FCC BDS Proposal Seen as a Heavy Lift; Views Vary on Merits

The FCC proposal to overhaul its telco special access regime into a technology-neutral framework for business data services (BDS) will be a very heavy lift, some commission watchers said Friday. Assessments of the merits of the plan varied from generally positive, to neutrally focused on industry fallout, to highly critical. Bernstein analyst Paul de Sa credited the FCC with doing an "impressive job" and "very good work," but CCMI blogger Andrew Regitsky said the plan is "unworkable" and creates a "potential mess." Guggenheim Partners analyst Paul Gallant said the regulatory moves raise concerns for large ILECs and cable, and opportunities for CLECs.

The FCC voted 3-2 on April 28 to adopt a BDS Further NPRM and ILEC tariff order (see 1604280057) that was released May 2 (see 1605030001). Chairman Tom Wheeler said the proposal was to create a "level playing field" and make regulatory judgments based on market competitiveness, asking many questions along the way. He said his goal is to complete the proceeding this year. Republican commissioners hammered the actions as heavy-handed rate regulation that would punish broadband investment.

"The FCC is clearly interested in drilling down much more precisely to find where market power actually exists," Gallant told us. "The challenge will be translating a very detailed proposal into a final workable set of regulations. It’s a lot to bite off in six months, but this is a priority for the chairman, and his track record suggests they’ll get it done this year."

Gallant said the FCC direction in the proceeding raises concerns for ILECs such as CenturyLink and Frontier Communications and hopes for CLECs and others. "Companies like Level 3 and Windstream have to be pleased with the proposal. It takes a big step in the direction they want on most key issues," he said. Verizon, which offered a joint proposal with Incompas, is in a different position, he said. "They’ve been the most forward leaning on 5G and they see backhaul as critical to 5G," he said. Verizon has more aggressively shed its wireline footprint than AT&T, "which may explain their different views on this." As for cable, he said, "I think [they were] genuinely caught off guard by the proposal to include them in any way in potential price regulation. In practice, I’d be surprised if the final rules really affect their current pricing freedom."

Regitsky took a dim view of the FCC direction. "In theory the proposal makes a lot of sense because in competitive markets regulation would be minimal, technological neutral and would eliminate the requirement that LECs file tariffs for their special access services," he said in a Friday blog post for CCMI, which provides telecom data and expertise. "While the proposal sounds great, the details make it obvious that the complexity involved make the new requirements almost impossible to implement. Furthermore, the new regulations would simply add to the authority and control of the Commission." Regitsky previously worked with Comptel (now Incompas).

De Sa said the FCC was off to a good start. "It seems like they’ve done an impressive job doing exactly what everyone said should be the approach, even though it’s extremely hard and time consuming: collect the voluminous data, define the product/geographic market, propose a market power test and remedy where problems [exist]," he emailed. "Seems like very good work."

Regitsky knocked the complexity of the test the FCC is considering to determine whether markets are competitive. He said the FCC seems interested in establishing census blocks as the appropriate market. "But how is it possible for the Commission to perform a market test in every census block in the country? And how often could such a test be administered? Markets are constantly changing, and no periodic market test can keep up with those changes," he wrote. "When a market test is finally approved, would the Commission create a new agency to run it?" he wrote. "Would every company in America providing BDS services be forced to file reports each time they decided to enter or exit a market? The requirements could easily overwhelm small companies, especially potential new entrants to BDS markets. Finally, any market test adopted would lead to endless dispute, which, of course, the FCC would have to resolve. What a potential mess."

Regitsky said the proposal has a major flaw: It would hit Ethernet services with new regulation. In noncompetitive markets, traditional special access services would face price cap regulation, with Ethernet benchmarked to those prices, he said. "This is particularly ironic for cable companies. When they entered the BDS market they added competition to Ethernet markets. Yet, this additional competition leads the Commission to assume that more regulation is needed. It’s almost like the Commission believes it is establishing regulations for the Bizarro world." He also said an FCC proposal to scrap mandatory tariffs and require carriers to publish all BDS contracts online while refraining from nondisclosure agreements would "chill competition."

An FCC spokesman defended the agency's approach. “The Commission is seeking broad input on how to design an up-to-date, workable system," he emailed. "It starts with a premise that tariffs need not be used anywhere, and with an initial view that there are competitive markets where the need for regulation is minimal. Both these approaches decrease regulatory complexity. But, in addition, the Commission is asking questions -- not proposing answers -- about how to design workable regulation in non-competitive markets.”