Last week we noted that the FCC has finally responded to CLEC concerns and announced that on August 6, it will adopt an order requiring ILECs to make “reasonably comparable” wholesale services available to CLECs during the transition of their networks to fiber. These requirements will be in place on an interim basis until the Commission completes its ongoing investigation into ILEC special access services sometime in 2016. 

We have agreed with CLECs on this issue, in recognition of the simple fact that CLECs continue to serve a high percentage of their business customers by purchasing special access or unbundled high capacity loops from ILECs. That is because it is almost never economical for CLECs to construct “last mile” connections to end user customer locations, and that is not likely to change even when all networks are 100 percent fiber.

It is clear, however, that ILECs are prepared to strongly oppose any Commission effort to mandate reasonably comparable wholesale services. Moreover, their arguments are based both on current market conditions and the legality of imposing price regulation on detariffed services such as Ethernet. These arguments are crystallized by AT&T in a July 14, 2015 letter to the FCC in Docket 15-1. The carrier claims the following:

1. Ethernet services are extremely competitive - The marketplace for Ethernet services is rapidly expanding and numerous providers are successfully competing to meet this demand. In 2014 the U.S. base of Ethernet port installations increased by 23 percent, following a 26 percent increase in 2013.  No provider has a port share that exceeds one-fifth of the market. There are eight providers with port shares that exceed 5 percent, including three ILECs, two CLECs, and three of the nation’s largest cable companies. And smaller providers – i.e., those with port shares under 4 percent – together have a port share of more than 20 percent. For example, Level 3, a CLEC, has overtaken Verizon as the second largest Ethernet provider in the U.S. measured by port share. And Comcast was recently named the fastest growing Ethernet provider on Vertical Systems Group’s U.S. Carrier Ethernet Leaderboard for the second consecutive year and “is well positioned in 2015 due to its extensive fiber network footprint.” In the face of this intense and growing competition, re-regulation of Ethernet services is wholly unwarranted.
2. Reversing forbearance for Ethernet requires a new proceeding - Several years ago, the Commission granted forbearance from rate regulation with respect to Ethernet services.  Assuming the Commission has the authority to “reverse” a decision forbearing from rate regulation; it could do so only by satisfying the rulemaking standards of the Communications Act and the Administrative Procedure Act [APA]… [A]fter forbearance has been granted, the Commission faces the same situation as in any other circumstance in which there is no regulation governing a particular activity – it must start from scratch with a new regulatory proceeding under the APA. Because the Ethernet marketplace is extremely competitive, the Commission does not remotely have a record that would allow it to conclude that heavy-handed rate regulation has become necessary to protect consumers and the public interest.
3. The Commission does not have a sufficient record to prescribe Ethernet prices under section 205 - Even if the Commission’s prior findings of forbearance could be “reversed,” the Commission could not require ILECs to provide an Ethernet service at the rates and terms of the pre-existing TDM [Time Division Multiplexed] service without complying with the stringent standards for a prescription under Section 205. Section 205 provides that the Commission may order a carrier to offer its services on different rates or terms only after it conducts a hearing and (1) makes definitive findings that the existing charges or practices for these services are “in violation of any provisions of this chapter” and (2) determines “what will be the just and reasonable” charges or practices “to be thereafter observed (AT&T exparte letter at pp. 2-4).

Of course, the real significance of AT&T’s letter is to put the Commission on notice that it will not passively accept price regulation of its Ethernet services.    

Since you can also take to the bank the fact that any FCC attempts to re-impose rate-of-return regulation on ILEC special access services in 2016 will also be greeted with vigorous opposition and a likely court battle, it is clear that CLECs have their work cut out for them to ensure they have viable wholesale services in the future.

By: Andy Regitsky, CCMI