Verizon’s Special Access Rate Hike Draws Ire of CLECs
An attempt by Verizon to raise its special access rates ahead of an expected reform of the special access pricing flexibility rules is drawing criticism as several CLECs accuse the telco of “an attempt to game the system.” Verizon’s proposed new rates for special access -- dedicated circuits often used by businesses, and as backhaul for wireless sites -- increase the monthly recurring charges for most of its customers by about 6 to 8 percent, opponents say. That’s on top of a rate hike last year, bringing the total increase to about 12 percent in some areas. That’s too pricy for members of the Broadband Coalition, who said the telco is upping prices to offset the cuts that the FCC might make this year, if it reduces or caps special access rates. The Broadband Coalition includes XO, tw telecom, Earthlink, Cbeyond, Megapath, Lumos, Integra and CompTel. A Verizon spokesman defended the move, citing an increase in the cost of materials and labor to provide the service.
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The FCC opened a proceeding in 2005 to reform its 1999 special access pricing flexibility rules, but so far no action has been taken. The rules allow ILECs to get out of rate regulation in certain areas by showing the existence of competition. Opponents of the rules argue that the commission itself has recognized their flaws. Current pricing flexibility rules are “incredibly crude,” an attorney representing an entity opposing the rate increase told us. “The standard you have to meet to get the pricing flexibility just isn’t very well correlated with the level of competition -- it’s not a good predictor."
The challenges started pouring in within days of Verizon’s tariff filing. On Monday, TelePacific urged the commission to reject, or suspend and investigate, the proposed revisions, calling the new rates “unjust and unreasonable” in violation of Section 201 of the Communications Act. The increases in most of the areas where it received pricing flexibility “are certainly not consistent with the intent of the special access Phase II pricing flexibility that Verizon obtained,” and are “yet another prime example” of how the current flexibility rules have “utterly failed,” TelePacific’s attorneys said. MetroPCS moved to block the increase, arguing the rate increases are prima facie unlawful and will undermine competition in the wireless market by increasing the cost of key inputs of its competitors. XO urged the FCC to investigate, arguing there was a “high probability that the tariff would be found unlawful” and would enable Verizon to earn “supracompetitive profits.” In a joint petition, tw telecom and Windstream said Verizon “once again seeks to exploit its freedom from price cap regulation,” and will “exacerbate the harm that special access purchasers already experience under the Commission’s flawed pricing flexibility special access regulations.” If the FCC does not issue a suspension order by Monday, the new rates will take effect midnight May 15.
A Verizon spokesman told us this is only its second special access rate change for DS1 and DS3 services in a decade. Adjusting for inflation, the prices its customers pay for the two services have actually declined by 16 and 21 percent respectively, even though “industry cost of the network components used to provide special access services -- including materials and labor -- has increased by up to 37 percent over the last ten years,” the spokesman said. The marketplace for high-capacity services, including special access, is growing increasingly competitive as wireless backhaul generates increasing demand, and customers have plenty of choices from cable providers, fixed wireless providers, and others, he said.
But some say the market is nowhere near as competitive as Verizon suggests. In its filing to block the increase, MetroPCS said it has choices at certain sites for its wireless backhaul facilities in Verizon’s ILEC territory, but “at a significant number of sites, Verizon is the only choice.”
"If there were someone else to go to, we would be going there,” Kelsi Reeves, tw telecom vice president-government relations, told us. The country is roughly divided into three sections, she said, each controlled by basically one special access provider: AT&T covers the Southwestern Bell states, CenturyLink has the west and northwest, and Verizon has the northeast and some operations in Texas, California and Florida. “A 10 percent rate increase when prices tend to be going down is significant,” she said. “If we had options, we would take them."
Reeves said the FCC is getting ready to issue a third round of data requests -- this one mandatory -- and she expects the FCC to move on special access by the end of the year. The way Reeves sees it, Verizon is raising its rates “while they still can because they're concerned that whatever the FCC is going to do is going to prevent them in the future,” she said. “It just seems pretty bold to ask for an increase,” especially when the FCC has said that the pricing flexibility triggers aren’t appropriate, she said. An FCC spokesman could not confirm an upcoming mandatory data collection.
After Level 3 asked the commission to declare unlawful Verizon’s “lock-up contracts,” which give customers discounts if they commit to spending more on special access, a Verizon vice president compared its own offerings to a health club that offers family memberships that cost less per person than individual memberships, or to a publisher that heavily discounts a magazine’s cover price for long-term subscribers (CD March 29 p6). But it’s not like a magazine subscription, Reeves said. Magazines are optional. “These special access circuits are like oxygen to us,” she said.
Jerry James, CEO of CompTel, told us the fact that Verizon can repeatedly raise its rates is “further evidence of the lack of competition sufficient to constrain price hikes in the special access market. Verizon’s actions show why it’s critical that the FCC to move forward with reforming its pricing flexibility rules.”