We have said here for a while that the FCC’s decade-long investigation of the special access market is going nowhere.  While special access customers and providers continue to argue over which market data should be made public and the Commission has yet to decide on the type of analysis it will conduct, the industry is moving on. While special access is still a multi-billion industry, more and more carriers and enterprises are moving away from circuit-switched dedicated services to packet-based services such as Ethernet. Finally, it appears the FCC is coming to grips with the fact that the industry has moved well past its efforts to “fix” special access.

We predicted that the special access investigation would result in the Commission only taking action to eliminate some of the ILEC optional payment plans (OPPs) that lock in customers with unfair termination liabilities and conditions that hinder the migration to Ethernet. That is likely to occur. The agency has just announced that at its April 28, 2016 meeting it will find some ILEC OPPs unlawful. While that is certainly a meaningful and much needed action, the April meeting will be more likely remembered as the day the Commission proposed a brand new regulatory paradigm for both special access and Ethernet services. 

The new paradigm is a radical departure from the current regulatory environment because it would treat special access and Ethernet services the same with both types of dedicated services populating the newly coined “business data service” (BDS) market. Under the new regime, special access services would be detariffed like Ethernet so providers could offer all their dedicated services under business contracts. Competition and not regulation would determine BDS prices, terms and conditions with the Commission only intervening in markets in which there was competition was insufficient to constrain prices. FCC Chairman Tom Wheeler spelled out his vision for the BDS world in an April 11, 2016 speech to INCOMPAS:

For the Commission to be effective, our rules must be based on market realities. So we need a fresh start.

To have such a fresh start, we need broad principles, we need to work to find common ground, and we need to seriously look at the best ways for the Commission to act. And we need to do it quickly.  My goal is that the Commission adopt the proposed BDS framework in April and that we conclude the proceeding, quickly, certainly no later than the end of the year. Now is the time for action. I assure you that I will treat this issue with the urgency it deserves. I expect that same from you and other stakeholders in this debate.

So what exactly are we proposing? My plan would establish a new competition-triggered deregulation framework for Business Data Services.

It would stop the traditional use of tariffs for BDS; discard the traditional classification of “dominant” and “non-dominant” carriers, and, I expect, de-regulate competitive markets that are now subject to price regulations.

This new de-regulatory, de-tariffing framework is built on four fundamental principles.

First, competition is best. Where competition exists, there is little for government to do except to maintain the traditional oversight of telecommunications services. But where competition does not exist, government’s role is to ensure that non-competitive market conditions cannot disadvantage business customers and their ability to compete and innovate in downstream markets. To that end, we propose the adoption and application of a new competition test designed to identify the markets in which current and potential competition is bringing material competitive effects to customers.

Second, the new regulatory framework must be technology-neutral. Companies and technologies that are delivering the same kind of BDS should be treated the same. That means that where TDM [time-division multiplexing] and IP [Internet protocol] deliver substitutable services, the market must be judged by looking at both. It means that all companies that provide BDS must be subject to the same overarching legal framework.

Third, Commission actions should encourage the transition from TDM to IP. The supply of circuit-switched BDS is still big business, but the future is in IP-based, packet-switched communications. That is why, for example, we propose to eliminate unfair contractual provisions that lock customers into legacy telecommunications technology. Specifically I have asked the Commission to vote on April 28 to declare unlawful contract terms used in a series of tariffs that include so-called “all or nothing” contracts that require a customer to make all of its purchases on a single set of terms, as well as the use of excessive penalties that punish customers when they fall short of their volume commitments. Unfair contractual terms can both slow the transition by customers away from TDM and to IP and, by limiting the use of IP-based products like Ethernet, actually discourage investment in the construction of new BDS facilities.

Fourth, regulation should be constructed to meet today’s marketplace – and tomorrow’s. To that end, we propose that tariffing of BDS be ended in all markets, for all BDS products. We would end the regime based on dominant and non-dominant carriers. Our focus will be to ensure that lack of competition does not unfairly harm commercial customers or the consumers who rely upon them. Where there is no competition, we should ensure that business customers are not overcharged and competition not unfairly disadvantaged.

While the Commission will not reveal the specific details of its proposal until the April 28^th meeting, it is clear that there are many unanswered questions. For example, how will the Commission determine when competition is sufficient to constrain BDS prices, terms and conditions?  How will competition be measured? Certainly the measures of competition used to determine ILEC eligibility for special access, including CLEC collocations, have failed miserably.   

In addition, if tariffs are no longer required, what happens to all existing tariff agreements for specific terms such as for five or seven years? Are they terminated and renegotiated? Are they grandfathered? And what happens to area-wide tariffed agreements when some markets are deemed competitive and some are not?

Suffice it to say, that before any new regulatory paradigm is implemented there will be a protracted period while the industry struggles to answer these questions. There also will likely be serious disagreements between the various parties.

In a surprise move, just as the Commission was making its business data intentions public, Verizon and INCOMPAS released a joint letter to the agency signaling that they had come to agreement on how special access and Ethernet should be regulated. It was strikingly similar to the Commission’s proposal. 

Other industry participants reacted very differently. For example, AT&T did not appreciate the Commission calling for regulation in rural non-competitive markets to incentivize investment.

But imposing regulation on special access prices and contract terms is not going to produce it. In fact, the entire notion that more layers of FCC regulation will yield more broadband investment is absurd on its face, and proves that this FCC remains ‘an economics-free zone.’ The Commission’s proposals will instead lead to far less investment in broadband infrastructure – especially in rural areas – the very opposite of where we should be going as a nation (AT&T Public Policy Blog, April 12, 2016).

The National Cable and Telecommunications Association (NCTA) has also reacted sharply to the new proposals fearing that the Commission will impose new regulations in markets in which their members have found success with their own business data services.

In short, while the Commission hopes to make its new BDS regulations effective by the end of 2016.  That is very unlikely. The numerous unanswered questions and the likely industry quarrels make this a battle that is likely to range well into 2017 and beyond.

By Andy Regitsky, CCMI