On April 28, 2017 the FCC released the text of its Report and Order (Order) in Docket 17-43, capping the decade long proceeding by detariffing and eliminating pricing rules for most ILEC special access services. Price cap regulation will continue for ILEC DS1 and DS3 end user channel terminations only in counties that fail a competitive market test and are classified as non-competitive. CLECs will also have to detariff their special access services.

The Order will become effective 60 days after it appears in the Federal Register. The industry has up to three years from the Order’s effective date to transition to the new detariffing requirements. Here are the important points special access suppliers and customers need to know:

I. Packet-based Services

The market for packet-based services such as Ethernet is competitive therefore those services will continue to be provided through contracts.

II. Special Access

Definitions                                                                                            

DS1 and DS3 Transport – defined as including the interoffice facilities along with channel terminations between a LEC serving wire center and an IXC point of presence are found to be competitive.

Competitive End User Channel Terminations – defined as a dedicated channel connecting a LEC end office and a customer premises, offered for purposes of carrying special access traffic that pass the competitive market test.

Non-Competitive End User Channel Terminations – defined as a dedicated channel connecting a LEC end office and a customer premises, offered for purposes of carrying special access traffic that fail the competitive market test.

Grandfathered Markets - A county that does not satisfy the competitive market test for which a price cap LEC has previously obtained Phase II pricing flexibility.

Competitive Market Test - A market (US 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.

III. Regulatory Relief

Competitive Counties - Price cap ILEC DS1 and DS3 transport and end user channel terminations in markets deemed competitive, and in grandfathered markets for a price cap carrier that obtained Phase II pricing flexibility prior to June 2017 are granted the following regulatory relief:

Elimination of the special access rate structure requirements

Elimination of price cap regulation

Elimination of tariffing requirements

Non-Competitive Counties – Price cap ILEC DS1 and DS3 end user channel terminations in non-competitive markets will be regulated based on ILEC Phase I pricing flexibility rules. Therefore:

Volume and term discounts are permitted

Contract tariffs are permitted but must be made available to similarly situated customers

Tariffs can be changed on a single days notice.

Restrictive non-disclosure agreements in contract tariffs for business data services sold in non-competitive areas are prohibited.  

A price cap ILEC that was granted Phase II pricing flexibility prior to June 2017 in a grandfathered market must retain its business data services rates at levels no higher than those in effect as of the Order effective date, pending the detariffing of those services.

Lower Bandwidth Special Access – ILEC special access services with lower bandwidth than DS1 (i.e., voice grade circuits) receive Phase I pricing flexibility. Thus, volume and term discounts, contract tariffs and tariff changes on one days notice are permitted.

CLECs - The Commission will not regulate CLEC business data services in any markets.

IV. Transition to Detariffing

The transition will begin on the effective date of this Order and will end 36 months thereafter.

For 6 months after the effective date of this Order, price cap ILECs must freeze the tariffed rates for end-user channel terminations in newly deregulated counties, as long as those services remain tariffed.

During this transition, tariffing for deregulated services will be permissive—the Commission will accept new tariffs and revisions to existing tariffs for the affected services. Apart from the 6-month rate freeze carriers will no longer be required to comply with price cap regulation for these services.

Once the rules adopted in this Order are effective, carriers that wish to continue filing tariffs under the permissive detariffing regime are free to modify such tariffs to reflect the new regulatory structure outlined in the Order for the affected services.

Both ILECs and CLECs may remove the relevant portions of their tariffs for the affected services at any time during the transition, and the rate freeze does not apply to services that are no longer tariffed. Once the transition ends, no price cap ILEC or CLEC may file or maintain any interstate tariffs for affected business data services.

Current contracts and contract tariffs are grandfathered and not affected by this Order.

However, such contract-based tariffs may not be extended, renewed or revised, except that any extension or renewal expressly provided for by the contract-based tariff may be exercised pursuant to the terms thereof. During the period between the Order’s effective date and the deadline to institute mandatory detariffing, upon mutual agreement, parties to a grandfathered contract-based tariff may replace it at any time with a new contract-based tariff negotiated under the rules adopted in this Order or with a new or amended contract that is not filed as a contract-based tariff.

V. Price Cap Reductions

The Commission adopts an X-factor of 2.0 percent that reflects its best estimate of the productivity growth that ILECs will experience in the provision of channel terminations relative to productivity growth in the overall economy.

Each year in the Annual Access Filings (AAFs), ILECs will have to reduce their rates still regulated by price caps by 2 percent plus or minus inflation measured by the Gross Domestic Product-Price Index (GDP-PI).

This year, however in addition to a typical AAF effective July 1, 2017, the Commission requires ILECs to file tariff review plans (TRPs) implementing the new X-factor that will become effective on December 1, 2017. To ease the burden on the industry, the Commission permits ILECs to use the same base period demand and value of GDP-PI in their December 1, 2017 filings as in their July 1, 2017 annual filings.

VI. Wholesale Services

The Commission declines to adopt any pricing rules governing the relationship between wholesale and retail rates for business data services

Upon the effective date of this Order the interim wholesale access rule for discontinued TDM-based business data services and unbundled network element platform (UNE-P) replacement services (also called commercial wholesale platform services) established in the 2015 Technology Transitions Order will expire. Thus upon discontinuing a DS1 or DS3 service, a price cap ILEC will no longer be required to provide wholesale access to UNE-P replacement services and business data services at DS1 speed and above on reasonably comparable rates, terms, and conditions.

VII. What’s Next

This Order significantly impacts carriers offering and purchasing services in a multi-billion dollar market. As such, the Order’s perceived losers such as CLECs and certain business customers are likely to file an appeal with the DC Circuit Court. Moreover, while stays of FCC orders are infrequent, we believe that the combination of the significance of this Order, with its radical departure from all previous FCC iterations of ILEC special access regulation, litigated by a Court stacked with Democratic judges will make a stay request more likely than usual.

There is no question that parties appealing the Order will attack the competitive market test, which is at least partly based on potential rather than actual business data services competition in a county. Such “tests” have not worked well in the past. Witness the special access pricing flexibility regime in which ILECs were granted pricing flexibility in many markets that lacked the competition to discipline prices. Special access prices actually increased in many markets, with relief found only for customers willing to sign multi-year contract tariffs that often stymied CLEC competition.

The FCC may ultimately be relying on winning at a newly conservative dominated Supreme Court since we anticipate that the competitive market test in this Order will not make it through the DC Circuit.  

By Andy Regitsky, CCMI