FCC Draft Would Bifurcate BDS Regime, Skip Geographic Competitive Market Tests

An FCC draft order would create bifurcated regulation of business data services, with telco legacy DS1 and DS3 offerings (up to 45 Mbps) subject to price-cap regulations -- including rate cuts -- while higher-speed and packet-based services such as Ethernet would face only general common-carrier requirements and complaint-driven enforcement, senior commission officials said Friday. There would be no geographically based competitive market tests, said one official on a call to answer reporter questions about Chairman Tom Wheeler's proposed BDS framework, which was summarized in a fact sheet (see 1610070027).

Most ILECs and their allies criticized the draft's DS1 and DS3 rate regulation, though they welcomed the lighter-touch approach to packetized services. Some wireless carriers and other ILEC rivals welcomed FCC action in general terms and looked forward to working with the agency on finalizing an order. But a group representing educational groups and community anchor institutions said the draft fell "far short." Other FCC commissioners and their aides didn't comment. The draft order wasn't put on the tentative agenda for the Oct. 27 meeting, but by circulating it Thursday, as expected (see 1610060055), Wheeler could still add it to the meeting agenda due Oct. 20.

Major telco DS1 and DS3 services would be regulated by price caps starting in July, even if they had received full pricing flexibility under "phase II" of the FCC's traditional "special access" (now BDS) regime, said one of the senior officials. The agency looked at market data and found "clear abuses" of those services, the official said. To capture efficiency gains, the DS1 and DS3 services would be subject to an 11 percent rate cut phased in over three years, starting in July with a 3 percent cut, and followed by 4 percent cuts the next two years. Going forward, price caps would be reduced annually by a 3 percent "X-factor" minus inflation. The official said price-cap telcos would have "phase I" flexibility to adjust the rates for those services downward from their tariff filings. The draft would prohibit telco "all or nothing" plans and rein in "excessive" early termination fees and penalties for volume commitment shortfalls, the fact sheet said.

ILECs could make showings and seek general waivers from regulation if they believed their DS1 and DS3 services deserved relief, but the draft wouldn't create a new process for handling such requests, the official said. The FCC doesn't expect a "tidal wave" of waiver requests, said another. The commission was mindful of the concerns of some telcos, such as Frontier Communications and CenturyLink, in reducing proposed rate cuts and lengthening the transitions, the official said.

TDM-based services above 45 Mbps and all packetized services regardless of the data speeds would be subject to lighter regulation, the official said. There would be no "price caps, benchmarking or other ex ante pricing regulation" for these services, nor "network unbundling or wholesale rate discounts," said the fact sheet. There would be general common-carrier regulation, tempered by some forbearance, plus a "robust complaint process," with wholesale rates presumptively unreasonable if they exceed retail rates, among other factors to be considered, said the fact sheet. Staff-supervised mediation would be required before a complaint. Rates for new entrants and parties with smaller market shares were unlikely to be questioned, the fact sheet said. A new Further NPRM would seek comment on collecting accurate data and developing "administrable means, if necessary" to address any emerging concerns about packetized BDS.

AT&T called the draft "little more than a wealth transfer to companies" that aren't investing in last-mile fiber infrastructure. The commission correctly, "for the time being," isn't regulating Ethernet, but there's no evidence to support reregulating all legacy TDM-based service regardless of competition, said Senior Executive Vice President Bob Quinn. He called the latter a "preposterous conclusion" that ignored market analysis submitted by economists, including the FCC's consultant. USTelecom President Walter McCormick said his group is concerned about such "indiscriminate price regulation" of legacy services.

Frontier CEO Dan McCarthy criticized the "rigid rate changes." While less severe than Incompas and Verizon proposed, he said, the changes would have a revenue impact of about $10 million in 2017, and $20 million in 2018 and 2019. “As we have previously stated to the FCC, we intend to mitigate the potential effect of all rate reductions with incremental reductions in our expenses,” he said. Communications Workers of America President Chris Shelton said the proposal to "radically cut rates" would undermine investment, jobs and living standards. Tech Knowledge Director Fred Campbell lambasted the proposal to subject packet-based BDS to Title II regulation, which showed the "terrible truth" that net neutrality regulation was "an excuse to regulate the internet from end-to-end just like it once regulated the plain old telephone network.”

The American Cable Association lauded the draft. “Given the Commission’s light-touch regulatory approach toward non-incumbent providers of business data services has proven successful in driving investment, innovation, and competition in the market, ACA is very pleased the proposed Order does not impose ex ante pricing regulation on these operators, especially those that are new to a market or have a smaller market share," it emailed.

Sprint commended Wheeler for moving forward to fix a "broken" BDS market, and said it looks forward to learning more about the item and working with the FCC to promote competition. Senior Vice President Will Johnson said Verizon is pleased the proposal includes "aspects" of its joint proposal with Incompas, and said it will work with the agency to "reach a balanced solution." BT said Wheeler's draft moved BDS "one step closer to real reform." The Ad Hoc Telecommunications Users Committee welcomed the rate relief, but said it will be disappointed if rate relief for Ethernet and other packetized services is delayed.

The Schools, Health & Libraries Broadband Coalition was openly critical. "The FCC must bring prices for BDS services under control. SHLB believes these efforts should be applied in a technology-neutral way to both TDM and Ethernet services. The FCC has fallen far short on reducing costs, and this proposal threatens to cut off the future of education," said Executive Director John Windhausen.

The draft was "not as bad as bears feared but there are loopholes," said Wells Fargo analyst Marci Ryvicker in a note on cable fallout.