On May 15, 2017 the FCC finally released the list of competitive, non-competitive and grandfathered markets it identified in its Business Data Services (BDS) Report and Order (Order) in Docket 17-43. In that Order, the Commission decided to eliminate price cap regulation for ILEC DS1 and DS3 special access services in counties deemed “competitive,” and in counties that previously obtained Phase II pricing flexibility (grandfathered counties), while keeping price cap regulation on DS1 and DS3 channel terminations in “non-competitive” markets. 

Here is the list:

http://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0515/DOC-344863A1.pdf.

One of the major criticisms of the BDS Order is that the competitive market test that the Commission used to classify counties identifies too many counties as competitive because it is partially based on potential competition, a measure that worked horribly when ILECs achieved special access pricing flexibility. Now that the list of BDS competitive counties has been released, it is clear that too many rural non-competitive counties are classified as competitive. The problem is that the potential competitors appear to be cable TV providers that may someday offer BDS to their customers. This means that many rural counties that have been receiving cable TV for 30 or more years but have no competitive BDS providers in the area are counted as competitive. 

Here is the official definition of a competitive market:

The competitive market test states that a county is competitive if 50 percent of the locations with demand for business data services in that county are within a half mile of a location served by a competitive provider or 75 percent of the census blocks in that county have a cable provider present. The competitive market test will be performed every three years to assure that each county is appropriately designated as competitive or non-competitive. 

The competitive market test results in about two-thirds of the counties in the country classified as competitive.

While I certainly do not have knowledge of most of the counties in the USA, the list of competitive counties includes many counties I do know in Southwestern Virginia. This is a very rural area with few people or large businesses and is notably poorer than the rest of the state. The area is not growing. Most likely, these counties have been classified as competitive because being located far from major cities they have been receiving cable TV for years. 

Proponents of the FCC’s competitive market test argue that even in a rural county there is likely to be demand for DS1 services by the existing businesses.  While that may be true, those businesses are already served by the existing ILEC which “won” the business long ago due to its historical presence in the area. If another BDS provider wanted to compete it would have to build its own facilities to reach each customer location, facilities that the ILEC already has in place.   Before beginning construction, the potential competitor would have to determine that an investment in facilities in a new market would result in a positive income stream. Unfortunately, in this type of market it would be unlikely to ever do so. The ILEC, free from all regulatory restraints, could price its DS1 service in any way it chooses to either win or maintain its service.  Moreover, history tells us that ILECs will sign up customers for long terms ensuring potential competitors have no realistic chance to compete. 

Because of its infirmities, the BDS Order has already been appealed to the DC Circuit Court by Windstream and Sprint. The ILEC special access customers and competitors claim that the Order is arbitrary, capricious and an abuse of discretion.  Moreover, they argue that the Order violates the notice-and-comment requirements of the Administrative Procedure Act, as well as the Communications Act of 1934 and the FCC’s own regulations. The carriers request the Court to block the Order’s implementation and provide any additional relief that may be just and proper.  Many other carriers are also expected to file appeals.

While we often support attempts by the new FCC to eliminate some of the more onerous regulations promulgated by Tom Wheeler under the Obama administration, we believe the Commission went much too far in deregulating the special access market. FCC Commissioner Clyburn had it exactly right in her dissent to the Order when she wrote:

Call it whatever you want—business data services (BDS) or “special access”—what this Order does is open the door to immediate price hikes for small business broadband service in rural areas and hundreds of communities across the country. Cash strapped hospitals, schools, libraries, and police departments will pay even more for vital connectivity, and soon we will see pressure on our Rural Healthcare and E-Rate fund budgets, resulting in less bandwidth for our schools, libraries, and rural healthcare institutions.

This is a 186 page all-out assault on America’s small business, schools and local economies that at a minimum, deserved the benefit of better data collection, and a more thoughtful approach. But in the rush to deregulate, the leadership, providing as much notice as a run-away train, opts to adopt a framework that relies on faulty data and lackadaisical market analysis to come up with an ineffectual competitive market test, calibrated to deregulate as broadly as possible. The order upends decades of competition analysis, by defining a particular market as competitive when there is only one provider in a market and the mere possibility of a second entrant. Unfortunately, this is not a “typo.” The mere presence of a second nearby potential business data service provider that is located a half a mile away is deemed a competitor whether they plan to serve an area or not.

By Andy Regitsky, CCMI