The FCC released its Further Notice of Proposed Rulemaking (FNPRM) in Docket 16-54 on May 2, 2016.  The FNPRM proposes a new regulatory framework for the special access and Ethernet services that constitute the business data market (BDS). In theory the proposal makes a lot of sense because in competitive markets regulation would be minimal, technological neutral and would eliminate the requirement that LECs file tariffs for their special access services. While the proposal sounds great, the details make it obvious that the complexity involved make the new requirements almost impossible to implement.  Furthermore, the new regulations would simply add to the authority and control of the Commission. 

Here are some of the specific problems:

Complexity of Market Test   

The most important part of the Commission’s proposal would require a market test to determine whether each market in the country is competitive or non-competitive.  Determining just how the classification would work is a major issue. First the Commission would have to define a market.  But is a market a metropolitan area like in the failed pricing flexibility program?  Or is it something much smaller like a census block or even an individual customer location? The Commission seems to prefer a census block similar to the criteria used in the universal service program. But how is it possible for the Commission to perform a market test in every census block in the country? And how often could such a test be administered?  Markets are constantly changing, and no periodic market test can keep up with those changes.

In addition, the Commission identifies two possible factors for determining whether or not a market is competitive, i.e., business density and the number of providers in the relevant geographic area.  But those factors raise more questions.  For example, what should the Commission use as the appropriate business density metric for the market test? Should it use the number of business establishments in a defined geographic area, the number employees, the level of payroll, or some other variable that is readily available and shown to be a good proxy for business demand? For example, should it assume any census block with more than some number of businesses establishments per square mile as competitive?   

Similarly, regarding the number of providers in a market:  How should the Commission incorporate this into a bright-line determination that a market is competitive? Should it require more than two facilities-based competitors in any area for a competitive trigger? Are there instances where having just one or two competitors is sufficient given the bandwidth level and business density in a given area? Does the type of competitor in the market make a difference? For example, should the market test consider competition from a cable company differently than a non-cable CLEC or vice versa?  If so, should this different weighting vary with bandwidth levels?

Even when a market test is finally approved, would the Commission create a new agency to run it?  And would every company in America providing BDS services be forced to file reports each time they decided to enter or exit a market?  The requirements could easily overwhelm small companies, especially potential new entrants to BDS markets.

Finally, any market test adopted would lead to endless dispute, which, of course, the FCC would have to resolve.  What a potential mess the Commission is creating!

Ethernet Baseline Pricing

The Commission makes the case for its new framework by claiming that it would only use regulations in non-competitive markets to create prices that would mimic competitive markets. But one major flaw in its proposal is that it would clearly impose more regulations on Ethernet pricing. Currently Ethernet providers regardless of whether they are ILECs, CLECs or cable companies are free to negotiate prices with individual customers through negotiated agreements. To be sure, Ethernet prices must be just and reasonable and not unlawfully discriminatory under sections 201 and 202 of the Telecommunications Act. However, as long as those requirements are met, providers are free to develop individual prices, terms and conditions that meet specific customer needs in the increasingly competitive Ethernet market. Under the proposed framework, however, the Commission would turn back the clock and begin to control individual Ethernet prices.

In non-competitive markets under the proposal, the prices of special access services would be regulated under price caps. That proposal by itself will bring a flood of ILEC lawsuits.  However, the Commission also seeks to ensure that, in non-competitive markets, rates for comparable Ethernet business data services not subject to price cap regulation are controlled. Thus, it proposes an anchor pricing or benchmarking approach for Ethernet services in non-competitive markets with three potential options:

The first option is to rely on regulated special access service prices to anchor the prices of similar packet services. This option would be effective only where special access prices could be expected to reasonably constrain the rates for higher speed packet-based services.  In that case, the Commission could decline to otherwise regulate packet-based BDS rates.

If, however, the Commission were unable to determine that regulated TDM prices would provide a reasonable constraint on packet-based BDS, a second option would be to establish one regulated price for packet-based BDS services. For example, establish a regulated rate for a 10 Mbps Ethernet service, which could serve as an anchor for nearby-bandwidth packet-based BDS, and could arguably constrain those rates.

The third option is to initially use reasonably comparable prices for regulated TDM services as a benchmark to help the Commission determine whether rates for various packet-based BDS are just and reasonable, but over time using, as a benchmark, the packet-based BDS prices established under this approach.

Regardless of the option selected, the result would be more regulations for Ethernet service providers.  This is particularly ironic for cable companies. When they entered the BDS market they added competition to Ethernet markets. Yet, this additional competition leads the Commission to assume that more regulation is needed. It’s almost like the Commission believes it is establishing regulations for the Bizarro world.

Elimination of Tariffs   

Under the proposed rules, special access providers would no longer have to tariff the rates, terms and conditions for their services. In theory this is a major advancement because it would put special access and Ethernet on an equal footing and enable providers to better meet the needs of customers through negotiated agreements. However, to replace tariffs, the Commission would forbid the use of Non-Disclosure Agreements (NDAs), and require providers to publish all of their agreements on their websites. 

There is nothing that would chill competition more than having the details of every agreement available for public perusal.  Moreover, customers purchase services based on their business plans.  What customer would sign up for a service that would reveal even indirectly (by the services it purchases) to its competitors?  And who will provide oversight of these agreements.  Will the Commission review them one by one to ensure they comply with sections 201 and 202 and the additional regulations mandated by the new requirements?  Will a company be called to the carpet each time the Commission had a question about an individual agreement?

It is clear that a review of individual agreements could take forever and would give the agency even more authority by allowing it to intrude into individual business plans.  

As FCC Commissioner Michael O’Rielly noted in his dissent to the proposal, this attempt to deregulate the business data services market and place all competitors on an equal footing is really a new power grab by the Commission:

At the same time that the Commission’s new mantra is to streamline regulation of ILECs, who were bestowed certain benefits by the government in the past, it plans instead to regulate every provider, even new entrants. In particular, the Commission would expand the universe of regulated providers to include cable companies—new competitors that already risked capital to deploy service without any warning that they might be “rewarded” for their success with restrictions on how they price and market their products. With the incumbents having already received forbearance for many packet-based services, there would have been no reason to think that their own comparable services would ever be subject to that type of regulation.  Indeed, the Commission does not have authority to do so, and labeling it a “technology-neutral” approach cannot solve that threshold problem. What possible incentive would a cable provider have to pursue an aggressive business broadband deployment strategy only to get regulated coming and going by the Commission? Just awful.

By Andy Regitsky, CCMI