer if, taking into consideration the availability of alternative elements outside the incumbent's network, including self-provisioning by a requesting carrier or acquiring an alternative from a third-party supplier, lack of access to that element materially diminishes a requesting carrier's ability to provide the services it seeks to offer. We find that a materiality component, although it cannot be quantified precisely, requires that there be substantive differences between the alternative outside the incumbent LEC's network and the incumbent LEC's network element that, collectively, "impair" a competitive LEC's ability to provide service within the meaning of section 251(d)(2). We therefore agree with the Illinois Commerce Commission that where a competing LEC's "ability to offer a telecommunications service in a competitive manner is materially diminished in value without access to that element," the competitor's ability to provide its desired services would be impaired. 64. We believe that a standard that includes a "materiality" component gives substance to the "impair" standard of section 251(d)(2)(B), and responds to the Supreme Court's concern that we "apply some limiting standard, rationally related to the goals of the Act." A standard that includes a materiality component preserves requesting carriers' ability to provide service using unbundled elements, as contemplated by the Act, and encourages them to invest and innovate. As envisioned by Congress, requesting carriers may need each of the three separate means of providing service (resale of the incumbent LEC's service, use of unbundled incumbent LEC network elements, deployment of self-provisioned facilities), or various combinations of these means, in order to serve different customer classes in different areas. The purchase of unbundled network elements from the incumbent should serve as a transitional strategy that will provide requesting carriers with the ability to gain a sufficient volume of business to justify economical deployment of their own facilities. 65. Although we recognize that the existence of some significant level of competitive LEC facilities deployment is probative of whether competitive LECs are impaired from providing service within the meaning of section 251(d)(2), we decline to adopt the incumbent LECs' position that the presence of a single competitor providing service, without using the incumbent's unbundled network elements, is dispositive evidence that a competitor's ability to provide service generally would not be impaired without access to such elements. According to Bell Atlantic, if an efficient competitor can and does provide service without access to the incumbent's network element, it is irrelevant whether a less efficient competitor might claim that it would be impaired without access to the element. We find that the "efficiency" argument raised by Bell Atlantic and other incumbent LECs is more relevant to the length of time a competitor has been in business than to the efficiencies created by the competitor's inherent capabilities or cost structure. More importantly, however, we agree with MCI WorldCom that the Act is not calibrated to the performance of the company whose business plan allows it to rely the least on the incumbent LEC's network elements. The provisions of the 1996 Act do not contemplate that either the incumbent LEC or the regulator will determine whether a particular carrier is "efficient." Rather, the Act is designed to create a regulatory framework that requires incumbent LECs to make network elements subject to the unbundling obligations of section 251 available to all requesting carriers, subject to the requirements of section 251(d)(2), and allows the marketplace to determine ultimately which competitors thrive or survive. 66. Moreover, the ability of one or more competitors to serve certain customers in a particular market is not dispositive of whether competitive LECs without unbundled access to the incumbent LEC's facilities are able to compete for other customers in the same market or for customers in other markets. In some markets, particularly those markets serving high-volume business customers, it may be practical and economical for competitive LECs to compete using self-provisioned facilities. In other markets, however, typically those markets consisting of residential consumers and small businesses, the delay and costs associated with self-provisioning a network element will preclude those same competitors, or others, from assuming the risk of entry, unless they can purchase unbundled elements from the incumbent. We agree with the commenters that point out that we cannot evaluate the needs of every potential carrier seeking access to each network element on a case-by-case basis. We conclude, however, that we should not adopt rules that would deny access to network elements to all competitors based on the presence of a single competitor that has been able to enter without the use of a particular unbundled network element from the incumbent LEC. 67. We believe that Congress rejected implicitly the argument that the presence of a single competitor, alone, should be dispositive of whether a competitive LEC would be "impaired" within the meaning of section 251(d)(2). For example, although Congress fully expected cable companies to enter the local exchange market using their own facilities, including self-provisioned loops, Congress still contemplated that incumbent LECs would be required to offer unbundled loops to requesting carriers. A standard that would be satisfied by the existence of a single competitive LEC using a non-incumbent LEC element to serve a specific market, without reference to whether other competitive LECs are "impaired" under section 251(d)(2), would be inconsistent with the Act's goal of creating robust competition in telecommunications. In particular, such a standard would not create competition among multiple providers of local service that would drive down prices to competitive levels. Indeed, such a standard would more likely create stagnant duopolies comprised of the incumbent LEC and the first new entrant in a particular market. An absence of multiple providers serving various markets would significantly limit the benefits of competition that would otherwise flow to consumers. 68. On the other hand, we are not persuaded by arguments of competitive LECs that the "impair" standard is met only once it is determined that a wholesale market exists for a particular element. We agree with the incumbent LECs that basing the "impair" standard on the existence of a wholesale market does not take into consideration self-provisioning as a viable substitute to the incumbent LECs' network elements. The Supreme Court decision in Iowa Utils. Bd. expressly faulted the Commission's analysis in the Local Competition First Report and Order for not comparing use of the incumbent LEC's element with "self-provision" or with "purchas[ed elements] from another provider." We find that, in order to thoroughly evaluate the availability of alternative elements outside of the incumbent LEC's network, we must consider elements available from all sources, including those elements available from third-party suppliers and through self-provisioning. 69. Several of the incumbent LECs argue that our standard should be based on an analysis similar to the one used by courts in determining whether, according to the essential facilities doctrine, a firm must share its facilities with competitors. We disagree. Although we acknowledge that the Supreme Court referred to the possibility of adopting a limiting standard based on the essential facilities doctrine, we find nothing in the legislative history or statutory language of the 1996 Act, or in the Court's decision that requires us to apply that doctrine in determining which network elements the incumbent LECs must unbundle. Indeed, the Court expressly declined to decide, as a matter of law, whether the essential facilities doctrine is mandated by section 251(d). Further, we believe that the standard under section 251(d) better reflects the overall goals of the Act. Accordingly, as discussed more fully below, we describe several factors that should be considered in determining whether a particular network element must be unbundled pursuant to section 251(c)(3). 70. As an initial matter, the legislative history and statutory language of the Act indicate that Congress did not intend to codify the essential facilities doctrine when it enacted section 251(d)(2). Specifically, the legislative history indicates that Congress was aware of antitrust principles and the essential facilities doctrine, in particular, when it considered the 1996 Act. At least since 1991, the Senate had considered telecommunications legislation that expressly referred to "essential facilities." Yet, in spite of its awareness of this doctrine, Congress did not adopt an essential facilities test for unbundling of network elements. Congress chose, instead, to adopt unbundling requirements that are based upon the "necessary" and "impair" standards of section 251(d)(2). Moreover, section 601(b)(1) of the Act expressly preserves the existing antitrust laws, indicating that Congress intended for the Act to augment, not replace, traditional antitrust rules. 71. The essential facilities doctrine is an antitrust doctrine that imposes an obligation on a firm that controls facilities that are essential for the existence of competition between itself and a competitor to share such facilities on non-discriminatory terms. The doctrine creates a narrow exception to the general antitrust presumption that a single firm may decline to deal with another firm. Under the essential facilities doctrine, a court may require a firm possessing monopoly control over an essential input to deal with a competitor, if it is shown that the monopolist is misusing control of an essential facility to foreclose competition in a downstream market. 72. Although we find that the essential facilities doctrine promotes the same economic and policy goals embodied in the 1996 Act, we find it to be of limited assistance in our analysis of the unbundling obligations of the Act because, as NTIA explains, the Act plainly imposes on incumbent LECs a broader duty to deal with competitors than does the essential facilities doctrine. In particular, the essential facilities doctrine differs from the analysis the Commission must undertake under section 251(d)(2) because Congress has already created an affirmative obligation for incumbent LECs to make their facilities available to competitors. Specifically, section 251(c)(3) imposes on incumbent LECs a general obligation to provide access on an unbundled basis to any network elements that the Commission identifies under section 251(d)(2). This obligation is not limited to situations in which the incumbent is misusing control of a unique facility to foreclose competition in a downstream market. Rather, section 251(d)(2) requires incumbents to share their facilities if competitors are merely "impaired" in their ability to provide services they seek to offer. In addition, sections 251(c)(3) and 251(d)(2) require incumbent LECs to make their facilities available at cost-based rates, whereas the essential facilities doctrine allows monopolists to continue charging monopoly rates for use of their facilities. 73. It is particularly notable that although the essential facilities doctrine is referenced in several Supreme Court rulings, the Supreme Court has never explicitly adopted the doctrine. Moreover, because antitrust jurisprudence has not clearly defined the contours of the essential facilities doctrine, the doctrine provides limited guidance in developing a limiting standard under section 251(d)(2). In order to establish liability under the essential facilities doctrine, a plaintiff must establish the existence of five elements: 1) a monopolist controls an essential facility; 2) the competitor is unable to practically or reasonably duplicate the essential facility; 3) the monopolist denies a competitor use of the facility; 4) the monopolist can feasibly provide the facility; and 5) there is no legitimate business justification for denying access to the facility the monopolist controls. Although the second prong of this test resembles the inquiry the Commission must undertake to evaluate the availability of alternative elements outside of the incumbent LEC's network, it does not establish a standard by which the Commission can measure the extent to which the cost of duplicating the element is economically infeasible, which, as described below, is a significant part of the our unbundling analysis. (i) Factors for Determining Availability of Alternative Network Elements 74. In order to respond to the Supreme Court's decision, we consider whether a requesting carrier's ability to provide the services that it seeks to offer would be materially diminished if it were required to use an alternative element available outside the incumbent LEC's network. We agree with those parties that argue that we must consider the totality of the circumstances to determine whether an alternative to the incumbent LEC's network element is available in such a manner that a requesting carrier can realistically be expected to actually provide service using the alternative. We therefore take into account alternatives that are available through both self-provisioning and from third-party suppliers, and we consider the extent to which these alternatives are available as a practical, economic, and operational matter. 75. We are not persuaded by the incumbents' argument that we must look at each element in isolation to determine whether or not that element independently satisfies section 251(d)(2). Such an analysis fails to reflect the manner in which carriers interconnect their networks, and ignores factors that would impair a requesting carrier's ability to actually provide service, which is the focus of section 251(d)(2)(B). Even if a particular element may be purchased outside of the incumbent LEC's network at reasonable prices, other factors, including the costs and delays associated with collocation arrangements, as well as additional costs and operational impediments associated with the manual processes used to interconnect certain network elements, may make it impossible as a practical, economic, and operational matter for a competitor to provide services in the local market quickly and on a wide-spread basis. 76. We acknowledge that some of the factors we consider in our analysis may implicate other proceedings or provisions of the statute. We therefore remain open to the possibility that issues that we address under our "impair" analysis, (e.g., collocation), could be addressed in other contexts, such as in enforcement proceedings. 77. Although we recognize that the factors of cost, timeliness, quality, ubiquity, and operational factors are only some of the factors that may influence a carrier's decision to enter a particular market, we agree with the California PUC that these factors are relevant to an inquiry of whether alternative sources of network elements are reasonably available from other sources, and thus, in many cases, whether requesting carriers are able to actually provide service using the alternative element. We also agree with the commenters that point out that we cannot evaluate the needs of every potential entrant for every network element on a carrier- by-carrier, market-by-market, week-by-week (or other time period) basis. We therefore will not analyze the availability of alternative elements, including those provided through self-provisioning, from the perspective of a carrier using any specific competitive strategy in a particular geographic market. 78. Although we find it reasonable to consider cost, time, quality, ubiquity, and other factors associated with self-provisioning or acquiring an element from a third-party provider, we do not base our decision on cost models or on the theoretical availability of alternatives from other sources. Rather, we find the marketplace to be the most persuasive evidence of the actual availability of alternatives as a practical, economic, and operational matter. As the Texas PUC stated, the Commission and the states should "base their decisions on marketplace information, while recognizing that minor increases in a competitor's costs must be weighed against other factors such as service quality, technological innovation, and the loss of efficiency in a rapidly changing marketplace." Discerning the practical, economic, and operational viability of self-provisioning or obtaining alternative elements from third-party providers is technical, complex, and subject to considerable uncertainty. We believe, however, that an examination of the factors we have identified provides the Commission with the ability to identify, through the exercise of its administrative judgment, discernable material differences between using the incumbent's unbundled network elements and those available from other sources that ultimately will affect a requesting carrier's ability to provide the services it seeks to offer. 79. We assign little weight in our "impair" analysis to the ability of a requesting carrier to use the incumbent LECs' resold or retail tariffed services as alternatives to unbundled network elements. In the Local Competition First Report and Order, the Commission expressly rejected the incumbent LECs' argument that requesting carriers are not impaired in their ability to provide service if they can provide their proposed service by purchasing the service at wholesale rates from the incumbent LEC. As the Commission concluded in that Order, allowing incumbent LECs to deny access to unbundled elements solely, or primarily, on the grounds that an element is equivalent to a service available at resale would lead to impractical results; incumbent LECs could completely avoid section 251(c)(3)'s unbundling obligations by offering unbundled elements to end users as retail services. In other words, denying access to unbundled elements on the grounds that an incumbent LEC offers an equivalent retail service could force requesting carriers to purchase, for example, an unbundled loop and switching out of an incumbent's retail tariff at a wholesale discount, subject to all of the associated tariff restrictions. US West maintains that it need not unbundle local transport because requesting carriers can purchase its tariffed special access services. In light of the little weight we assign to the availability of resold services in our analysis, we reject US West's argument. This argument would foreclose competitive LECs from taking advantage of the distinct opportunity Congress gave them, through section 251(c)(3), to use unbundled network elements. 80. As the Commission explained in the Local Competition First Report and Order, using unbundled network elements and resold services present different opportunities, risks, and costs, in connection with providing local telephone service. These differences influence the entry strategies of potential competitors. The Commission stated that carriers using unbundled elements will have greater opportunities to offer services that are different from those services offered by the incumbents. More specifically, carriers reselling incumbent LEC services are limited to offering the same service an incumbent LEC offers at retail. While competitive LECs using unbundled elements may have greater competitive opportunities than carriers offering services available for resale, they also face greater risks. A carrier purchasing unbundled elements must pay for the cost of the element, pursuant to terms and conditions agreed to in negotiations or ordered by states in arbitrations. Thus, the competitive LEC faces the risk that end-user customers will not demand a sufficient number of services to allow the competitive LEC to recoup the costs it incurs using the unbundled element; a carrier that resells the incumbent LEC's services does not face the same risk. The 1996 Act grants competitive LECs the option of using either the incumbent LEC's unbundled network elements or resold services, thereby allowing the competitors to balance the risks and opportunities associated with each. 81. In addition, even if we agreed with US West that an incumbent LEC's retail tariff provided competitive LECs with a viable alternative to the incumbent LEC's unbundled network element, competitors would have no assurance that the incumbent LEC would not change the tariff in such a manner that the competitive LEC could no longer rely on it to provide the services it seeks to offer. Most services that competitive LECs purchase for resale are contained in state tariffs, and are subject to the states' tariff approval process. Relying on these state-approved tariffs would compromise our ability to determine which network elements must be unbundled pursuant to section 251(d)(2) because we would not be able to evaluate each incumbent LEC retail tariff as a possible alternative for every network element. In addition to being administratively unworkable for us to evaluate every state tariff filed by the incumbent LECs, relying on these tariffs as alternatives to the incumbent LECs' unbundled network elements would create inconsistent unbundling rules among the states, a result that, as we explain further below, would not promote the development of competition for all consumers. 82. Moreover, we do not find the Supreme Court's decision requiring us to consider the availability of elements outside the incumbent LECs' network to be at all inconsistent with our decision to consider alternatives available through self- provisioning or from third-party suppliers. The Supreme Court required us to compare the use of unbundled network elements with "self-provision, or with purchase from another provider." If we were to construe the Supreme Court's opinion in the manner suggested by US West, we would have to consider whether an incumbent LEC's duty to unbundle an element would be limited by the existence of an alternative service that the incumbent LEC provides itself, whether or not there are other competitively-supplied alternatives. In other words, under US West's argument, the existence of its retail tariffs alone would be sufficient to eliminate its obligation to unbundle certain elements. The Supreme Court's opinion does not require us to ignore whether there are other non-incumbent LEC alternatives to the incumbent LEC's unbundled network elements, proposed by US West. 83. We believe that the "impair" standard we adopt in this Order will encourage the development of facilities-based competition. Specifically, as competitors acquire more customers, and the material differences in cost, time, quality, and operational impediments diminish, competitors will gradually reduce their reliance on the incumbent LECs' facilities. Competitors will also deploy more of their own facilities as it becomes practical to do so. As the material differences decrease, the Commission will be able to apply the same standard to remove elements from the national unbundling obligations. 84. Cost. In addition to the direct cost of purchasing the element, we consider all of the costs that requesting carriers would incur using an alternative element to provide the services it seeks to offer. Although not dispositive, the costs associated with self- provisioning or purchasing alternative elements from third-party suppliers are relevant to our determination of whether the element is a practical and economical alternative to the incumbent LEC's unbundled network element. 85. We believe that an "impair" standard based on cost is more appropriate than a standard based on profitability, because profit margins for both new and existing carriers will depend on the degree of competition that exists in the market. If the cost of the alternative element is materially greater than the cost of obtaining the corresponding element from the incumbent, the requesting carrier will not be able to provide service at prices that are competitive with the incumbent's prevailing retail prices. 86. In determining whether the cost of self-provisioning or purchasing an element from a third-party source is materially higher than using the incumbent LEC's unbundled network element, we evaluate the difference between the cost to the requesting carrier of obtaining the unbundled element from the incumbent LEC at forward- looking costs and the cost of an alternative element. Because the Commission's rules require that network elements be priced based on forward-looking economic costs, we believe that forward-looking costs are the appropriate costs to consider in our analysis. 87. In order to provide service using its own facilities, a competitor will incur the costs of purchasing, installing, and provisioning the equipment it needs to provide service using its own loop or by interconnecting with the incumbent's network. The record in this proceeding addresses several types of costs associated with using an alternative element. These include the direct costs of provisioning the element, including fixed and sunk costs, as well as other costs that are likely to materially affect the requesting carrier's ability to provide the services it seeks to offer. "Fixed costs" are costs that do not vary with the level of output. A "sunk cost," on the other hand, is a cost that, once incurred, cannot be recouped if the firm ceases production. To the extent that a competitive LEC incurs significant fixed costs or sunk costs when it uses its own facilities or acquires facilities from a third party, these costs can disadvantage the competitor relative to the incumbent. 88. Fixed costs are frequently associated with economies of scale. Specifically, where a firm faces both a fixed cost and a constant or declining variable cost, the firm's average unit cost will fall as output increases, and the firm's cost structure is said to exhibit economies of scale. For example, the cost a competitive LEC incurs to construct its own fiber transport ring would constitute a fixed cost, because, at least in the short run, this cost would not vary as the competitive LEC's output changed. If a competitive LEC incurs significant fixed costs when it uses a particular facility, in its early stages of development it would have a significantly higher average unit cost than the incumbent LEC, which has a significantly larger output and customer base over which to spread the fixed cost. Since the Commission's rules require unbundled transport to be priced based on forward-looking costs (a form of long-run average incremental cost), leasing the incumbent's unbundled transport facilities is likely to be significantly less costly than deploying one's own transport facilities when the competitor has a relatively small volume of traffic, and thus its output would be small relative to that of the incumbent. 89. Certain network facilities also involve sunk costs, because the facilities cannot be easily re-deployed or sold should the competitor decide to cease offering service over those facilities. For example, the cost of the loop serving a customer's home is largely a sunk cost because it cannot be recovered if the carrier ceases serving the customer. It is generally recognized that the need to incur sunk costs can constitute a barrier to entry. Specifically, where an incumbent has already deployed sunk facilities to serve all customers, a competitive LEC may be unwilling to sink the costs of duplicative facilities, either because it may be unable to lure customers away from the incumbent and generate enough revenue to recover these sunk costs, or because resulting competition between itself and the incumbent LEC would drive prices so low that, even if the competitive LEC won a significant number of customers, it would still be unable to recover its sunk costs. In such situations, the incumbent has a "first mover" advantage. 90. The non-recurring costs of collocating equipment in the incumbent's end offices, including the costs of connecting the incumbent LEC's unbundled loops to the competitor's switch, and the fees required to obtain rights-of-ways, also constitute sunk costs. Unlike the costs associated with purchasing portable equipment, such as multiplexers or switches, the non-recurring costs incurred to collocate equipment and connect network elements to the competitive LEC's collocated equipment in an incumbent's central office are sunk costs and cannot be recovered if, for whatever reason, the carrier exits that market. 91. Additional costs, such as the costs a competitive LEC incurs to connect its own facilities to the incumbent LEC's unbundled network elements, affect the extent to which an alternative element is available as a practical and economic matter, such that a requesting carrier can actually use the element to provide the service it seeks to offer. For example, when a competitive LEC deploys its own switch but purchases the customer's unbundled loop from the incumbent, the competitive LEC may incur significant costs to connect the customer's loop, located in the incumbent LEC's central office, to its own switch. When these cutover costs are added to the costs of collocation, a competitor's ability to provide service in an efficient manner, when using its own switch for unbundled switching, could be materially diminished. We thus look at all of the costs a competitor must incur when using alternatives to the incumbent LEC's network element. 92. We find that significant fixed and sunk costs associated with using alternatives outside the incumbent LEC's network contribute to a finding that lack of access to the incumbent's unbundled network elements impairs the requesting carrier's ability to provide the service it seeks to offer. This is particularly true for a new competitive LEC that has few customers from which it can recover these costs. Because the per-customer costs decrease as the number of subscribers served by the carrier increases, a carrier must acquire a sufficient customer base if it is to recover substantial costs associated with deploying its own facilities. It is reasonable, therefore, that a competitive LEC, at a minimum, would want to serve a substantial number of business and/or residential customers within a particular Metropolitan Statistical Area (MSA). If the competitor must collocate its own switches in multiple central offices throughout the MSA in order to serve those customers, the costs associated with collocation may impair the competitor's ability to provide the services it seeks to offer, even if the cost of purchasing the individual equipment hardware is not excessive. 93. In addition, we find that the type of customers that a competitive LEC seeks to serve is relevant to our analysis of whether the cost of self-provisioning or acquiring an element from a third-party supplier impairs the ability of a requesting carrier to provide the services it seeks to offer. Section 251(d)(2)(B) requires us to consider whether lack of access to the incumbent LEC's network elements would impair the ability of the carrier to provide the services it seeks to offer. Consistent with the Act, we define the term "services" as it is used in section 251(d)(2)(B), to mean "telecommunications service," as it is defined in section 153(46) of the Act. Section 251(c)(3) of the Act places an affirmative duty on the incumbent LEC to provide unbundled elements to "any requesting telecommunications carrier for the provision of a telecommunications service." Section 251(d)(2)(B), in turn, requires that a requesting carrier should not have access to unbundled elements unless it would be impaired in its ability to provide "the services that it seeks to offer." Different types of customers use different services (e.g., large business customers order different services than residential customers). We therefore conclude that it is appropriate for us to consider the particular types of customers that the carrier seeks to serve. 94. Competitive LECs generally seek to provide service to residential and small business customers and/or to large business customers. The different revenue- generating potential of these different customer groups will often determine whether or not a competitive LEC can afford to incur the costs of self-provisioning a facility or of acquiring it from a third-party supplier, to the extent that it is available from a third-party provider. For example, a model submitted by MCI WorldCom that compares the costs of serving residential customers using unbundled elements from the incumbent LEC with the costs of serving the customers using its own facilities indicates that, at low market penetration levels, the costs of collocation would impair a competitive LEC's ability to serve residential customers using its own facilities. The model further demonstrates, however, that using the incumbent LEC's unbundled network elements, the entrant would be able provide service, even at the same low market-penetration levels. 95. Although the model submitted by MCI WorldCom is clearly not dispositive, we note it to illustrate that a requesting carrier's ability to serve residential and small business customers may be materially diminished without access to the incumbent LEC's network. Larger business customers, on the other hand, may generate sufficient revenue to allow the requesting carrier to serve the customer using certain self-provisioned facilities or facilities acquired from third-party sources. 96. We also consider, as part of our analysis, the economies of scale and scope that the incumbents have due to their ubiquitous network. The record demonstrates that, although facilities-based competition has developed in particular markets (primarily for large business customers in high-density areas), incumbent LECs continue to enjoy significant economies of scale and density not enjoyed by competitive LECs. Because these economies lower the incumbent's per-customer costs of providing service, vis-…-vis their competitors, we find these economies relevant to our inquiry of the extent to which costs of using alternative elements impair a requesting carrier's ability to provide the services it seeks to provide. 97. We are not persuaded by the argument of BellSouth and other incumbent LECs that we should not consider the impact of the incumbents' economies of scale because competitors are capable of matching or exceeding the incumbent LECs' economies by building their own facilities. The Commission has concluded previously that an incumbent LEC's existing infrastructure generally enables it to serve new customers at a much lower cost than a requesting carrier that must install its own switches, trunking, and loops to serve its customers, and that Congress has addressed this problem by mandating that incumbent LECs share their economies of scale and density with competitors. 98. We continue to believe that one important purpose of the unbundling provisions of the Act is to permit competitive LECs to compete with the same economies as the incumbents, especially in the early stages of local competition, when their networks are limited in their reach, and their customer bases are necessarily small. The incumbent LECs still enjoy cost advantages and superiority of economies of scale, scope, and ubiquity as a result of their historic, government-sanctioned monopolies. These economies are now critical competitive attributes and would belong unquestionably to the incumbent LECs if they had "earned" them by superior competitive skills. These advantages of economies, however, were obtained by the incumbents by virtue of their status as government-sanctioned and protected monopolies. We believe that these government-sanctioned advantages remain barriers to the requesting carriers' ability to provide a range of services to a wide array of customers, and that their existence justifies placing a duty on the incumbent carriers to share their network facilities. Indeed, Congress, in section 259 of the Act, recognized expressly the benefits that the incumbent LECs have as a result of their economies of scale and scope. Section 259 requires the Commission to ensure that incumbent LECs make their infrastructure available to qualifying carriers on terms and conditions that permit the qualifying carriers to "fully benefit from the economies of scale and scope of such [incumbent] local exchange carrier." Although section 259 of the Act is different from section 251 in that qualifying carriers obtaining infrastructure from the incumbent LEC pursuant to a section 259 agreement may not use such infrastructure to compete with the incumbent LEC in its service territory, both sections make the incumbent LECs' broad economies of scale and scope available to other carriers by requiring them to grant other carriers access to their networks. 99. We do not agree with Ameritech that competitive LECs are not impaired in their ability to provide service because they have cost efficiencies which the incumbent LECs do not have. Although we agree that competitors may have certain cost advantages, we find that these advantages are likely to be outweighed by other costs that competitive LECs, but not incumbent LECs, incur to provide service. For example, many competitive LECs are likely to incur higher costs than the incumbent LECs to attract customers, because unlike the incumbent, many competitive LECs must establish a brand name and develop a reputation for service quality before they can overcome the incumbents' long-standing relationships with their customers. Similarly, competitive LECs must incur the initial costs of setting up their operations and developing their back-office systems. AT&T also points out that new entrants face a high level of risk when they enter the local market, because they enter without the incumbent LEC's knowledge of local operating costs (e.g., location and quality of outside plant facilities) and consumer demand (e.g., peak traffic volumes over certain facilities and demand growth). 100. We recognize that a new entrant in many industries will face disadvantages arising from economies of scale. We further recognize that, even after competition in local telecommunications markets is well-established, and the Commission can eliminate certain unbundling requirements, smaller competitors will be at a disadvantage to the extent that incumbent LECs continue to enjoy significant economies of scale in the provision of local telephone service. Nonetheless, we believe that the existence of economies of scale, as well as sunk costs, are relevant factors to consider in our assessment of whether failure to provide access to a particular unbundled network element will impair a requesting carriers' ability to provide the services it seeks to offer. Although we find economies of scale to be a relevant factor in our analysis, we note that we are not basing our determination of whether competitive LECs are "impaired" within the meaning of section 251(d)(2) solely on the existence of scale economies, nor do we assume that the incumbent LEC's scale economies are insurmountable in all circumstances. 101. Timeliness. We also conclude that the time associated with using alternative elements is relevant to a determination of whether a requesting carrier would be impaired in its ability to provide the services it seeks to offer. A thorough evaluation of the delays associated with using alternative elements requires an analysis of both the start-up time required for a competitor to enter a market and serve a substantial number of customers in an MSA, as well as the time it would take a competitor that has already entered the market to expand its operations to serve more customers. We conclude that delays caused by the unavailability of unbundled network elements that exceed six months to one year may, taken together with other factors, materially diminish the ability of competitive LECs to provide the services that they seek to offer. 102. We recognize that the deployment of alternative elements, whether through self- provisioning facilities or by acquiring them from third-party suppliers, will require a reasonable amount of time. The delays associated with using alternative network elements will exist whether the requesting carrier is either just beginning to provision service or whether it is deploying additional facilities to expand its operations to serve more customers. Commenters differ in their opinions as to what constitutes a reasonable time to self-provision facilities. There is considerable evidence in the record, however, that indicates that it takes between six months and one year to engineer, furnish, and install a switch, including the time needed to obtain collocation space in the incumbent LEC's central offices where the switch will be connected to unbundled loops. Also, NTIA argues that we should consider as nontrivial any delay in service provisioning in excess of six months as compared to the time it would take for a competitive LEC to begin provisioning a service using an incumbent LEC's network element. 103. Based on the record before us, we conclude that it is reasonable to expect that a competitive LEC will need between six months and one year to provide service using a self-provisioned facility or one acquired from an alternative source. The local telecommunications market grows at an extremely rapid pace for many products and services. Indeed, we have reported that the demand for certain services has increased significantly from year to year since the passage of the 1996 Act and that we expect this trend to continue, particularly for advanced services. We believe that any delay that a competitive LEC experiences in serving this fast-paced, high-growth market can impair its ability to provide its desired services. Although we cannot quantify precisely how much of a delay associated with an alternative network element will materially diminish the ability of a competitor to provide its desired services, we find that delays that exceed six months to one year may, taken together with other factors, materially diminish the ability of a competitive LEC to provide the services it seeks to offer because it prevents the competitive LEC from responding quickly to the demand for its services in a rapidly changing market. Moreover, we agree with NTIA that incumbent LECs can take advantage of delays caused by the unavailability of unbundled network elements by using their "unique access to most customers to gain a foothold in new markets, and, in markets where services may be offered pursuant to long term-contracts (e.g., DSL and other advanced data services), to 'lock-up' customers in advance of competitive entry." 104. We disagree with Ameritech that a competitor is not impaired in its ability to provide a service if it can deploy alternative facilities within two years of its decision to do so. Congress made unbundled elements available to competitive LECs to avoid the time it would take competitive LECs to duplicate the incumbents' networks, thereby promoting the rapid development of competition for all consumers. We believe that requiring consumers to wait up to two years to have access to a choice of competitive service offerings, while competitors attempt to provide service without access to unbundled elements, is unreasonable and inconsistent with the objectives of the Act. 105. We also disagree with US West's claim that we should not consider the amount of time required for a competitive LEC to self-provision an element or acquire it from a third-party supplier because there are always inherent provisioning delays associated with using alternative elements. We believe the amount of time it takes a competitive LEC to self-provision an element or acquire an alternative from a third-party supplier is highly relevant to its ability to provide the services it seeks to offer. In particular, we agree with commenters that in order to compete effectively, competitive LECs must be able to initiate service promptly upon the request of their customers. We also agree with NTIA that delays in the introduction of competitive services caused by the unavailability of unbundled elements from the incumbent LEC would give the incumbent valuable time to entrench itself with existing customers. 106. Although we agree with US West that self-provisioning or acquiring alternative network elements from third-party suppliers involves normal delays incurred when starting or expanding a business, we find that significant delays will materially diminish a requesting carrier's ability to provide the services it seeks to offer. In addition, we have accounted for the inherent provisioning period to which US West refers by determining that