Level 3 Criticizes Price-Cap LECs’ Market Power, ‘Unreasonable’ Lock-Up Contracts
Companies are submitting to the FCC data they say shows the lack of competition in the special access market, as well as the price-cap LECs’ exercise of market power. That’s even before the agency requests data from companies affected by special access “pricing flexibility” waivers. Level 3’s 39-page filing Friday -- much of which was redacted for public inspection -- attempted to demonstrate the price-cap LECs’ market power, arguing it must “begrudgingly purchase the vast majority” of its special access needs from carriers like Verizon, AT&T and CenturyLink because there’s often no other choice available.
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"Since Level 3 has no option but to buy many connections from Verizon in locations where Verizon is the only provider, Level 3’s overall costs would skyrocket unless it commits to buy all, or nearly all, of its connections in Verizon’s territories from Verizon,” the company said. It argued it was “clear evidence of a problem in desperate need of a solution.” A Verizon spokesman said the special access market is “highly competitive, with a number of players competing against one another.”
"Keep in mind that 95 percent of these services are slow, TDM-based 1.5 Mbps services that would not even qualify for support as broadband services under the Commission’s recent Universal Service order,” an AT&T spokesman said. “The Commission’s policies should be looking to move us forward to an all-IP, fiber-based world and getting companies like Level 3 off the sidelines and investing in building out fiber to the 100,000 buildings within 500 feet of its fiber network.”
Level 3 presented several “real life examples” of differential pricing it said were caused by the price-cap carriers’ market power. In one building where the FCC has granted Verizon pricing flexibility, the telco has “unilaterally raised its DS-1 pricing by about 6 percent within the last year, and attempted to raise its rates a second time by another about 8 percent in April,” Level 3 said. It noted that Verizon “withdrew that proposed increase after many CLECs and others objected to it” (CD May 15 p2). Conversely, CLEC prices have remained relatively low, but Level 3 can’t take advantage of that pricing “because Verizon, as a condition to providing Level 3 with discounts from highly inflated ‘rack rates,’ requires Level 3 to buy the vast majority of its special access needs from Verizon in Verizon territories,” the backbone and network company said. “Take these examples multiplied by tens of thousands of buildings and hundreds of thousands of DS-1’s and DS-3’s and the problem Level 3 faces with the price-cap LEC lock up plans starts to come in to focus."
Commission staff have considered whether they can regulate the lock-up market, Level 3’s filing said. During a meeting earlier this year, “the Commission asked whether it must make a finding of market power before it can make a determination that the lock-up arrangements used by the price-cap LECs violate Section 201(b) of the” Communications Act, Level 3 wrote. Section 201(b) requires all charges and practices for telecom services to be “just and reasonable.” According to Level 3, the commission said that “while a finding of market power is not required or dispositive, a finding of market power would ‘inform the Commission’s decision’ on whether lock-up practices employed by the price-cap LECs are unjust and unreasonable.” A commission spokesman declined to comment.
Verizon, AT&T and CenturyLink are able to earn “supra-competitive rates of return without any fear of losing business,” Level 3 said. It pointed to several areas where the price-cap LECs charge rates “well in excess” of CLECs. “Obviously, if a market was competitive, unilateral conduct on the part of service providers that is clearly disadvantageous to customers would be uncommon, if not completely absent,” Level 3 said. In addition to Verizon’s attempt at increasing its DS-1 pricing in April, Level 3 pointed to an AT&T move to eliminate its generally available tariffs providing overarching discounts and not requiring individual negotiation. Level 3 characterized this as a move to ensure maximum commitment terms and “gerrymander” the market so that only certain customers can avail themselves of the discounts.
"This is an 18 billion dollar market that is operated in an anti-competitive manner by the price cap LECs, and, absent further action on the part of the Commission, will continue to be operated in that way for years to come,” Level 3 said. The backbone provider said price-cap LECs’ vigorous opposition to special access reform shows how important the special access marketplace is to their bottom lines.