FCC Should Address ‘Patently Unreasonable’ Special Access Contract Provisions, CLECs Argue

The failure of the current special access rules has allowed ILECs to “pocket billions of dollars in monopoly revenues each year,” said Sprint Nextel (http://bit.ly/Z8gPuO). “While Sprint understands the Commission’s desire to collect as much data as possible and to analyze those data thoroughly, it also asks the Commission to balance that desire against the need to put an end to the long-running harms caused by the current rules.” The reevaluation of the special access marketplace should start with a “traditional market power analysis” based on key indicators like market share and concentration. A new econometric model could be useful “as a complement” to the traditional market power analysis, but only if it accounts for key variables affecting access -- like marginal price -- and the role that ILECs’ “anticompetitive terms and conditions” have on pricing and competition, Sprint said. The commission should address onerous contract terms such as “loyalty mandates,” excessive early termination fees and restrictive circuit migration policies, Sprint said.

By stifling competitive deployment of local fiber transmission facilities, and suppressing demand for ethernet and other packet-mode special access services, ILECs’ exclusionary purchase arrangements “undermine the goal of increased deployment and adoption of advanced services set forth in Section 706” of the Communications Act, wrote BT Americas, Cbeyond, EarthLink, Integra Telecom, Level 3 and tw telecom in joint comments (http://bit.ly/UbjwsD). The CLECs suggested the commission follow the advice Verizon offered regulators in the U.K., where it lacks incumbency: “Continued regulatory controls must remain in place to safeguard access to the necessary wholesale inputs and thereby support competition to the benefit of customers,” they said, quoting a Verizon Ofcom filing.

The CLECs encouraged the commission to adopt rules halting exclusionary ILEC practices before waiting to conclude the market analysis. “The Commission has the authority to adopt rules now,” they wrote, pointing to a long record they say demonstrates “patently unreasonable” terms and conditions in violation of Section 201(b) of the Communications Act. “Each month that passes is another month in which American businesses must make do without the benefits of a truly competitive business broadband marketplace,” they said. “There is simply no reason for the Commission to stand by and do nothing while this harm continues."

Level 3 wrote separately to criticize “demand lock up” arrangements, arguing that the ILECs’ practices impact “ordinary Americans” by limiting facilities-based competition and charging excessive amounts for special access services (http://bit.ly/UbaYC9). Level 3 said it “grossly overpays” for its special access services because it’s not free to buy from competitive suppliers “given the lock up arrangements it has had no choice but to enter.” Because a single “unchallenged” provider of special access “has little incentive” to improve quality or costs, consumers suffer, Level 3 said. The high special access costs, which make it less feasible to construct competing facilities, also costs jobs, the CLEC said: “Economists estimate that special access cost reductions of 60%, which are a real possibility were competition permitted to flourish, would create approximately 176,000 U.S. jobs.” Level 3 wants the FCC to step in to “eliminate monopolistic lockup contract provisions” such as discounts in exchange for a long-term commitment. The commission should ban enforcement of any such commitments in existing contracts, Level 3 said.

The New Jersey Division of Rate Counsel said “tension” exists “between pursuing a rigorous analysis” of the market, “and taking steps to correct the flawed regulation that now exists” (http://bit.ly/VSST8j). The state recommended clear deadlines for completion of the marketplace examination, lest the commission embarks “on an endless pursuit of yet more data and yet more analyses.” The Ad Hoc Telecommunications Users Committee, which represents high-volume purchasers of special access services, encouraged the commission to weigh aggregate supply constraint more heavily in its analyses, defining the geographic market for special access services as an individual building (http://bit.ly/Ve7hee).

ILECs disagreed with CLEC allegations of competitive harm. For almost a decade, CLECs have demanded the commission dictate the rate and terms of ILEC special access services “based on bare assertions that there are no marketplace alternatives to those services,” said AT&T (http://bit.ly/X5Sgsr). “But they have refused to disclose the scope and capabilities of their own competing networks, even as marketplace developments increasingly discredited their claims.” Instead of a “large-scale, quixotic investigation into whether it should re-impose long outdated rate regulation on legacy TDM-based services that have entered a permanent and irreversible decline,” the commission should devote its “scarce resources” to facilitating the IP transition. If the commission chooses to continue, it should bear in mind the ultimate goal of fashioning “easily administrable pricing flexibility rules that rely upon readily observable metrics that can serve as reasonably accurate proxies for the presence of competitive facilities investment,” AT&T said. The econometric analyses proposed in the notice must be “structured and implemented in a statistically sound way,” lest the results be invalid and the project become complex and unmanageable, the telco said.

Verizon and Verizon Wireless encouraged the commission not to rely exclusively on an econometric model, which is “only as reliable as its inputs” (http://bit.ly/Yp0fkh). The commission was right to issue a comprehensive and mandatory data request, but “backward-looking” in that it primarily seeks data only from year-end 2010 and 2012, Verizon said. “In a rapidly changing marketplace a model relying on historical data inevitably will not account for changes that are already occurring, let alone those that are readily foreseeable.” The telco also warned of econometric models’ vulnerability to “bias and inconsistency based on how it is constructed,” and asked for full transparency so Verizon can “evaluate its structure” to ensure the results are fair. The commission’s analysis should also reflect the growing demand for IP-based broadband that is quickly replacing legacy special access services, Verizon said. Verizon also defended its “entirely voluntary discount plans” which it said offers customers extensive flexibility. The commission should not devote resources to analyze the reasonableness of terms and conditions in current special access contracts, the telco said.

"Legacy telephone networks have given way to high-speed residential broadband networks offering speeds of four, ten, or twenty megabits per second,” said CenturyLink. Yet the way CLECs tell it, “carriers and businesses in every market across the nation still clamor for - and, indeed, cannot survive without -- the legacy DS1 and DS3 services on which they relied a decade ago or more.” The wholesale and enterprise marketplace has been “altered irrevocably” by the rise of competitively provisioned high-capacity Ethernet service, and any analysis should account for that, the ILEC said (http://bit.ly/X2TI1K). The commission should “ensure the integrity” of its analysis by “demanding comprehensive response” from everyone, including competitive providers of high-capacity services, CenturyLink said. The commission should also “acknowledge the market’s irrevocable (and desirable) migration away from DSn-capacity services toward OCN-capacity fiber-optics and gigabit Ethernet offerings,” it said.

CenturyLink urged the commission to “resist calls to interfere with the terms and conditions and discount plans that virtually every provider of high-capacity services offers to attract and retain highly sophisticated customers.” Stripping ILECs of their ability to tailor plans to particular demands of customers would “harm competition and run counter to the industry’s shift toward individualized services, with no countervailing benefit,” CenturyLink said.