Last year the FCC determined that price cap ILEC special access and packet services should be almost entirely deregulated with only DS1 and DS3 transport subject to price cap regulation if the ILEC failed a highly criticized "competitive" market test.  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 a unique position.  More than 200 ROR ILECs now receive universal service support based on a cost model called the Alternative Connect America Fund Cost Model (ACAM).  In return for a fixed amount of support, these ILECs are required to meet a specified level of broadband deployment.  This method to recover Connect America Fund (CAF) dollars has become very popular among ROR carriers.  However, as a result, these LECS are no longer in the NECA Common Line Pool and remain subject to rate regulation only for their special access services.  Some parties sought to change that.

ITTA and USTelecom suggested to the FCC that ROR ILECs selecting the ACAM have the option to opt into the regulatory scheme adopted in the BDS Order for their DS1 and DS3 services.  The Petitioners argued that the burdens of ROR regulation made little sense as rural ILECs increasingly utilized incentive-based regulation:

Continued compliance with rate-or-return-based rate regulation, including tariffing, tariff review plans, cost studies, and associated requirements, entails significant costs that are difficult for model-based rate-of-return carriers to recover in the competitive marketplace of BDS.  For carriers receiving model-based support for universal service, these costs now are incurred only for BDS. In addition, the incentive of a model-based rate-of-return carrier to invest in facilities capable of providing robust, modern BDS and making the transition to an Internet Protocol based network is undermined because of the inability to flexibly meet customer needs. Regulatory rigidity harms competition, and thus imposes unreasonable costs on customers. For model-based rate-of-return carriers, these costs can exceed the benefits of rate-of-return regulation.  (Docket 17-144, ITTA and USTelecom Petition, at p. ii).

The FCC has just responded to this Petition.  In a Notice of Proposed Rulemaking NPRM) that will be voted on at its April 17, 2018 meeting, the Commission proposes incentive regulation for the special access services of ROR ILECs that use ACAM.  It also proposes to allow non-ACAM ROR ILECs to choose similar incentive-based regulation.  According to the Commission:

We seek comment on a regulatory framework that would provide electing A-CAM carriers a path to move from rate-of-return regulation to a more efficient system of incentive regulation for their TDM [Time Division Multiplexed] transport and end user channel terminations at speeds at or below a DS3.  In so doing, we propose to require that each A-CAM carrier’s decision about whether to move their BDS offerings out of rate-of-return regulation be made on an all-or-nothing basis for all of an A-CAM carrier’s study areas that receive A-CAM support.  We also invite comment on what would be an appropriate market analysis for these lower speed services and on a competitive market test that would allow us to distinguish between markets that are sufficiently competitive so as not to warrant the burdens of ex ante pricing regulation from those that are not...because we are proposing to allow other rate-of-return carriers that receive model-based or other types of fixed support the opportunity to elect the same or similar lighter touch BDS regulation that we propose for A-CAM carriers, we also seek comment on providing a path forward for regulating such carriers’ BDS offerings. (Draft NPRM, Docket 17-144, at pp. 6-7.)

The ROR ILECs that select incentive regulation would obtain Phase I pricing flexibility for their DS1 and DS3 services.

We propose to allow electing A-CAM carriers to offer term and volume discounts and contract-based services for their TDM transport and end user channel termination services offered at speeds at or below a DS3.  Electing A-CAM carriers would be required to maintain generally available tariffed rates subject to incentive regulation for these lower speed TDM transport and end user channel terminations, and other special access services included in their tariffs. (Id., at p. 8).

However, recognizing that rural areas face limited competition, the incentive regulation for ROR ILECs differs from their price cap counterparts in one critical aspect:

While the Commission found TDM transport to be competitive in price cap areas generally, here we propose to allow electing A-CAM carriers to convert lower speed TDM transport services to incentive regulation but not to immediately eliminate ex ante pricing regulation for them.  (Id., at p. 9).

Some other critical proposals in the NPRM:

Once the Commission develops a competitive market test for ROR ILECs, in areas deemed competitive, ROR ILEC DS1 and DS3 special access transport and channel terminations would be free of price regulation;

Special access services above DS3 and packet-based services would be free from all price regulation;

In non-competitive markets subject to Phase I pricing flexibility, ILEC special access rates would be required to decrease each year by 2 percent Productivity Factor.

As noted above, the FCC plans on adopting this NPRM on April 17^th.  Parties will have the opportunity to comment on the Commission's proposals 30 days after the NPRM is published in the Federal Register.  While some parties may quibble with some details of the proposals, the feeling here is that most ROR ILECs will be wildly supportive.  Others might agree, if the Commission develops a competitive market test based on actual and not potential competition.