Almost twenty years ago, a group of ILECs and IXCs (long-distance providers) made telecom history by putting aside their constant war with each other to agree to a plan that lowered switched access charges, froze special access rates, and increased subscriber line charges (SLCs) paid by end user customers. Everyone knew that the so-called CALLS (Coalition for Affordable Local and Long-Distance Service) Plan made economic sense since the end user making a phone call is the actual cost causer and should pay, at minimum, most of the costs. However, to this observer whose job at the time was to oppose all ILEC access increases on behalf of MCI (remember them); it was a jolt out of the blue. ILECs actually working with the ILECs to reach a common sense agreement just didn’t happen. But it did!

Two decades later, we may have a second major instance in which disparate industry fractions work together to reach a common goal – regulations for special access and Ethernet services. If the rumors are to be believed, ILECs and CLECs are negotiating an agreement to settle the bitter dispute over the FCC’s proposed regulations for the business data services (BDS) market.

 As we’ve discussed before, the Commission has proposed 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 (productivity factor) to account for the greater efficiency of telecom companies in relation to the general economy. In addition, for the first time, Ethernet services provided by cable companies would be benchmarked to ILEC special access services to ensure that customers in all non-competitive markets pay charges that mimic competitive market rates.

Shockingly to some, Verizon has broken with the usual impregnable ILEC wall and has agreed with INCOMPAS the CLEC association on a joint framework that would mirror many of the Commission’s proposals, including:

•    A test to determine the competitiveness of each U.S. market
•    Agreement that all BDS at or below a specified threshold should be deemed non-competitive in all census blocks, with the specified threshold should be no lower than 50 Mbps.  
•    Agreement that price caps should apply to TDM-based Business Data Services in areas served by price cap ILECs.  
•    Agreement that there should be a one-time adjustment to these rates  to account for the freeze in rates under the CALLS Plan, and that going forward there should be an annual adjustment to rates based on an  productivity factor of 4.4 percent minus inflation.
•    Agreement that prices for Packet-Based Business Data Services deemed non-competitive should be reduced through a benchmark price
•    Agreement the benchmarks should be reduced annually by 4.4 percent minus inflation to reflect increased efficiencies. 

So far the other major ILECs and cable companies have in public been adamantly opposed to this framework, but we know that there have been discussions on whether this framework could actually be the basis for an industry-wide agreement. There are several reasons ILECs could support this framework.

First, special access revenues are significantly declining each year.  If ILECs determine it is not worth fighting over a rapidly diminished special access pie they could support a deal, especially if the annual forced price reduction through a productivity factor is low enough to have a de minimus impact on their overall revenues.

Second, ILECs would much rather concentrate on their Ethernet offerings where they face much more competition than for special access.  If as part of the deal their cable competitors face price regulation for the first time, so much the better.

Thus, a negotiated deal could be to the benefit of ILECs and clearly better than an FCC-imposed large productivity factor that forced special access rates significantly lower each year. It is, however, a lot harder to see what benefits, if any a proposed deal would have for cable companies.

Cable companies are the newest entrants into the BDS market.  Their presence clearly makes all the markets they enter more competitive. Their packet-based services have never been regulated before.  However, based on the FCC’s proposal they would now face price regulation.  What kind of signal does the Commission send when it encourages competitors to enter markets to increase competition, but then decides new regulation is needed after companies plow millions of dollars into upgrading infrastructure to offer competitive services? It clearly makes no economic sense. Moreover, the FCC’s proposal doesn’t particularly help cable companies even if ILEC special access rates are forced down each year since their Ethernet rates would be benchmarked to those decreases.

The feeling here is that there is no particular advantage for the cable companies to agree to a deal that is even remotely like the Verizon-INCOMPAS framework or the Commission proposal. Thus, any industry deal that regulates their Ethernet rates is likely to be opposed not just at the Commission but also in the courts.

By Andy Regitsky, CCMI