2016 has been a great year for the FCC so far. It recently won an overwhelming victory when the DC Circuit Court of Appeals affirmed its Net Neutrality rules. In addition, the Commission is in the process of meeting many of the goals of Chairman Tom Wheeler, including making broadband access to the Internet part of the Lifeline program, establishing stringent privacy rules for Internet service providers (ISPs) and “fixing” universal service for rural ILECs. No doubt the agency is on a roll, with little fear that a hopelessly gridlocked Congress will rein in the continued expansion of its power. However, there is one potential roadblock standing in the way of a completely triumphant year for the Commission: its proposed new rules for the business data services (BDS) market appear to be based on inaccurate data.

In its Further Notice of Proposed Rulemaking (FNPRM) in Docket 16-54 released on May 2, 2016, the Commission proposed new regulations which are revolutionary for the industry because special access and Ethernet services would be made available to enterprise and carrier customers through negotiated contracts instead of tariffs. The Commission would identify some U.S. markets as competitive and allow the free market to control prices. Many other markets, however, would be classified as non-competitive. In those markets, ILEC special access prices, terms and conditions would be regulated through price caps and price regulation would also be imposed on Ethernet services. Regardless of whether provided by ILECs or newer entrants such as CLECs or cable companies, Ethernet providers would be required to price their services almost certainly based on a time-division multiplexed (TDM) “backstop,” price, which would ensure price discipline in a “non-competitive” market.     

On June 17, 2016, however, the entire FCC proposal was placed in serious jeopardy when most of the major ILECs filed a Motion to Strike the proposed rules because those rules were based on inaccurate industry data which significantly understates the number of competitive markets. According to the ILECs,

It has now become clear that the [industry analysis] report prepared by [the FCC’s consultant] Dr. Marc Rysman for use in this rulemaking, as well as nearly all other analyses submitted into the record, were based on an irretrievably flawed data set that severely understated cable providers’ ability to provision true business data services (“BDS”). The record now shows that the major cable providers were able to provide Metro Ethernet – not what the Commission calls “best efforts” service – in 22 times as many census blocks in 2013 as was reflected in the original data set on which the Rysman Report and many other analyses were based. The Administrative Procedure Act, the Data Quality Act, and bedrock principles of evidence require that these materials be stricken from the record. Indeed, given the central role the Rysman Report plays in the Commission’s proposals, the agency should rescind the aspects of the May 2 FNPRM that cited or relied upon them, allowing the Commission and parties to conduct new analyses reflecting accurate data regarding the state of the marketplace. The Commission should then develop and seek comment on new proposals as appropriate (CenturyLink, Inc. et al, Motion to Strike filed June 17, 2016 at p. ii).

The public first became aware of the data problem just one week before the FNPRM was released when Comcast filed an ex parte letter with the FCC explaining that, in response to the FCC’s data collection request, it had not reported locations connected to nodes that had been physically upgraded to enable the provision of Ethernet-over-HFC [Hybrid Fiber-Cable] service as of 2013.   

Other large cable companies, including Cox Communications, Charter Communications, and Time Warner Cable also admitted that they had made the same omission as Comcast.  All of these omitted facilities could be used to supply Ethernet service in competition with ILEC special access and presumably if included in the original data, would have led the Commission to different conclusions as to the competitiveness of the BDS market and the amount and type of regulation needed.  With cable competition in many more markets than originally thought, ILECs could justifiably argue that price cap regulation is completely unnecessary and unfairly targets them. 

Until now, the FCC has played down the impact of the revised data.  First it asserted that the industry had time to analyze the revised data.  It has since backed off that argument and more recently claimed that the newly identified locations are not actually competitive because the cable companies could only offer “best effort” Ethernet services similar to the less-than reliable service sold to consumers in which a certain download speed is promised but almost never actually realized, and certainly not competitive to special access. 

This is clearly false, since even the cable companies admit that they could offer their Metro Internet service in those locations, which clearly is a service they use to compete with ILECs.

This will not cut it with ILECs.  They make it clear in their Motion that if the Commission does not agree to allow sufficient time for the industry to analyze and comment on the new data or continues with its original proposal based on the “flawed” data, they will immediately appeal to the Federal Courts.  With so much money at stake in this proceeding, they are deathly serious.

We await a Commission response to the Motion. Mr. Wheeler has stated that he plans on completing the BDS proceeding by the end of this year. If he grants time for the industry to analyze the new data it would put the kibosh on that hope. It is an interesting dilemma for him and the entire Commission and is the first serious barrier this year to his expansionist plans. It could be a rocky Fall.

By Andy Regitsky, CCMI