I was flat out wrong! I thought the Eighth Circuit Court of Appeals would conclude that the FCC acted in an “arbitrary and capricious” manner when it used “potential competition” as a measurement to determine the competitiveness of a given market in its Order to deregulate ILEC DS1 and DS3 special access rates. 

Unfortunately, its Opinion, which largely denied the appeals of the FCC’s Business Data Services (BDS) Order has great implications for the future of telecom competition in too many areas.  

The FCC will surely use the Opinion as justification for a similar competitive market test to minimize the markets where ILECs must continue to make unbundled network elements (UNEs) available in the ongoing proceeding examining if UNE requirements should be eliminated. The Opinion could also be used to justify the Commission’s decision to believe only evidence supporting its decision to eliminate net neutrality requirements. 

All in all, the Opinion by the Eighth Circuit could be one of the most damaging to ILEC competitors in years. Here are the details: 

In its 2017 Business Data Services (BDS) Order, the FCC reached several conclusions about ILEC special access rates:

It concluded there was reasonable competition, now or at least over the medium term, for ILEC special access rates with bandwidths above DS3 and all Ethernet services. 

It found that a competitor with nearby BDS facilities restrained prices for DS1 and DS3 services in the short term and provided reasonable competition in three to five years. 

The Commission further stated that after the fact (ex ante) pricing regulation is of limited use—and often harmful—in competitive markets.

As a result of these findings, the agency took three actions:

It continued forbearance from ex ante regulation of ILEC special access services above DS3 along with all Ethernet services. 

It extended its forbearance from ex ante regulation to include DS1 and DS3 transport services in all markets.

It established a Competitive Market Test for ILEC DS1 and DS3 special access channel termination services. 

In the Competitive Market Test, the Commission found that a single competitor, even if merely within a half mile of a set of customers rather than directly servicing those customers, significantly affected prices such that the costs of price caps would exceed the benefits in that market. It also determined that a residential cable network could substitute for low-bandwidth BDS for some customers.

Based on these conclusions, the FCC established two criteria for competitiveness. First, a business location is competitive if a competitor’s facilities are within half a mile. Second, a business location is competitive if a cable provider’s facilities are within the same census block.

The FCC defended its decision to count as competition special access providers that were simply within a half-mile of customers even if they were not actually providing service by arguing:

Most of the buildings are far closer to competitive fiber than half a mile, as the average distance between buildings served by ILEC BDS and a competitive fiber line is 364 feet.

These nearby networks exist because competitors build their fiber rings so that they can market to multiple customers near a lateral line, aggregating demand for a build out.  

Finally, the FCC predicted that cable’s aggressive build outs since the collection of special access data in 2013 had likely brought most of the locations that were within half a mile of competition in 2013 within a quarter mile of competition in 2017.

CLECs attacked the use of potential competition by claiming that their networks are near low-bandwidth customers because they built lines near high-bandwidth customers in the same area, not because it was economical to serve those low-bandwidth customers.

Unfortunately for CLECs, the Court concluded that with competing sets of evidence, the FCC is free to accept the evidence it chooses to believe:

We recognize that the relevant data presents radically different pictures of the competitiveness of the market depending on the economic theory applied and the weight given to conflicting pieces of evidence. But the FCC may rationally choose which evidence to believe among conflicting evidence in its proceedings, especially when predicting what will happen in the markets under its jurisdiction. Thus, we deny the petitions for review as to the Competitive Market Test because the FCC’s resolution of competing evidence was not arbitrary and capricious. (August 28, 2018 Opinion of Eighth Circuit Court of Appeals, Case No. 17-2296, at p. 30).

With the confirmation of another conservative justice expected in the next few weeks, it is unlikely that any appeal of this Opinion would have any chance for success at the Supreme Court. Moreover, with more and more customers shifting to Ethernet services, traditional special access services are becoming less and less important. Thus, CLECs and their enterprise customers are probably worried more about the impact this decision will have on the UNE proceeding. My advice. Keep any appeal out of the Eighth Circuit Court!