The special access battle is on! On September 11, 2015, we detailed how CLECs are aggressively demanding the FCC to re-regulate ILEC special access rates before the special access investigation is completed by removing their pricing flexibility status and once again making them a part of price cap regulation (Read more here). The CLEC demands came in a joint FCC filing made on August 28, 2015 in Docket 05-25 by Birch Communications, BT Americas, and Level 3 Communications (“Joint CLECs”). 

In addition to seeking increased special access regulation, the CLECs argued that the Commission also had the authority to reverse its decision to forbear from dominant carrier regulation of ILEC Ethernet services. That forbearance decision enabled ILECs to offer these services through negotiated contracts for the last eight years without having to file tariffs or cost support.

As can be expected when major revenue sources such as special access and Ethernet are attacked, ILECs have reacted strongly. In the last few weeks, Verizon USTelecom and AT&T have filed rebuttals to the CLEC claims. We detail the ILEC arguments below and discuss what is likely to occur next for special access and Ethernet.  

ILECs claim first in their rebuttals that the Commission has no legal authority to re-regulate special access or Ethernet services without holding a rulemaking proceeding where CLECs would be required to show that the current ILEC rates for special access and Ethernet services are unreasonable and in violation of section 201 of the Telecommunications Act.

As AT&T notes, no party has demonstrated that the current rates for special access Phase II pricing flexibility contract tariffs are unreasonable:

Accordingly, contrary to Joint CLECs' apparent belief, the Commission could not lawfully just select a rate from thin air for such services that it believes to be in the "zone of reasonableness" and force it on the ILECs in a price cap regime. Rather, to invoke the Commission's authority to regulate competition and to impose new rate regulation under Sections 201 and 202, the Joint CLECs must clearly demonstrate that there is a market failure that requires a regulatory solution. That would require the Commission to make an affirmative showing that the lLECs' current rates are unjust and unreasonable - i.e., completely outside the zone of reasonableness - before it could intervene, whether price caps technically constitute a prescription or not. Indeed, the Commission has acknowledged that to impose interim special access rate prescriptions, here the "record would have to support the conclusion that every rate [and practice for] every service for which pricing flexibility [or forbearance] has been granted violates Section 201 (AT&T September 28, 2015 letter to FCC, Docket 05-25, pp 6-7)."

Nor have the CLEC’s demonstrated in any proceeding that Ethernet rates are unreasonable and dominant carrier regulation should be imposed.   

Verizon states:

[T]he Commission cannot simply “reverse” a forbearance grant, despite what some parties say. The Commission could re-regulate enterprise broadband services only by first satisfying the rulemaking requirements of the Communications Act and the Administrative Procedure Act. That requires a record based on current marketplace facts. And current marketplace facts—including developments since 2013—show that competition for enterprise broadband services is robust and growing more so (Verizon September 24, 2015 letter to FCC, Docket 05-25, p. 1).

The ILEC’s second major argument against increased regulation for special access and Ethernet services is the patent unfairness to subject them to more regulations than their competitors in an increasingly competitive broadband market. For example, AT&T argues:

Even if there were no procedural bar to the Joint CLECs’ proposals, they would be unlawful on substantive grounds. Eight years ago, the Commission found that “there are a myriad of providers prepared to make competitive offers to enterprise customers demanding packet-switched data services located both within and outside any given incumbent LEC’s service territory,” including “many competitive LECs, cable companies, systems integrators, equipment vendors, and value-added resellers.” For that reason, the Commission granted forbearance from dominant carrier tariff filing and cost support requirements, although it made it clear that Sections 201 and 202 and the Section 208 complaint process would continue to apply. As the Commission anticipated, that competition has become even more robust in the years since forbearance was granted. As shown below, publicly available data confirm that providers of all types are successfully competing in the marketplace: no Ethernet provider has a port share that exceeds one-fifth of the market; eight providers have port shares that exceed five percent (five of which are non-ILECs); the second largest provider in terms of port share is a CLEC; and numerous smaller providers together have a port share of more than 20 percent. Accordingly, the Commission would have no substantive basis for re-imposing rate regulation (AT&T letter at pp. 1-2).

In our opinion, the FCC will not place any new regulatory constraints on either ILEC special access or Ethernet services before it concludes its special access investigation. If it were to attempt to do so, it would invite an ILEC appeal all the way to the U.S. Supreme Court. Moreover, ILECs would have a great chance to win since the Commission is clearly not permitted to change the regulatory status of a class of services without holding a formal proceeding first. 

CLECs are well aware that the Commission is unlikely to act before the investigation is completed, so why are they lobbying now for immediate regulatory prescriptions almost certain not to occur? The belief here is that in the net neutrality and technology transitions proceedings, the FCC has shown that it is very sensitive to the needs of small competitors and less sensitive to the concerns of large ILECs. 

In addition, this FCC appears to be heavily influenced by lobbying. Thus, CLECs clearly think it is worth their time and money to plant a seed in the Commission’s collective mind reinforcing the idea that additional ILEC regulation is needed.  We should find out if their strategy worked sometime next year.

By Andy Regitsky, CCMI