FCC Chairman Tom Wheeler made it official last week when he announced at a meeting of the Competitive Carriers Association that, before the end of the year, the Commission will release an Order prescribing new regulations for the Business Data Services (BDS) market consisting of special access and Ethernet services.  While no one outside of the agency knows exactly what the Order will include, an analysis of the Commission’s Notice of Proposed Rulemaking (NPRM) in Docket 16-143 and its public statements since, enable us to make the following educated guesses:

The FCC will allow BDS competitors to function relatively regulation-free in markets (census blocks) it deems competitive. Unfortunately, few markets will actually meet the test to be classified as competitive. Most industry observers believe to be classified as competitive a market will have to include four companies actually providing BDS services. That is in line with the Verizon-INCOMPAS proposal. But as the National Cable and Telecommunications Association (NCTA) notes in a July 14, 2016 letter to the FCC in Docket 16-143, this definition would classify 99 percent of the census blocks in the country as non-competitive and thus subject to corrective regulation!

In non-competitive markets, the Commission will take measures to ensure that BDS rates mimic those in competitive markets. The corrective regulation is likely to include an upfront price reduction to ILEC special access rates to account for the many years rates have essentially been frozen under the CALLS plan. 

The Commission has long believed that telecommunications is a declining cost industry in which rapid technological improvements allow companies to avoid costs more efficiently than companies in other industries. For years under price caps regulation, ILEC special access rates were required to decrease by a certain percentage each year to reflect this relative cost avoidance efficiency of telecoms. However, since 2003 under the CALLS plan, this so-called “productivity factor” decrease no longer applied. The FCC has apparently accepted the argument that current ILEC special access rates are too high because ILECs face fewer costs in 2016 that have not been reflected in any rate reductions since 2003. Therefore, it is expected the Commission will require ILECs to make a significant upfront rate decrease to their special access rates. 

Going forward, the Commission is likely to require annual forced ILEC special access productivity factor reductions as it re-imposes price caps in the markets it classifies as non-competitive. 

Regulation will almost surely target lower speed services such as DS1 and DS3. Those are the services in which the Commission believes the ILECs are clearly dominant.

Ethernet services offered by cable companies will be subject to price regulations for the first time. Those services will have price benchmarks tied to ILEC special access services with a mandated price ceiling for each type of service. As ILEC special access service rates decline each year, the Ethernet services benchmarked to those services would have forced reduction rates to meet the reduced benchmarks.  

As we have noted here before, we are not in favor of the likely BDS regulation to come, believing it far too heavy-handed in an industry (special access) that is rapidly declining as more and more customers move to Ethernet services. 

Moreover, burdensome regulation tends to impede rather than spur real competition. Some of us can still remember the “competition” in the local telephone market provided by CLECs using only ILEC unbundled network elements including switching. When the courts rejected the Unbundled Network Element Platform (UNE-P), too many CLECs were either forced out of business or were purchased by others as the local market rapidly thinned out. 

The danger in the BDS market is that prices will decline for special access so drastically there will be little incentive for new entrants or new service offerings in most markets. In addition, as ILECs cut costs to remain profitable as rates decrease, they are likely to cut jobs. Indeed, this may already be occurring, as the Communications Workers of America (CWA) notes in a September 20, 2016 letter to the FCC:  

Dear Chairman Wheeler,

Last week I wrote you about my concerns that drastic rate cuts in the Business Data Services proceeding would lead CWA employers to look to cut good jobs and network investment. Well it appears this was not idle thinking. CenturyLink announced plans to lay off up to 3,500 employees. As reported by USA Today, CEO Glen Post claims the job cuts are a response to the “decline in our legacy services.”

Surely, we don’t want to see more of these headlines. I know this is not a legacy you want for your tenure, but I fear we may see more of this if the Commission radically slashes rates of Business Data Services (FCC Docket 16-143, September 20, 2016 ex parte Letter from Christopher M. Shelton, President of the CWA).

There will be many other problems if the Commission carries through with its BDS plans. For one thing, in the past when the Commission mandated special access rate decreases and productivity factors it performed extensive economic analyses. No such analysis has been done here.  Thus, it is likely that mandated rate decreases will be easily challenged in a court appeal.

Moreover, the very data the Commission will likely use to reach its conclusions have already been challenged as flawed, especially since it includes inaccurate cable data.

The wisdom of imposing price regulations on new entrants in BDS markets remains mystifying. New entrants offering competing services in a market should theoretically put ceilings on the prices of the entrenched competitor. Yet here, the FCC plans on putting a price ceiling on the new entrant!  How does that make sense?

Finally, it remains a mystery as to why the Commission plans on imposing so much new and onerous regulation on a declining industry. Wouldn’t the Commission’s time be better spent creating incentives for more BDS customers to move to Ethernet rather than forcing legacy rates down and encouraging customers to continue with special access?  

Feelings aside, it seems clear that a slew of new special access regulations are coming and coming quickly. The industry should be prepared.

By Andy Regitsky, CCMI