In 2017, the FCC determined that price cap ILEC special access and packet services (called Business Data Services) should be almost completely deregulated with only DS1 and DS3 transport subject to price cap regulation if the ILEC failed a competitive market test in a county. This regulatory scheme became effective on August 1, 2017 when the Business Data Services (BDS) Order took effect. 

That Order put many rate-of-return (ROR) ILECs in an unusual regulatory position. More than 200 ROR ILECs now receive universal service support using the Alternative Connect America Fund Cost Model (ACAM). In return for a fixed amount of financial support, these carriers are required to meet a specified level of broadband deployment. As a result, these ILECS are no longer in the NECA Common Line Pool and remain subject to rate regulation only for their Business Data Services. 

To alleviate this regulatory inconsistency, the FCC has just approved a Report and Order (Order) in Docket 17-144 at its October meeting. In the Order, the Commission approved the following changes:

ROR ILECs receiving model-based or other fixed high-cost universal service support will have the opportunity to elect to move their lower speed (DS3 and below) Time Division Multiplexed (TDM) Business Data Services to incentive regulation. This is a choice for these companies, not a mandatory change. 

There will be no ex ante (after the fact) pricing regulation for lower speed TDM-based end user channel terminations for ROR ILECs selecting incentive regulation in areas deemed competitive by a competitive market test. 

The Commission will eliminate ex ante pricing regulation of higher speed TDM-based special access above the DS3 level and similar packet-based services for ROR ILECs selecting incentive-based regulation. 

The Commission will forbear from requiring ROR ILECs who select incentive regulation to comply with tariffing, cost assignment and jurisdictional separations requirements for their higher speed (above DS3) BDS, and for their lower capacity TDM end user channel termination offerings in areas deemed competitive by the competitive market test. 

Rate-of-return ILECs eligible to elect incentive regulation include those that receive universal service support based on ACAM, those that receive fixed support under the Commission’s Alaska Plan, those that are affiliated with price cap ILECs and those that accept future offers of ACAM support or otherwise transition away from legacy support mechanisms in the future. 

 According to the Commission:

Allowing rate-of-return carriers that receive fixed high-cost support to move their BDS offerings to a lighter touch regulatory framework will help drive competition for BDS offerings in the communities served by those carriers. It will also reduce unnecessary regulatory burdens faced by those carriers that elect the new regulatory framework. Under the framework we adopt today, electing carriers will not be required to provide cost-based justifications for their BDS rates and will therefore no longer need to conduct annual cost studies to justify those rates. They will also no longer be required to file tariffs for their packet-based and higher-capacity TDM services and for their lower capacity TDM end user channel termination offerings in areas deemed competitive by the competitive market test we adopt today. Electing carriers will be able to pass those cost savings on to their customers or use them to upgrade their networks. (Report and Order Public Draft, at para. 4.).

The Commission notes that the current record does not provide it with enough information to determine whether to take additional deregulatory steps with respect to the inter-office transport access element of BDS provided by electing ILECs. Thus, it adopts a Further Notice of Proposed Rulemaking (FNPRM) seeking industry comments on further deregulating transport services provided by these carriers. 

Additionally, in response to a partial remand of the 2017 BDS Order from the Eighth Circuit Court of Appeals, the Commission issues a Second Further Notice of Proposed Rulemaking (Second FNPRM)) in which it proposes to eliminate ex ante pricing regulation of TDM transport services offered by price cap carriers. That section of the Order was vacated and remanded back to the FCC because the Court found the Commission did not provide carriers with sufficient notice for its actions.

There are several important things for ROR ILECs to consider as they mull over electing incentive-based regulation for their BDS services.

Incentive-based regulation for ROR ILECs will begin on July 1, 2019.

Carriers will have two opportunities to elect to move their BDS offerings out of rate-of-return regulation—one to be effective as of July 1, 2019 and a second effective as of July 1, 2020.

Electing ILECs are prohibited from returning their study areas to rate-of-return regulation. 

The Commission adopts a specific methodology electing ILECs carriers must use to establish rates for their lower capacity TDM transport and end user channel termination services: 

For rate-of-return carriers that file their own tariffed rates, initial BDS rate levels must be the rates in effect on January 1, 2019. 

For rate-of-return carriers participating in the NECA traffic-sensitive tariff pool, members exiting the pool must set their initial BDS rate levels by adjusting NECA pool rates in effect on January 1, 2019 by a net contribution or net recipient factor (depending on whether the ILEC contributes or receives funds from the pool). 

Electing carriers will then adjust their rates using a methodology that is consistent with the price cap formulas in sections 61.45 to 61.47 of the Commission’s rules, by applying the productivity factor (X-factor), inflation factor (Gross Domestic Product-Price Index (GDP-PI)), and any required exogenous cost changes. ILECs may adjust these rates to reflect the pricing flexibility permitted by the pricing bands in the Special Access category. 

The productivity factor will be 2 percent a year. That means electing ILECs must decrease their BDS rates annually by 2 percent before applying the GDP-PI and exogenous costs to their rates.

In areas deemed non-competitive by the Commission, electing ILECs will still obtain pricing flexibility for their lower-speed BDS services. This will allow them to offer volume and term discounts and contract tariffs.

The Commission adopts a competitive market test for electing ILECs that uses publicly available Form 477 data to measure whether a cable operator offers a minimum of 10/1 Mbps in 75 percent of census blocks in a study area served by a ROR ILEC. If so, that study area is deemed competitive. 

In those competitive study areas, the Commission will remove ex ante pricing regulation of lower capacity TDM end user channel terminations.

The competitive market test will be repeated every three years.

The transition period for detariffing will begin on July 1, 2019 and will end 36 months later. In addition, for 6 months following the date incentive regulation becomes effective, electing carriers must freeze their tariffed rates for Business Data Services that are no longer subject to ex ante pricing regulation, including end-user channel terminations in newly deregulated study areas, provided those services remain tariffed. 

Finally, a ROR ILEC electing incentive regulation for its business data services must notify the Chief of the Wireline Competition Bureau of its election by May 1, 2019 for it to become effective concurrent with the annual access tariff filing in 2019.