Verizon Defends Its Special Access Pricing
Verizon defended itself against claims by Level 3 and others who the telco says “mischaracterize Verizon’s special access discount plans and their pro-competitive economic justifications” (http://xrl.us/bmzp86). Level 3 has long argued that the special access market is “broken” (CD July 23/10 p13), accusing Verizon and others of imposing unfair special access contracts (CD Feb 7/11 p13). The Internet backbone company told the FCC last month that incumbent price-cap LECs continue to use “exclusionary and anti-competitive contracting practices to minimize competition in the special access marketplace, thereby ensuring that they can reap the rewards of pricing well above competitive rates” (http://xrl.us/bmzp88). Level 3 asked the commission to declare Verizon’s “lock-up contracts” unlawful under Section 201(b) of the Communications Act.
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The way Level 3 sees it, lock-ups give customers the choice between high advertised prices, “which customers rarely pay,” and large discounts conditioned on the customer committing 85-100 percent of their prior year’s purchases to the price-cap LEC, with “heavy shortfall penalties” if purchases fall below required levels. Companies are further enticed with discounts for “shifting away from rivals,” and punished with penalties “for using the competition,” Level 3 said. “The significance of the price-cap LECs’ lock-up terms cannot be overstated -- they prevent facilities-based competitors from entering the multi-billion dollar special access market on a viable scale, thus preventing them from providing meaningful competition to the price-cap LECs for special access."
Verizon rejects Level 3’s claims, comparing its own offerings to a publisher who heavily discounts a magazine’s cover price for long-term subscribers, and to family memberships at a health club that cost less per person than an individual membership. A customer who purchases a single special access circuit can subscribe to a term-only discount plan, the telco said, under which the customer will receive discounted pricing for keeping that circuit in service for a certain amount of time. Such a term-based discount plan gives Verizon the certainty that revenue from the leased circuits will help cover its up-front costs. “In order for revenues to cover the costs of providing a special access circuit, the circuit needs to be in service for a certain amount of time,” wrote Donna Epps, Verizon vice president-federal regulatory affairs. “The commitments associated with the term-based discount plans increase the likelihood that those costs will be covered.” Verizon also offers discount plans based on volume. The breadth of different plans gives customers flexibility to choose a plan that suits their needs, said Epps.
Level 3 proposed six remedies, all of which entail the commission promulgating rules to preclude price-cap LECs from offering certain terms. Level 3 wants the FCC to forbid offering a discount in exchange for a commitment to purchase more than 50 percent of the amount spent on special access services in the previous year; forbid the inclusion of terms that would prevent other customers from obtaining similar terms; and forbid the imposition of multiyear purchase commitments, excessive termination penalties and circuit migration charges in excess of cost.
Verizon calls this “extreme regulatory relief” based on mischaracterizations. “These measures are wholly unwarranted, particularly when the record evidence demonstrates that the special access marketplace is competitive,” the telco wrote. Its tariffed plans give customers “choices to meet their business needs,” give them “significant discounts” with the purchase of as little as a single circuit and the flexibility to add and subtract circuits as needed, the company said. Its discount plans reflect “legitimate economic efficiencies” and aren’t anticompetitive, Verizon said, saying Level 3’s requested relief would “wreak havoc on the special access marketplace” and lead to fewer choices for customers.
Tw telecom has also argued for special access reform. At a meeting with Wireline Bureau officials last month, company attorneys said the CLECs must subscribe to discount plans if they want to realize “acceptable margins,” and their choices are limited to “off-the-shelf plans or to ILEC dictated terms and conditions” (http://xrl.us/bmzqa6). Current special access tariffed month-to-month prices are “not competitive,” and tw finds itself “in a squeeze -- paying supra-competitive rates for outdated technology,” the company said. “Overpaying for special access reduces our ability to buy new off-net technology."
The FCC tends to be “very, very careful when you're getting into a contract between two private parties,” said Global Medley Analyst Jeff Silva. First, the commission would have to determine whether it had the jurisdictional authority to intervene, and even then it could be difficult to do so while special access reform is in flux, he said. “What they're able or not able to do now may be different from six or seven months down the road when policy has advanced.”