We know the FCC is going to propose a new regulatory paradigm for special access and Ethernet services at its April 28, 2016 meeting. The new regime will treat circuit-switched and packet-based dedicated services the same with both types of circuits constituting the newly named business data service (BDS) market. Special access would be detariffed to join Ethernet as services provided to enterprise and carrier customers through business contracts.

We also know that the Commission is poised to eliminate some of the onerous terms and conditions ILECs impose through their special access optional payment plans (OPPs). These terms and conditions lock in customers for multiple years and force them to purchase almost all of their circuits from that ILEC or pay exorbitant termination liabilities if they wish to move to Ethernet or another special access provider.

What we don’t know is how the Commission will handle markets in which the ILEC (or more rarely someone else) is clearly the dominant provider and competition has not constrained special access pricing. Will the Commission attempt to re-impose price cap regulation in these markets?  Would the agency actually require ILECs to reinitialize (reduce), their current special access rates to ensure a return on net investment of only 11.25 percent?  Or even worse for price cap ILECs, would the Commission require a special access return on net investment of 9.75 percent to equal the new rate-of-return authorized for rate-of-return ILECs?

More broadly, how many special access markets are actually competitive? If most markets are truly competitive, a return to price cap regulation for those non-competitive outliers would be almost meaningless. On the other hand, if most markets are not competitive more regulation may is needed, but that would mean that the FCC goal of equality for special access and Ethernet is really a Tom Wheeler pipe dream.

Thankfully for the first time, the FCC actually has real data to determine the actual extent of special access and Ethernet competition in multiple U.S. markets.  The data comes from the Commission’s decade long special access investigation which is finally in the home stretch.  Although the agency has yet to determine how it will conduct the market analysis of the special access market, other parties have had the opportunity to review the data and are reaching their own conclusions. First out of the gate is Sprint, and if you are a fan of competition, the special access market is not a pretty place. In an April 18, 2016 meeting with the Commission, the CLEC made the following points:

1. There is inadequate competition to discipline BDS prices, terms and conditions:

In 73 percent of locations (buildings and cell cites) where any company offers BDS, the ILEC is the only provider of any BDS product.

In 97 percent of locations there is only a monopoly or a duopoly that does not discipline anticompetitive behavior.

There are only three or more providers in 3 percent of such locations.

2. Even analysis using larger census blocks (CBs) shows inadequate competition:

Use of CBs overstates competitiveness of the BDS marketplace.

Erroneously assumes competitor can, in all cases, rapidly and with low cost extended service to a new location.

Proper geographic area is the building/cell site.

3. Market concentration and revenue share analysis:

Market concentration exceeds the “Highly Concentrated level in 99 percent of census blocks.

ILECs control 85 percent of revenues for BDS products offering 50 Mbps or lower (equivalent to DS3 and DS1 circuits).

Even including very high-capacity BDS, ILECs control 73 percent of all revenues reported in response to the FCC data request.

4. The data collection also revealed widespread ILEC use of anti-competitive terms and conditions:

Loyalty mandates.

Overage and shortfall penalties.

All-or-nothing commitments.

Use of terms to undermine Ethernet market entry.

5. Faced with this data the ILECs last ditch argument is that cable entry solves everything:

This is just the latest in a long line of baseless ILEC claims that a new entrant is about to transform the BDS marketplace instantly from a monopoly to a robustly competitive arena – remember broadband over power line?

Cable Hybrid Fiber- Coaxial (HFC) is unsuitable in many cases because of capacity limits and refusals to guarantee key quality elements – especially for wireless.

Even if cable were magically to compete everywhere with a substitute product, which is not the case, this would still produce only a duopoly in 90 percent of locations – and a duopoly is inadequate to protect competition.

Of course Sprint provides only one side of the special access competition argument and we will highlight ILEC rebuttals in future weeks. Nevertheless the data is what it is. If Sprint ‘s analysis is on the mark, the Commission’s goal of treating special access and Ethernet the same and letting competition determine rates in most markets is simply a non-starter. In fact, this analysis argues for the polar opposite of the Commission’s intentions. The only way to equalize special access and Ethernet in the business data service market would be to re-impose tariff and pricing regulations on Ethernet services! That is a conclusion ILECs and other Ethernet providers would never accept and would be a huge step back for the industry.  Folks, batten down the hatches. The battle over special access and Ethernet regulation is just beginning!

By Andy Regitsky, CCMI