FCC Expected to Vote 3-2 on BDS Regulation, With Clyburn, Rosenworcel Key

The FCC likely will vote 3-2 along party lines to adopt business data service regulation, agency watchers told us. Some said Democratic Commissioners Mignon Clyburn and Jessica Rosenworcel may seek modifications to the draft order circulated by Chairman Tom Wheeler, which could be placed on the agenda Thursday for an Oct. 27 meeting (see 1610070052). Commissioner offices didn't comment Friday. Meanwhile, Incompas and others lobbied the FCC and made filings in docket 16-143.

"BDS has a lot of moving parts, so some changes are probably inevitable. And like other major items, its fate probably rests with the two Democratic commissioners," said Cowen and Co. analyst Paul Gallant. "But given the draft's more limited scope, I wouldn't think there are any show-stopping concerns that end up derailing the item." New Street Research analysts previously predicted Clyburn and Rosenworcel would "ultimately" support an order, while Republican Commissioners Ajit Pai and Michael O'Rielly would dissent (see 1610110028). An ISP privacy order tentatively set for an Oct. 27 vote may also be OK'ed along party lines (see 1610120063).

Pai and O'Rielly dissented in April from a BDS Further NPRM over rate regulation concerns (see 1604280057). Wheeler's draft order proposed price-cap regulation for TDM-based DS1 and DS3 services (with data speeds 45 Mbps and below), but backed off ex-ante rate regulation of packet-based Ethernet services.

The vote is likely to be 3-2, said CCMI telecom consultant Andrew Regitsky. "The two Republicans will probably dissent in part to the price-cap regulation for declining services (DS1 and DS3). Especially since it would be for all markets, and at least some have existing competition," he emailed. "The original proposal with the market test was administratively difficult, if not impossible. It also could have been picked apart in court due to flaws with the data. The new proposal is much more straightforward, and with its smaller drawn-out one-time decrease, lower X-factor [productivity-based rates cuts] than I expected, and no required benchmarking for packet services, a court appeal is much less likely. I think it was actually a smart move by Wheeler."

Free State Foundation President Randolph May agreed the Republicans are unlikely to support rate regulation. "I just don't think at the end of the day what Wheeler's proposing comports with their policy perspective," he said. Verizon's proposals with Incompas give Wheeler cover to say he has some ILEC support, said a former FCC senior official, but competitors and enterprise users will be paying less under regulations the two Republicans feel aren't needed. The two Democratic commissioners have nothing to lose by following Wheeler's lead, and all three Democrats will declare victory and say they finished the job of "re-regulating special access," the ex-official emailed.

A telecom attorney sees "a predictable 3-2 split" with Wheeler's chance of getting Republican votes "nil." To the extent there are changes to the draft, the lawyer said, the most likely is a slower rampdown of 5-6 years in legacy BDS rates for smaller ILECs. The draft would reduce DS1 and DS3 rates by 11 percent over three years (plus annual X-factor reductions of 3 percent minus inflation), said a "fact sheet."

In the FNPRM, Wheeler scrapped language that BDS above 50 Mbps seems competitive, responding to pressure from Clyburn. If Clyburn demands more regulation in the order, it could create a "dilemma" for Wheeler, May said, stressing he doesn't know her intentions. A telecom attorney is skeptical Clyburn would be able to convince Wheeler to adopt rate regulation of high-speed, packetized Ethernet services, though some concession is possible, perhaps "fresh look" contract provisions.

May wants the FCC to move in a more deregulatory direction. "My sense is -- I hope it's more than a hope -- that Commissioner Rosenworcel will play a positive role in moderating the proposal so that it has less of a dampening effect on broadband investment," he separately emailed. "I think she may have more of an understanding than Chairman Wheeler or Commissioner Clyburn that if [Democrat] Hillary Clinton is elected president, she’s going to need business investment to be reignited if she wants to have an economy that is not merely stagnant. Commissioner Rosenworcel is no doubt aware that the growth rate of capital investment by the major ISPs has declined in the last year or so."

Rosenworcel cited three guiding principles in her FNPRM statement: "First, our policies must feature incentives for providers to build and invest in networks. Infrastructure matters -- we need to encourage its deployment. Second, our policies must enhance competition. Competition benefits consumers and leads to greater innovation. Third, our policies must be capable of administration. It is simple to draw complex conclusions from the data before us. But we must modernize special access in a way that is both smart and practical."

Incompas urged the FCC to begin the rate cuts Jan. 1 (the draft eyes July implementation, agency officials told us Oct. 7). The agency also should adopt a proposal to address "supracompetitive rates" that BDS customers face for packetized services with speeds below 50 Mbps, said an Incompas filing posted Thursday on discussions with aides to Clyburn and Rosenworcel. Incompas urged preserving tech-transition protections for wholesale inputs, and placing a "backstop" in a complaint process. "If a customer -- whether it be a wholesale wireline customer, large retail customer, or wireless carrier -- only buys an input to a finished service, it should not be paying the full price for the finished service," said the group. A Windstream filing on a Wireline Bureau meeting backed Incompas/Verizon-proposed mechanisms to ensure "actual price reductions occur" in areas where ILECs had "pricing flexibility." A Verizon filing opposed previous calls by Windstream (and others) to require wholesale discounts for competitors.

Mediacom said it offers BDS as private carriage and asked that it continue to be able to do so for new construction and upgrades even if the FCC generally classifies BDS as common carriage, said a filing on meetings with aides to Clyburn, O'Rielly, Pai and Rosenworcel. FCC action under consideration "may have devastating effects on rural broadband" and slow 5G wireless deployment, said an ITTA filing on a public meeting in West Virginia attended by Wheeler, Sen. Joe Manchin, D-W.Va., and others. An Iowa Utilities Board filing urged the FCC to consider all relevant data, including from cable companies, and ensure rural broadband investment isn't undermined.