It's rare when the entire telecommunications industry is united about a particular issue, but this is one of those rare times. Everyone in the industry believes that before the year is out, FCC Chairman Tom Wheeler will attempt to implement new regulations for the business data services market (BDS) consisting of special access and Ethernet. 

The new regulations are expected to include a market test to determine which markets are competitive versus those that are non-competitive. In competitive areas, the free market would be allowed to operate without Commission interference. However, in the vast majority of markets deemed non-competitive, the Commission would use price cap regulation to regulate ILEC special access pricing and use those prices as benchmarks for the pricing of cable Ethernet services. This would enable customers in non-competitive areas to pay rates that would mimic competitive market rates. 

Almost all carriers that would be subject to such regulation have opposed the FCC’s proposal with the exception of Verizon. That ILEC and the CLEC association INCOMPAS have joined together to issue their own proposed compromise agreement which would include large up-front rate cuts to ILEC special access rates and would classify all BDS services below 50 Mbps in all markets as non-competitive. The latest Verizon-INCOMPAS iteration was filed with the FCC on August 9, 2016 and includes the following:

Price caps would apply to special access in areas served by price-cap LECs. This would include areas currently subject to Phase II pricing flexibility, and prices in Phase II areas would be returned to price cap levels before any further adjustments.

There would be a one-time adjustment to rates for these special access services (implemented over no more than a two-year period) to account for the freeze in rates under the CALLS Order. The Commission would apply this one-time rate adjustment in two steps. In the first year, the Commission would reduce the Price Cap Index (“PCI”) by 10 percent with an additional rate reduction based on an X-factor of 4.4 percent minus inflation. In the second year, there would be an additional 5 percent reduction in the PCI, plus an additional rate adjustment based on an X-factor of 4.4 percent minus inflation. Going forward the PCI would continue to be adjusted annually by an X-factor of 4.4 percent minus inflation.

The plan would utilize a benchmark approach for Packet-Based Business Data Services (Ethernet) deemed non-competitive.

The benchmark for the switched Ethernet service closest in quality to TDM-based DS1 special access that each price-cap carrier currently offers at its lowest speed above 1.5 Mbps—typically 2 Mbps or 3 Mbps—for a three-year term would equal the carrier’s tariffed, publicly available DS1 special access circuit rate for a three-year term, after applying the full one-time adjustment and annual X-factor minus inflation adjustment. The DS1 circuit rate would include the rates for one channel termination, one fixed mile, five variable miles and 1/20th of a DS3/DS1 multiplexing arrangement. This and all other Ethernet benchmarks cover charges for the carrier handoff point to the end user premises.

Once the lowest-speed benchmarks are established, the benchmarks for higher Ethernet speeds would be derived by applying the price-cap carrier’s respective relationship of rates for higher-speed Ethernet services to the lowest-speed Ethernet services. The Ethernet rate relationship would be developed using the rates in each price-cap carrier’s publicly available product guide. A carrier that does not have a publicly available product guide would file with the Commission rate information necessary to establish the benchmarks. For carriers for which the necessary information is not available, the Commission could develop a benchmark using the average of the available information. Services with a different quality of service should reflect a reasonable relationship to the benchmark.

New entrants (cable services) would not be subject to the benchmark at least until the FCC reassesses market competition in approximately three years.

All Business Data Services at or below 50 Mbps would be deemed non-competitive in all census blocks. All services above 1 Gbps would be deemed competitive.

As to be expected, ILECs, other than Verizon are not pleased with the “compromise” proposal. They claim that there is no justification for re-imposing price caps, or for an up-front price decrease in their special access rates. They reject the FCC’s data supporting such results, claiming the data is flawed because it lacked accurate cable information.  They are most adamant about the proposal that all services below 50 Mbps be deemed non-competitive.  As  CenturyLink, Frontier, FairPoint,  Cincinnati Bell and Consolidated Communications noted in a joint August 30, 2016 Press Release:

However, the FCC's own data reveals that, in reality, competitive service providers account for the majority of the market for offerings below 50 Mbps. To disregard the providers that make up a majority of the market, and to drive prices below existing competitive rates, threatens the viability of broadband investment in underserved communities.

The threat of FCC action along with the Verizon-INCOMPAS proposal and FCC encouragement has led to some industry discussion to see if all sides could reach a global agreement. Since cable companies would see their Ethernet services price regulated for the first time, they saw no reason to compromise.  Verizon and INCOMPAS have tried to rectify that in their most recent plan by proposing that new entrants into a market would not face price benchmarks for three years.

Recently, sources have claimed that the talks were not progressing very far. However, with the end of the summer, things may change. If the FCC proposes very tough special access regulations as expected, ILECs will face the choice of either negotiating an industry agreement or appealing the Order to the courts. The belief here is that once a BDS Order is released, ILECs and cable companies will have much more incentive to reach a compromise.

By Andy Regitsky, CCMI