After more than 30 years working in telecom regulation, it is more than clear that there are three industry truisms: 

First, whenever a telecom company proposes something that is in the “public interest,” it really means that proposal is in its own interest. 

Second, whenever a new regulation is established, at least one telecom company will immediately test the limits of that regulation. 

Third, and up until now, most inviolable, the ILECs are a team that always works together with all disagreements kept far from the public eye. 

Astonishingly, this appears to be changing!

There is an apparent ILEC breakup regarding the proper regulation for the business data services (BDS) market. The FCC is proposing a new regulatory environment for special access that would re-impose price caps on ILEC DS1 and DS3 services in many if not most U.S. markets deemed non-competitive. Price caps would almost certainly require ILECs to reduce their special access rates by a certain percentage each year to account for the productivity of telecom companies in relation to the general economy.  Moreover, if it were to listen to some of the consumer advocate groups advocating for price caps, the Commission could even require ILECs to reduce their special access rates up front, “re-initializing” them to a level that would mimic a lower rate-of-return that could be expected in a competitive market.

Naturally, almost all the large ILECs say that such regulation is counter-productive, since they argue that they face increasing competition in almost all non-rural markets from both CLECs and cable companies. 

As we discussed last time, the latest ILEC action in the BDS proceeding was to file a Motion to Strike on June 17, 2016 arguing that data filed late by cable companies contaminated the data universe the Commission utilized to formulate its BDS proposals. ILECs made clear that if the Commission did not allow them additional time to analyze the revised data or sticks with its proposals based on the “flawed” data, they would file a court appeal. As usual, the Motion was supported by the major ILEC association - USTelecom.

Verizon, however, has chosen another path. The ILEC did not sign on to the Motion to Strike, nor has it filed any comments with the FCC supporting any ILEC position in this proceeding. Instead, it has joined with INCOMPAS, the CLEC association and agreed on a joint framework for the business data services market. Remarkably, Verizon even agrees with CLECs and consumer advocates that its special access rates should be reduced up-front!

The joint framework includes eight principles that are listed below

We support a competitive market test that balances precision with administrability, and accounts for potential competition, by analyzing competition by capacity-based products and census block geographies.

Second, recognizing economic challenges to new facilities-based entry at lower speeds, and for administrative ease, we agree that all Business Data Services at or below a specified threshold should be deemed non-competitive in all census blocks. We agree that the specified threshold should be no lower than 50 Mbps.  Likewise, recognizing the greater economic incentives to build out very high capacity circuits, and for administrative ease, we agree all services above 1 Gbps would be deemed competitive.

Third, we agree that the Commission should determine whether a census block is competitive for Business Data Service between the thresholds specified above, that the Commission initially should use the recent data collection for this purpose, and that the Commission should schedule periodic updates of these data.

Fourth, we agree that a census block should be deemed competitive by measuring the number of facilities-based providers in the census block, although we have not agreed on what constitutes such a provider.

Fifth, we agree that the Commission should periodically review the extent to which its framework (including the low-bandwidth threshold, the high-bandwidth threshold, and the census block test) accurately classifies services as non-competitive and competitive

Sixth, we support ex ante price regulation for all Business Data Services deemed noncompetitive.

Seventh, we agree that price caps should apply to TDM-based Business Data Services in areas served by price cap ILECs. We agree that there should be a one-time adjustment to these rates (implemented over no more than a two-year period) to account for the freeze in rates under the CALLS Order, and that going forward there should be an annual adjustment to rates based on an X-factor of 4.4 percent minus inflation.

Eighth, we agree that pursuant to the ex ante price regulation framework, prices for Packet-Based Business Data Services deemed non-competitive should be reduced. We would support accomplishing this through a benchmark price approach for such Business Data Services that satisfies the objectives of Sections 201 and 202 of the Communications Act; is applied in a way that is technology-neutral and that does not discourage new entrants from entering markets and building facilities to compete with existing providers; and which may recognize differences in bandwidth, term, and class of service.

Going forward, we agree the benchmarks should be reduced annually by 4.4 percent minus inflation to reflect increased efficiencies. The Commission should review this periodically to account for market conditions (June 27, 2016, Joint letter from Verizon and INCOMPAS in FCC Docket 16-143, at pp. 1-2).

Of course, this leads to the sixty-four thousand dollar question, why has Verizon broken away from the other ILECs on BDS regulation? Verizon claims that it is time for compromise in a proceeding that has gone on for more than a decade:

Verizon has approached this process from its unique perspective as one of the country’s largest sellers and purchasers of Business Data Services. And we recognize that no approach will be perfect. But with an eye towards a workable framework that is practical and administrable for all participants in the Business Data Services marketplace and the Commission, that is rooted in record, not only today’s marketplace, but tomorrow’s as well (WC Docket 16-143, Comments of Verizon, filed June 28, 2016 at pp.2-3).

AT&T, however, believes that Verizon’s changing corporate structure makes it more likely that Verizon will be on the side of CLECs now and in the future:

Having shed substantial portions of its wireline operations, and with a pending purchase of XO Communications, Verizon, like Sprint, has become a net purchaser of BDS. Its joint proposal with Incompas is thus not a compromise, which requires two parties with divergent interests. It is simply joint advocacy to advance their common interests (WC Docket 14-143, Comments of AT&T, filed June 28, 2016, note 16).

Of course, it is ironic that AT&T is now unhappy about Verizon’s change of position since, when it was a long distance provider 11 years ago, it initiated the current proceeding when it complained about the high prices it was paying for the same ILEC special access services it now defends. 

And that brings us to yet another truism about the telecom industry. If you are a telecom attorney, be prepared to argue both sides of every issue. Because if you stay around long enough, you are likely to have that task.

By Andy Regitsky, CCMI