Special Access 'Overcharges' Cost More Than $150 Billion, CFA Says

Special access "overcharges" by major telcos have cost consumers over $150 billion in macroeconomic losses since 2010, said Mark Cooper, Consumer Federation of America research director, in a paper released Tuesday. The inflated charges are due to "premature" FCC deregulation of Bell dedicated circuits leased by competitors and business customers, said Cooper, who summarized his findings at an event hosted by New America's Open Technology Institute. AT&T said Cooper's report was based on outdated data, and it said more recent data showed the special access market is highly competitive where there is demand. Other ILECs didn't comment but some referred us to an economist who is skeptical of Cooper's estimate.

Bell critics appearing on a subsequent OTI panel hailed Cooper's findings. The reported $150 billion loss is "mind-boggling" but doesn't encompass all that fallout from a "broken market" that restricts consumer choice, said Charles McKee, Sprint vice president-government affairs. John Windhausen, executive director of the Schools, Health & Libraries Broadband Coalition, said his "anchor institution" members are paying higher connection costs because special access prices are excessive. Phillip Berenbroick, Public Knowledge counsel-government affairs, said the extra costs ripple through the economy to users of bank ATMs, gas stations, retail outlets and other business services.

Speakers called on the FCC to curb Bell special access pricing and practices. "Now is the time. This is the year. ... The commission must address this marketplace," said General Counsel Angie Kronenberg of Incompas, which represents CLECs, Sprint and other ILEC rivals. She said FCC special access action would ensure the "competition, competition, competition" mantra of FCC Chairman Tom Wheeler "can actually happen." The agency in April or May could issue a Further NPRM in its broad special access rulemaking and an order in its ILEC tariff investigation (see 1603210048). Kronenberg said the FCC could also soon act on a joint Incompas/USTelecom request for making certain types of confidential market data public in aggregated form.

ILECs are abusing "market power" to overcharge customers by about $20 billion a year in a $40 billion annual special access market, Cooper said. The figures have been growing, he said, so the cumulative "out-of-pocket" excess expense for the past five years is about $75 billion. Because special access services are "intermediate" services for other business providers, the overcharges suppress much economic activity, costing the country at least another $75 billion in indirect economic output over that period, which added to the direct costs yields total macroeconomic loss of $150 billion, he said. Cooper and panelists called special access a necessary input for other services, including mobile broadband backhaul.

Cooper said the special access market is heavily concentrated. He said he used previous industry Automated Reporting Management Information System data, surveys and a proxy based on FCC local competition reports to calculate special access market concentration as in the 7,000 to 8,300 range under the Herfindahl-Hirschman index (HHI) used by DOJ and the FTC in antitrust reviews, which is about three times the 2,500 level they consider "highly concentrated." Because their special access services were often deregulated without effective competition, incumbents didn’t pass their "declining costs" through to customers, and ILEC profits “went through the roof,” he said.

Hal Singer, principal at Economists Inc., questioned the estimate. "Cooper asserts that half of the total spending on special access represents payments above the incremental costs of providing those services, which in his mind, serves as a measure of the perfectly competitive benchmark," Singer emailed. "Of course, he cannot measure the true incremental costs of providing business broadband. And even if he could, there is no reason to expect broadband prices to fall to incremental costs in an industry with high fixed costs. Moreover, his market share estimates are based on a fictitious market (special access), which ignores Ethernet services. Because businesses are rapidly substituting to these services, the relevant market should include Ethernet. And because cable operators and CLECs are making significant inroads in the supply of Ethernet, ILECs' share of the relevant market is much smaller than what Cooper claims, and more importantly, declining rapidly. Combined with evidence of Ethernet price declines, it's hard to portray this industry as being monopolized."

Cooper said his data came from public sources and would "withstand scrutiny." Kronenberg said the FCC record showed "definitively" that the ILECs have market power and abused that dominance. If the commission moves forward with special access regulation based on the evidence, it will withstand scrutiny, she said.

AT&T pushed back. "The FCC’s most recent data collection on special access shows that there are competitive facilities present in virtually all of the [Metropolitan Statistical Area] census blocks nationwide with special access demand," a company spokesman emailed. "The Consumer Federation of America 'study,' however, relies on almost 10-year-old data to support Mark Cooper's analysis of the special access marketplace. Further, this is simply a repackaging of the same flawed analyses the CLECs have been peddling to the FCC since the beginning of this proceeding. Putting them together in a single 'study' doesn’t make them any less flawed. As we’ve shown again and again, these analyses fail to count important competitors in the marketplace like cable, and use inappropriate methods of measuring competition to reach the CLECs’ desired results. This effort is the same old song without even a new title."

Cooper said the reason public data are old is that the FCC stopped collecting that information when it showed excessive ILEC profit.

An AT&T official in the event's audience said the company had noted that 95 percent of all census blocks had two or more special access competitors, and within those were 99 percent of the business establishments in the country -- descriptions that led the FCC to immediately impose a "gag order." He also disputed McKee's comments that evidence in the FCC proceedings showed that special access costs were higher in the U.S. than elsewhere around the globe. The AT&T official asked if the panelists agreed confidential data should be made publicly available in aggregated form.

McKee said Sprint believes the aggregated data should be made public so it "can demonstrate" ILEC market power and abuses, and he also said he would be happy to address AT&T's "premature disclosure." Cooper said markets need more than two competitors to function properly. He said takeovers that reduce a market from three to two competitors would be blocked under antitrust law and from four to three would "almost always" be blocked. The argument that two competitors is enough "is the recourse of liars and thieves," he said.