The FCC investigation into ILEC special access rates is heating up! CLECs are now demanding that the Commission fundamentally re-regulate ILEC special access rates by removing their pricing flexibility status and once again making them a part of price cap regulation. This comes as industry comments regarding the type of market analysis the Commission should conduct on the special access data it collected are due later this month. It also comes as the FCC has recently ordered ILECs to make reasonably comparable wholesale Internet protocol (IP) wholesale services available to CLECs as the ILECs transition their networks to fiber. These transitional IP wholesale services must be made available to CLECs until the special access investigation is complete – probably in 2016.

The newfound CLEC aggressiveness comes in a joint FCC filing made on August 28, 2015 in Docket 05-25 by Birch Communications, BT Americas, and Level 3 Communications (“petitioners"). They argue first that the Commission is legally justified to re-regulate ILEC special access rates:

1. The Commission has the legal authority to re-regulate ILEC special access rates – The Commission has the broad authority to establish rules to ensure that rates for incumbent LEC special access services are just and reasonable and not unjustly or unreasonably discriminatory, as required by Sections 201(b) and 202(a) of the Act. These statutory terms “just,” “reasonable,” “unjust” and “unreasonable” are ambiguous… “Filling these gaps,” the Supreme Court has explained, “involves difficult policy choices that agencies are better equipped to make than courts.” Therefore, in the event of a challenge to the Commission’s interpretation of the ambiguous “just and reasonable” [requirement] a court [must] accept the Commission’s reasonable construction of the statute “even if the agency’s reading differs from what the court believes is the best statutory interpretation (Petition, at. pp. 1-2)."

Flush with presenting the Commission’s legal authority, the petitioners then assert the FCC should perform a market analysis to identify the relevant special access markets in which ILECs have the ability to set and maintain supra-competitive prices. Then for those relevant markets, the Commission should take the following actions.

2. Bring ILECs’ Phase II price flexibility DS1 and DS3 special access services and packet-based special access services back under price caps based on evidence that ILECs have market power in the provision of  those services – Currently, ILEC’s that  have received Phase II pricing flexibility for their DS1 and DS3 special access services do not have to include them in the calculation of the price cap formula for their overall special access basket, nor do they have to follow the FCC’s Part 69 rules that require specific access elements. Thus, in many markets, ILECs have the flexibility to fashion individual customer contracts that don’t have to meet any regulations other than not having rates that fall below average variable costs. This allows them tremendous flexibility to meet customer needs and CLECs argue that this is an insurmountable disadvantage for them. If the FCC were to require Phase II special access rates to once again be part of price cap regulation, this advantage would dissipate. The petitioners also assert that the Commission has the authority to reverse the grants of forbearance from dominant carrier regulation of ILECs Ethernet services and impose rate regulation, including tariffing and price cap regulation, on those services. They argue that both the Commission and the D.C. Circuit Court have expressly confirmed the agency’s authority to reverse these grants of forbearance.

3. Reduce the price cap index (“PCI”) for the special access basket based on evidence that ILEC productivity gains have outpaced those of the larger economy in previous years (i.e., since the beginning or expiration of the CALLS plan) – Under the price cap rules, ILEC switched and special access rates were required to be reduced each year by a so-called “X” or productivity factor, which was a measure of the amount each year ILEC productivity was greater than that of the overall economy. The required reductions ensured that customers shared in the overall productivity of the ILECs. However, in 2000 the industry agreed on a plan called CALLS (“Coalition for Affordable Local and Long Distance Services”). Under CALLS, rates for ILEC special access services were reduced by 3 percent in 2000 and by 6.5 percent in 2001, 2002 and 2003. Since that time, ILEC special access rates only increase or decrease due to inflation or costs outside the control of the ILEC (“exogenous costs”). If the Commission were to reduce the price cap index for ILEC special access services, it would reflect the time period from 2004 until now in which there were no forced productivity reductions. Presumably, this would be a huge reduction in ILEC special access allowed revenues and rates.

4. Adopt a prospective productivity factor that lowers the PCI for the special access basket each year by a specified percentage based on evidence of likely future incumbent LEC productivity gains – Once ILEC special access rates were reduced to reflect all previous years productivity, then the Commission would restore annual productivity reductions in special access rates.

If the FCC were to try and impose ILEC special access price cap regulation it would put the ILECs in a dilemma. Their first instinct would be to litigate any such attempt to the U.S. Supreme Court. However, delaying a final resolution in the special access investigation could require them to make reasonably comparable wholesale services available to CLECs for years.  What would the ILECs do? 

 The best bet is that considering how much money is at stake, if the FCC tries to reduce special access rates through either the re-introduction of a productivity factor or through forced rate reductions that ensure that ILECs recover no more than 11.25 percent rate-of-return on their net investments, it would trigger ILEC generated multi-court litigation. Moreover, since the special access data request is for only a single year of data, it is going to be very difficult for the Commission to prevail in court. Of course, the FCC is well aware of these facts, therefore, it is doubtful that it would even try to re-regulate special access rates. We shall see what happens over the next few months.

By Andy Regitsky, CCMI