Friday brought a huge surprise for the industry! On Friday October 16^th, the FCC issued an Order Initiating [an] Investigation And Designating Issues For Investigation (Order) in Docket 15-247 into the terms and conditions of the special access tariff pricing plans of AT&T, CenturyLink, Frontier and Verizon (the Order can be found here).   

CLECs have long alleged that these ILEC optional payment plans (OPPs) are unreasonable, anticompetitive and lock up the vast majority of the overall demand for Time Division Multiplexed (TDM) business data services. 

ILECs, however, dispute CLEC assertions regarding their OPPs. They claim that OPPs are an accepted long-term way for conducting business in the telecommunications market that benefit all: CLECs obtain lower prices while ILECs have lower costs because they serve a predictable customer base with predictable facilities for a long period of time. 

The Commission notes the substantial lobbying on both sides of this issue, and believes that a more systematic inquiry into ILEC tariffed OPPs are needed before any determination on the merits can be made. By initiating this investigation, the Commission intends to gather sufficient information to decide whether and how to resolve these allegations. The investigation will be spearheaded by the Commission’s Wireline Competition (Bureau). 

This investigation will complement the Commission’s ongoing investigation into the special access market in Docket 05-95. Industry comments regarding the data that was filed in that investigation are due in December.

According to the Commission, CLECs make the following allegations regarding ILEC OPPs:

Competitive LECs allege that incumbent LEC business data services tariff pricing plans incorporate a complicated web of all-or-nothing bundling, loyalty and term commitments, complex enforcing penalties, circuit migration rules and other provisions. They assert that the effect is to lock up substantial proportions of carrier and end-user demand, which locks out competition for such demand and consequently harms both competition and innovation. It is alleged that constrained competition not only keeps prices higher than they would otherwise be, but that the lock-up slows innovation, including the use of new IP-based products; limits investment in new networks; and even hampers competition in the closely-related mobile marketplace. These results are alleged to result, in part, from the continued reliance by competitive LECs and their customers on tariffed, incumbent business data services. In other words, competitive LECs assert that, in order to compete for customers with any demand for relatively low bandwidth services beyond large downtown areas, they must purchase as wholesale inputs significant amounts of business data services from the local incumbent LEC. They assert further that in practice their only option in making such purchases is to be entangled in a web of terms and conditions that limit significantly their ability to respond to marketplace opportunities to deploy their own infrastructure, which would introduce additional choices for customers (Order, at para. 6).

At the heart of competitive LECs’ concerns with incumbent LECs’ terms and conditions are the percentage commitments that are a condition of participation in many incumbent LEC tariff plans. The percentage commitments require purchasers to commit a high percentage of their historical or existing purchases when they enter into an incumbent LEC tariff plan. These commitments commonly range from 80 to 95 percent of the buyer’s previous purchase levels. XO asserts that “price cap LECs’ Commitment Plans . . . effectively lock up demand not only in areas where the price cap LECs provide the only facilities-based option . . . but extend into those areas where other providers do have network facilities.” Competitors allege that these commitments, both by themselves and in conjunction with other terms and conditions that amplify their effect, serve to lock up a large percentage of the demand for these services (Id., at 12).

ILECs dispute these assertions:

The incumbent LECs assert their pricing plans are not anticompetitive because such plans are voluntary, purchasers have a number of options to meet their needs and competitive LECs’ characterization of those plans as “lock-in” plans is inaccurate. AT&T contends that its tariff pricing plans are “only one of many ways in which customers can obtain dedicated access from AT&T and other ILECs.” Other options it cites include pricing flexibility contract tariffs, non-tariff Ethernet services, UNEs and combinations of these options. Verizon states that its plans are “entirely voluntary” and “do not restrict customers’ ability to obtain high-capacity services from Verizon’s competitors or through self-supply.” Verizon also asserts that its pricing plans “offer customers a range of options when their voluntary discounts expire, including migrating some or all of their circuits away from Verizon.” Incumbent LECs also contend that their pricing plans are efficient and pro-competitive. Verizon states that “volume discounts in exchange for commitments of term and volume are commonplace because they enhance efficiencies and reduce transaction costs and risk for both the buyer and the seller.” They claim that their plans benefit both parties– customers receive lower prices and the incumbent LEC seller receives “some certainty about its expected revenues and network utilization.” Incumbent LECs assert further that the competitiveness of the special access market, particularly the Ethernet market, undermines competitive LEC claims of anticompetitive conduct and contend it is inappropriate to conduct a tariff investigation prior to analyzing the data submitted in the Commission’s special access data collection. Incumbent LECs point to the rapid growth of Ethernet services and the relative decline of TDM-based special access as a portion of the special access market, effectively questioning the utility of conducting an investigation into TDM-based special access services. Incumbent LECs claim further that their pricing plans have not foreclosed entry by competitive LECs in the special access market, citing evidence of competitive LECs’ entry into the special access market and investment in and expansion of their networks (Id., 16-18).

The Commission designates the following issues for investigation:

1. Whether the use of percentage commitments based on a purchaser’s historical or existing (at point of entry into the plan) levels of purchases in certain incumbent LEC tariff pricing plans is a just and reasonable practice under section 201(b) of the Act or is unreasonably discriminatory under section 202(a) of the Act;
2. Whether the use of shortfall fees in certain incumbent LEC tariff pricing plans is a just and reasonable practice under section 201(b) of the Act;
3. Whether the use of upper percentage thresholds in certain incumbent LEC tariff pricing plans is a just and reasonable practice under section 201(b) of the Act or is unreasonably discriminatory under section 202(a) of the Act;
4. Whether the use of overage penalties in certain incumbent LEC tariff pricing plans is a just and reasonable practice under section 201(a) of the Act;
5. Whether the use of certain long term commitments in tariff pricing plans at issue is a just and reasonable practice under section 201(b) of the Act;
6. Whether the use of early termination fees in certain incumbent LEC tariff pricing plans is a just and reasonable practice under section 201(b) of the Act; and
7. Whether certain commercial agreements for special access services contain discounts, credits, waivers, refunds, or other provisions that directly or indirectly affect charges for tariffed special access services and should thus be subject to the filing requirements of section 203 of the Act and the Commission’s rules.

In response to these allegations, ILECs must file direct cases by December 18, 2015. These direct cases must present the ILECs’ positions with respect to the issues listed above. ILECs must follow the instructions in the data request template prepared by Bureau staff for responding to ensure all data and narrative questions are answered and responses are properly identified. Oppositions or comments responding to the ILECs’ direct cases must be filed by January 21, 2016. The ILECs may file Rebuttals to oppositions by February 22, 2016.

The ILEC direct cases must include the following information for each tariff pricing plan covered by this investigation:

[Data] annually for calendar years 2012 through 2014 [including] (1) the tariff name, (2) the pricing plan name, (3) the section number of the pricing plan within the tariff, (4) indicators of whether participants in the plan are (i) required to make a percentage commitment, and (ii) given an option to make a percentage commitment and (5) an indicator of whether participants in the plan are required to make all of their purchases within the plan, rather than being permitted to purchase similar services in the region from the incumbent LEC out of another pricing plan at the same time (Id., at 28).

In addition, the incumbent LEC must submit the following agreement-level data and information for each instance of an agreement or subscription made by a customer to purchase services under the pricing plans under investigation [including] (1) an agreement ID, i.e., a unique identifier for each instance of an agreement by a customer to purchase services under a tariff pricing plan under investigation that was in effect during any part of calendar years 2012 through 2014, (2) the start date of the agreement, (3) the end date of that agreement, (4) the tariff name from Table I associated with this agreement ID, (5) the pricing plan name from Table I associated with this agreement ID, (6) the section number of the tariff from Table I, specifying the tariff pricing plan associated with this agreement ID, (7) the purchaser name, (8) indicators of whether the purchaser is: (i) an end user, (ii) a competitive provider purchaser, and/or (iii) a mobile wireless service provider, and (9) a unique identifier for the purchaser. In the event that a large number of agreements occur under any one pricing plan under investigation, we limit the number of agreements an incumbent LEC must include in its submission in the following fashion. Where more than 20 agreements are associated with end user purchasers for any one pricing plan, the incumbent LEC shall file data only for the 20 largest end user purchase agreements in dollar terms, or for end user purchase agreements that account for at least 80 percent of all end user purchases under the pricing plan, whichever includes fewer purchase agreements (id., at 29).

CLECs have been lobbying against the alleged anti-competitive effects of ILEC OPPs for years. Why has the Commission chosen to launch an investigation now, without waiting for the global special access investigation to conclude? While no outsider knows for certain, the opinion here is that it has dawned on the Commission that its global special access investigation has backed it into a corner. 

In the special access investigation, the FCC is reviewing ILEC pricing flexibility plans using just one year of data. CLECs are arguing that pricing flexibility has enabled ILECs to accrue extraordinary profits, especially since under price cap current regulations there is no lawful way to order rate reductions. 

However, the Commission knows that any attempt to modify regulations to force ILECs to lower special access rates (such as requiring rates to be decreased to earn an 11.25 percent return on net investment) would be greeted by a multi-court, multi-year lawsuit, helping no one. Moreover, conclusions based on a single year of data in a rapidly changing market are easily shredded. Thus, the special access investigation is extremely unlikely to lead to any major changes in how ILEC special access services are regulated.

But it is clear that this activist FCC wants to do something to demonstrate its support for the relatively smaller ILEC competitors.  With this investigation into ILEC OPPs it can! 

The Commission can deem some of the OPPs unlawful under sections 201 or 202 of the Telecommunications Act. It can also reduce termination liabilities to aid movement from carrier to carrier. It can do so without changing how ILECs are regulated overall and thus, hopefully avoid a lawsuit.  Importantly, it can issue edicts in this investigation based on three years of data that cannot be so easily dismissed. 

Thus, this investigation enables the Commission to help CLECs in ways that the Commission has increasingly concluded could not be done in the global special access investigation.  It will be interesting to see how ILECs react.

By Andy Regitsky, CCMI