In November the FCC was poised to approve a new regulatory paradigm for special access and Ethernet services now collectively called the business data services (BDS) market. The plan would have re-imposed price cap regulations on ILEC special access services with forced large up-front rate decreases and large annual decreases based on ILEC productivity. It was strongly opposed by ILECs.

But then Donald Trump was elected. Tom Wheeler’s FCC was forced to cancel its BDS vote scheduled for just after Election Day. Now, with the arrival of a new FCC, the previous Commission’s BDS plan was quickly put out to pasture, never to return (at least for the next four years).

Ajit Pai is now the new FCC Chairman, and with Republicans in a 2-1 majority, it was expected that sometime this year the new Commission would release its own proposal for regulating the BDS market, one that would be based primarily on the free market rather than extensive regulations. While the Commission has not yet addressed this issue, there are rumors flying around the industry that it soon will.

Proof of this comes from a March 13, 2017 BDS proposal from AT&T which is extremely market-based and would almost completely eliminate forced ILEC special access price cap decreases. The proposal is based on two main principles: (1) Let the free market work whenever possible (2) If there is no competition, apply minimal regulations.

The proposal is based on existing ILEC pricing flexibility principles. Thus to really appreciate it you need to know which ILEC behaviors are permitted with pricing flexibility. Pricing flexibility is divided into two phases.

Phase I Pricing Flexibility - Permits an ILEC to provide volume and term discounts, and individual contract tariffs (theoretically but never actually) available to all similarly situated customers.

Phase II Pricing Flexibility – In addition to everything permitted under Phase I, an ILEC gains the ability to ignore the Part 69 access structure requirements and price cap regulation. An ILEC can also file tariff revisions on one day’s notice.

In other words, other than being forbidden from filing prices below incremental cost, ILECs with Phase II pricing flexibility can price their special access services at any price using any pricing structure.

Pricing flexibility was originally based on the premise that ILECs face substantial competition in many markets, with competition measured by collocation or revenues in ILEC central offices. Pricing flexibility was granted on a Metropolitan Statistical Area (MSA) basis.

Unfortunately the measure of competition used to grant pricing flexibility was highly flawed and ILECs were granted pricing flexibility in too many MSAs without sufficient competition. Too many times they used it to undercut competitors with contract tariffs that could not be matched. Moreover, those low prices kept potential competitors from entering a market since they could never obtain sufficient revenues to justify investing in facilities. Thus, in 2012 the FCC stopped granting new pricing flexibility requests. The previous BDS plan would have either eliminated or severely limited pricing flexibility completely. The AT&T proposal resurrects pricing flexibility.

With that (long) introduction completed, here are the details of AT&T’s plan:

Ethernet - As the Commission has already determined, Ethernet services are highly competitive nationwide. No additional regulatory burdens should be imposed on these services.

Special Access Dedicated Transport - The record shows that DSn transport services are highly competitive. As of 2013, competitive providers have deployed competing transport networks in more than 95% of census blocks with special access demand. As such, transport should be subject to Phase II regulatory treatment nationwide.

Special Access Channel Terminations - Again, DSn channel terminations are highly competitive, and, as Professor Rysman found, that competition impacts prices at distance as far from competitive facilities as a half a mile. Commission, DOJ, and DC Circuit precedent have all found that for services like the ones at issue here, with high sunk costs, a single facilities-based competitor is enough to introduce permanent competition into the marketplace. As such, a reasonable Competitive Market Test [CMT] would be: An MSA will be considered competitive if 80% of the buildings with special access demand within the MSA are within 2,000 feet of at least one competitor.

MSA-Based Test - Basing the CMT on MSAs makes the most sense. The CMT described above is different from the pricing flexibility tests because it does not rely on collocator or revenue-based proxies. Instead, it is a measure of actual competition within the geographical area and confirms the vast majority of DSn demand within a “competitive” MSA will be subject to competition. It would be expensive and time consuming for both incumbent providers and resellers to transition away from their existing MSA-based billing and ordering systems. Therefore, the Commission should adopt the MSA-based CMT, which more accurately measures competition and which can be administered without major systems overhauls.

Accordingly, the Commission should immediately grant Phase II relief in any MSA in which the 2013 data show that 80 percent of the locations served by ILECs are within 2000 feet of at least one competitor, and it should immediately grant Phase I relief in all other areas.

X-[Productivity] Factor - The record shows (1) that the current X-factor (set equal to inflation) has been the correct measure and should be retained, and (2) if the Commission adopted a new measure, the only reasonable option would the BLS [Bureau of Labor Statistics]KLEMS [Capital, Labor, Energy, Materials, and Services data] methodology. (Docket 16-143, AT&T March 13, 2017 Letter and ex parte)

If the X-factor is set equal to inflation (as it is currently) or set using the BLS data, it would mean ILECs would be forced to reduce special access rates each July 1 by approximately 2 percent. The old BDS proposal would have required much steeper productivity decreases.

At present we don’t know if AT&T introduced this new BDS proposal on its own initiative or because it is covertly working with the Commission. However, it is likely that AT&T received some type of signal from the Commission suggesting it introduce its plan now. This is strongly indicative that (1) the Commission will soon address this issue, and (2) Its official proposal is likely to look a lot like the AT&T one.

AT&T’s competitors ought to quickly decide if they can live with this plan (highly unlikely) or quickly come up with a plan of their own and march in to enlighten the FCC. However, with Pai in charge, carriers seeking additional special access regulation have a mountain in front of them.

By Andy Regitsky, CCMI