Special Access Rates Expected to Increase in Price Flex Areas

After the FCC didn’t act on the pricing flexibility petitions Monday, customers quickly bemoaned the upcoming price hikes. The Ad Hoc Telecommunications Users Committee, a group of high-volume corporate customers of special access and other telecom services, warned of prices going up “immediately.” The NoChokePoints Coalition said it was “disappointed” the FCC didn’t act “to stop price increases in San Francisco, San Antonio, Houston, Tulsa and Lincoln.” Commissioner Ajit Pai noted in a statement that the petitions, which sought relief under a “longstanding, Clinton-era deregulatory framework,” were unopposed.

The price increase isn’t quite automatic. AT&T must first amend its tariff to place the San Francisco/Oakland and San Antonio metropolitan statistical areas into the “Full Service Relief MSAs” section. At that point those areas would be subject to the rates listed in Section 31 of the Pacific Bell Telephone Co. tariff. Those rates are substantially higher than what’s listed in Section 7, which shows the rates in price cap areas.

For example, for 1.544 Mbps DS-1 services in various geographical areas in California, the listed monthly price cap rate per circuit ranges from $130 to $145.25. In price flex areas, those same circuits range from $152.50 to $180. That’s an increase ranging between 17 and 24 percent. Ad Hoc and the various CLECs which purchase special access say the increased prices in price flex areas are de facto proof that real competition doesn’t exist there.

"The carriers’ price increases demonstrate that those markets aren’t competitive,” said Colleen Boothby, attorney at Levine Blaszak representing Ad Hoc. Real competition would drive down prices closer to cost, she said. “The rules are defective, because they arbitrarily de-regulate markets that don’t have enough competition to protect consumers from the ILECs’ abuse of their market power."

But those rack rates are misleading because very few companies of the size represented by Ad Hoc pay the actual listed month-to-month rates for a single DS-1 circuit, said Robert Quinn, AT&T senior vice president-federal regulatory. “Those are not the rates charged for the vast majority of our special access circuits, which are sold at significant discounts under negotiated terms,” he said. “Those discounts are driven by, among other things, term and volume commitments similar to those offered by our competitors. In other words, pricing is driven by the competitive marketplace."

The difference between the price-cap rates and the rack rates in pricing flexibility areas are “almost completely driven by the artificial reductions that were forced as part of the huge regulatory bargain driven by the FCC in 2000,” Quinn said. In the meantime, AT&T still has to maintain its loops even as the number of customers connected to wireline loops has “cratered,” he said. Serving fewer people with the same infrastructure, increased employee pay to keep up with the cost of living and rising health care costs, and increased maintenance costs have all driven costs up throughout AT&T’s service area, including price flex areas, he said. “But, our list rates have remained virtually unchanged since 2000."

Windstream received Phase II relief in Houston. The relief granted to the telco will not affect prices automatically, “but we now have the flexibility to make changes more in line with our competition if we choose,” said Eric Einhorn, senior vice president-government affairs. In Lincoln and Tulsa, Windstream received Phase I relief, which “only enables us to offer lower prices,” he said, adding that the price caps in those locations will still govern.

Windstream’s request for pricing flexibility, however, “should not be viewed as an endorsement of the current rules,” Einhorn said. “Windstream remains concerned that the FCC has left open the possibility of significant price increases, with little advance notice, in those markets where carriers have already received pricing flexibility. Windstream hopes the Commission will not permit disruptive rate hikes to occur in the near term while comprehensive reform is pending,” Einhorn said in a written statement.

'Artificial Reductions'

In explaining the gap between price cap and price flex areas, Quinn points to the proposal by the Coalition for Affordable Local and Long Distance Service, adopted by the FCC in 2000. The CALLS proposal created a separate special access “basket” in which the FCC applied an “X-factor” of 3 percent in 2000, and then 6.5 percent over the next three years, at which point the special access rate caps were frozen (http://xrl.us/bnc76x).

Meanwhile AT&T’s costs have gone up, Quinn said, as they are wont to do even in competitive areas. “The simple argument that prices don’t ever go up in competitive markets is specious and silly,” he said. “The price of a cup of coffee has gone up since 2000. The price for an airline ticket has gone up. Those markets are competitive. You need to ask some of those high-priced CLEC lawyers what their billing rates were in 2000. They are in a competitive market, but their rates have undoubtedly gone up."

Ad Hoc dismisses AT&T’s arguments. “This is about throwing a lot of dust in the air to distract from the fact that AT&T raised prices in the face of what was supposed to be a competitive market,” Boothby said. She accused AT&T of “dropping down into the minutiae and arcanities of the price caps rules as a distraction.” The price cap rates AT&T said were artificially driven down in a regulatory bargain are actually too high, Boothby said. Before AT&T “got the FCC to kill the earnings report” in the 2008 ARMIS forbearance orders, AT&T reported a 138 percent return on special access in 2007, Boothby said. “AT&T’s special access prices shouldn’t have been stuck where they are for the past several years. This is a declining cost industry. Prices should be dropping like a rock and they haven’t."

"The argument that the impending special access rate hikes caused by the deemed-granted petitions are justified because price cap levels are too low is ludicrous,” said another attorney representing special access purchasers. “Price cap rates are in fact far too high. The FCC set these rates a decade ago and has not adjusted them in years -- as it was always supposed to do under the price cap system.” The FCC even eliminated the productivity factor that it originally relied on to account for productivity gains, the attorney said. “So while telecom rates have been decreasing everywhere else across the industry because technology keeps getting better and cheaper they have stayed artificially high in only one place: Special access."

The NoChokePoints Coalition last week pointed to a study by the GAO that shows inadequate competition in markets where pricing flexibility has been granted (CD June 22 p7). But that study had a very small sample size and only looked at a subset of the tariff element, so it didn’t accurately portray what customers are paying, Georgetown Senior Policy Scholar Anna-Maria Kovacs told us Thursday. It’s not always fair to compare price flex areas against price cap areas, because there are “a whole bunch of very competitive areas that have not met the collocation trigger,” she said. “So you could have a comparison against extremely competitive areas, even though they are nominally considered noncompetitive."

The special access order circulating on the eighth floor would have frozen AT&T and Windstream’s pricing flexibility petitions. Now that the petitions were deemed granted, the order will have to be “reworked,” an agency official said. The consensus on both sides is that the collocation triggers are not an accurate proxy for the existence of competition, said Stifel Nicolas analyst David Kaut. Without access to all the data, it’s hard to say whether a particular deal is anticompetitive or not, he said. Pai said a “mandatory, near-term data collection is also critical; past voluntary requests just haven’t worked."

"There is no metaphysical truth for people on the outside that don’t have access to all the numbers,” Kaut said: “And even if you have access there is a dizzying array of data that both sides can throw out,” such as accounting arguments, and ARMIS data that is no longer required. “So there is something of an information vacuum here and it’s hard for anyone on the outside to make some sort of definitive judgment as to who’s right and wrong,” he said. Kaut doesn’t know what the upcoming mandatory data request will show, and said he suspects the FCC will find “a very complicated mosaic of areas that have competition and areas that don’t, and it doesn’t always correlate that well with the current regime.”