If you are a rural ILEC expecting to see your DS1 and DS3 special access services deregulated this year, AT&T may have put a crimp in your plans. You may get that deregulation, but at the cost of seeing your remaining terminating switched access rates moved to bill-and-keep. This potential dilemma for rural ILECs springs from the FCC's recent Notice of Proposed Rulemaking (NPRM) released April 25, 2018 in Docket 17-144, in which the Agency proposed to permit incentive regulation for the special access services of ILECs that still use rate-of-return (ROR) regulation. 

The goal is to put smaller ILECs on a regulatory par with the larger price cap ILECs, since last year in its Business Data Services Order (BDS), the Commission determined that price cap ILEC special access should be almost completely deregulated with only DS1 and DS3 transport remaining subject to price cap regulation in non-competitive markets. As the Commission noted in the NPRM: 

We seek comment on a regulatory framework that would provide...carriers a path to move from rate-of-return regulation to a more efficient system of incentive regulation for their TDM [Time Division Multiplexed] transport and end user channel terminations at speeds at or below a DS3. (NPRM, Docket 17-144, at p. 6.).

The Commission proposed that ROR ILECs that select incentive regulation would obtain Phase I pricing flexibility for their DS1 and DS3 services, enabling them to offer volume and term discounts and individual contracts to their DS1 and DS3 special access customers. 

The industry comment and reply comment period for the NPRM concluded July 2nd, and there was almost unanimous agreement for the Commission's proposal.  

There is substantial record support for the original Petition’s proposal. TDS Telecom states that eliminating unnecessary requirements and allowing an optional move to incentive regulation “will enable these carriers to more quickly upgrade their networks and better respond to customer demand in this competitive marketplace, ultimately benefitting the rural communities they serve.” The market has evolved to the point where the “burdens of rate-of-return regulations for BDS offered by model-based carriers often outweighs the benefits.” NTCA and WTA likewise support providing both an optional pathway to incentive regulation for BDS and further deregulation of BDS pricing in line with the rules previously adopted for price cap carriers. Importantly, every commenter agrees with the NPRM’s proposal that removal of outdated and burdensome legacy regulations would promote competition and investment in rural networks. (ITTA and USTelecom Reply Comments, Docket 17-144, filed July 2, 2018 at p. 2.

AT&T, however, believes there is a major flaw in the Commission's proposal. Incentive regulation for ROR ILECs would apply to special access services only, leaving switched access rates still under ROR regulation. This would be a violation of the Commission long enforced "all-or-nothing rule" which requires ILECs regulated through price caps to include all their access services under the price cap umbrella. Without enforcement of this rule, AT&T believes rural ILECs would have the incentive to shift their costs to ensure they are recovered under the rate-of-return rules:

Carriers under rate-of-return regulation set their prices based on reported costs, while carriers under price cap regulation set their prices based on a formula that accounts for general price inflation and expected carrier productivity. Thus, under price cap regulation, if a carrier’s costs rise faster than the formula, its profits will fall. Under rate-of-return regulation, however, a carrier experiencing cost increases would seek – and typically be granted within a year – a compensating price rise, so its profit level would be preserved. Because of these differences, if a holding company has both rate-of-return and price cap study areas, it may have incentives for internal cost shifting across study areas (price cap vs. rate-of-return), or even among services (e.g., switched access vs. special access) within the same study area – mitigating any diminution in the holding company’s profits that price cap formulas may produce. (AT&T Reply Comments, Docket 17-144, filed July 2, 2018, at p. 3).

Therefore, AT&T believes the Commission has two choices: Either enforce the all-or-nothing rule for ROR companies, or if it chooses not to, the Commission must make sure no cost-shifting is possible. It would do so, among other things, by requiring ROR ILECs to immediately reduce all end office switched access rates to bill-and-keep. 

AT&T requests that the Commission decline to waive the “all-or-nothing” rule for these carriers and require that any...carrier that elects incentive regulation have that election apply across all its study areas and, even more critically, across all of its interstate services within a study area. In all events, should the Commission grant its per se waiver of the all-or-nothing rule, AT&T requests...the Commission require that any electing carrier’s initial price cap BDS rates should be adjusted downward by 75 basis points to reflect the appropriate rate-of-return that that carrier would have transitioned to under the Commission’s rate-of-return framework, its terminating end office access rates be immediately adjusted to bill and keep and that the Commission not forbear from Part 32 cost assignment rules and separations requirements. (Id., at p. 5).

ROR ILECs are not scheduled to move their end office charges to bill-and-keep until July 1, 2020, so if the Commission agrees with AT&T they would suffer an immediate major loss of revenues. Based on the Commission's historical protection of rural ILECs, it is unlikely to allow this to happen. It would have to find a way to make these ILECs whole, and with universal service funds lacking, it's hard to see where additional revenues would come from. Thus, it likely the Commission would allow rural ILECs to violate the all-or-nothing rule and deal with cases of alleged cost-shifting on a case-by-case basis sometime in the future. If so, this would be a major win for ROR ILECs. We should see an Order later this year.