FCC Denies Qwest Phoenix Forbearance Petition; Seeks Comment on Analytical Framework for Future Petitions

"The traditional market power framework enables us to respond to a petition for forbearance by evaluating the record evidence of actual and potential competition, and considering

whether there is evidence of sufficient competition to conclude that forbearance is warranted,” the commission said in the order. The framework is based on the FTC-Department of Justice Horizontal Merger Guidelines (CD June 07 p1).

Qwest filed its petition in March 2009, and sought forbearance mainly from loop and transport unbundling obligations. The telco also wanted to forbear from certain dominant carrier requirements, certain price cap regulation and Computer III requirements, including interconnection and open network obligations for mass market and enterprise switched access services. Qwest is disappointed with the decision, saying it is “inconsistent with the forbearance statute.” The FCC applied a similar standard to deregulate AT&T’s long distance services “when AT&T enjoyed a much greater market share than Qwest has today in Phoenix,” Steve Davis, public policy and government relations senior vice president said in a statement. The decision “fails to recognize these market facts.” Qwest “fully met the rules that applied when this petition was filed,” he said. “It is disappointing that … the commission would change those rules and then apply them retroactively.” The telco is “reviewing the commission’s decision and considering our options,” spokesman Tom McMahon said.

The FCC considered the competition in wholesale and retail services. Although Qwest says that there are many options for carriers to purchase last mile wholesale services, the commission found “a lack of significant wholesale competitors to Qwest” in Phoenix. The commission acknowledged that “Qwest faces competition in the Phoenix Metropolitan Statistical Area from numerous competitors,” mainly for retail services. But for residential and enterprise services, competing providers “rely predominantly upon Qwest facilities, including UNEs and other wholesale services, to provide their services.” The record doesn’t reveal “significant fixed wireless wholesale service offerings in the Phoenix MSA” because Cox, XO, Level 3 and other competitors have few networks facilities and therefore rely on Qwest’s facilities, the commission said. The FCC also determined that due to the few last-mile connections owned by facilities-based competitors, new wholesale entry isn’t likely “to be reasonably timely and that Qwest is therefore likely to remain the only major wholesale provider of relevant services in the Phoenix MSA."

The FCC also shot down Qwest’s attempts to include the spike in mobile wireless services “in the same relevant product market as wireline service.” No commenter has submitted evidence supporting a conclusion that mobile wireless service constrains the price of wireline service, the order said.

The order increases predictability for the telecom industry and “provides a clear, data-driven and economically sound analytic framework for evaluating future petitions of this type,” Chairman Julius Genachowski said in a statement. “This outcome is consistent with the agency’s denial of similar petitions in 2007 and 2008."

Baker agreed with the decision, but said she hopes that “the application of the statutory test using the analytic framework in this order will not become an insurmountable hurdle for petitioners, which in turn would undermine the will of Congress to relieve regulatory burdens where competition can better regulate the market,” she said. In future proceedings, “I hope the commission will take the opportunity to consider in more depth the competitive effect of mobile wireless competition in the rapidly changing marketplace."

McDowell expressed similar concerns: “It is hard to believe, however, that a 25 percent rate of mobile wireless-only households does not have any effect on the market for access to telecommunications services.”

"In Phoenix, the FCC used a new test that ignores the reality of the marketplace,” Verizon spokesman David Fish said. “This moving of the goal posts is at odds with Congressional intent.” The telco remains hopeful that the commission will evaluate all market facts when it assesses Verizon’s forbearance remand, he said.

Many players in the industry are calling the order a victory for competitive local exchange carriers. The analysis “suggests the FCC will make it harder for incumbent telcos to escape network unbundling obligations in other cities as well,” said analyst Paul Gallant of Washington Research Group. The market power test will likely give most CLECs “greater comfort that they will not lose wholesale access to discounted UNEs based on cable, or even wireless penetration for the residential retail market,” Stifel Nicolaus said in a research note.

CompTel is gratified that the commission acknowledged “that forbearance should not be granted in the absence of sufficient competition to constrain prices and protect consumers and the public interest,” CEO Jerry James said.

Free Press urged the commission to apply the same analysis to the local residential broadband market and other markets, “given that 96 percent of consumers nationwide have two or fewer providers to choose from.” The decision “is a welcome change from the previous FCC’s process of blindly granting forbearance petitions without actually analyzing the state of market competition,” Research Director Derek Turner said.

Some competitors, including XO, Cbeyond and One Communications, approve of the FCC’s use of the analytical framework, saying that it benefits competition. “This rulemaking demonstrates a synthesis of modern economics, network technologies and common sense,” said Lyndall Nipps, tw telecom regulatory vice president for the western region. “This ruling is a victory for small businesses and the economy as a whole in that it will stimulate continued investment and job creation by competitive telecommunications providers,” said Jim Geiger, Cbeyond CEO.

The Wireline Bureau is seeking comment on whether to apply the same analytical framework in future proceedings. Comments are due Aug. 23, replies Sept. 22.