At next week's agenda meeting (April 28), the FCC will likely consider the imposition of new special access pricing regulations, rejecting incumbent phone carrier claims that competitive conditions in the dedicated enterprise private line market justify continued deregulation. The FCC also plans to issue an order modifying volume and term conditions in special access contracts that are deemed unreasonable under traditional common carrier standards.
The FCC estimates that special access is a $40 billion market that will grow substantially as high capacity connections become increasingly critical to furnish backhaul to expanding wireless facilities in metro markets. Thus, lower backhaul costs should benefit wireless carriers like Sprint and T-Mobile. For top tier wireless players like AT&T and Verizon Wireless, lower backhaul costs could be beneficial in geographic territories outside their wireline footprint.
We previously noted the upcoming FCC action, a proceeding raising concerns for incumbents like Verizon and AT&T, and even raising concerns for cable operators (like Comcast (CMCSA), Charter (CHTR) and Time Warner Cable (TWC)) seeking to expand their enterprise service offerings (Potomac Research, FCC Tees Up Special Access, April 5, 2016). The upcoming action is positive for competitive local exchange carriers (CLECs) like Level 3, XO Communications, Windstream (which acquired PAETEC) and others.
Tariff Investigation: The FCC tariff modification would close an ongoing investigation of the special access contracts of Verizon (VZ), AT&T (T), CenturyLink (CTL) and Frontier (FTR). Competitive carriers, including Level 3 (LVLT, which acquired tw telecom), have complained the incumbents impose volume and term commitments, enforced by significant penalties, that effectively shut out alternative sources of private line supply and discourage CLEC investment in private line extensions into enterprise buildings. The FCC is expected to mandate modifications that will benefit CLECs. Such competitors lease access to special access connections to provide service for off-net locations (buildings not served by CLEC proprietary lines).
Potential Rule Changes: Apart from action on the tariff investigation, the FCC will commence a rulemaking to consider substantial changes to the special access regulatory regime. Verizon and an industry association representing competitive carriers (INCOMPAS) have jointly proposed a new regulatory approach that would end tariffing and deregulate special access in markets deemed competitive. In markets not considered competitive, rate restrictions would be imposed but would apply on a technology-neutral basis to all providers of enterprise private lines.
Defining when markets are competitive and non-competitive, and the size or granularity of markets under consideration, would be issues explored in the upcoming rulemaking proceeding. The FCC would need to establish criteria for setting reasonable rates and develop an effective system of enforcement.
Cable operators oppose the Verizon/INCOMPAS regulatory principles, rejecting the notion that they should be subject to any type of pricing regulation as an emerging provider making new facilities-based investment in the enterprise services market. Competitors agree that cable private line options have been expanding to serve enterprise buildings and provide backhaul from cell towers, but they contend a functional duopoly still results in supra-competitive rates, justifying regulation of both incumbent telco providers and cable operators.
The FCC is interested in the Verizon-INCOMPAS approach as it represents the potential foundation of a consensus industry solution. But without support from AT&T, CenturyLink and cable operators, the fight over final rules will be intense. The Commission hopes to wrap this up late in the year, recognizing that potential changes in FCC personnel next year could derail possible rule changes for the special access market.
Cable Operators at Risk: The proceeding poses two major enterprise market risks to cable providers. First, any regulatory mandate that drives down incumbent telco special access rates would affect the retail pricing flexibility of cable operators. They have generated double-digit growth in enterprise services and have plans to grow more substantially in this market, particularly in the provision of backhaul for wireless services.
Second, the FCC is now considering, consistent with the Verizon proposal, the imposition of rate regulations on all special access providers, renaming the offering "business data services." This would extend pricing rules to cable operators and other providers of enterprise private lines. Cable operators have not been subject to federal special access regulation and direct pricing regulation would become a new and potentially substantial burden.
Although the FCC would apply Title II common carrier telecom regulation to all special access services -- even if labeled as "business data services" -- the risk to cable operators appears to be complex rate regulation, not the more ominous regime involving mandatory network unbundling. Under existing statutes, only incumbent phone carriers (essentially the former Baby Bells) are subject to loop unbundling. The obligation does not extend to cable operators or CLECs.
Moreover, the FCC, backed by senior telecom policy officials in the Administration, generally does not favor network unbundling mandates to promote competition. They have an expressed preference for facilities-based competition, avoiding the regulatory and litigation burdens associated with estimating wholesale pricing and other requirements for an unbundling regime. After years of experience with the 1996 Telecom Act local phone competition rules, the Commission seems to acknowledge that genuine competition only comes from facilities-based alternatives.
Absent such alternatives, however, the FCC appears willing to intervene in a market deemed non-competitive, ensuring prevailing special access rates are reasonable. The upcoming proceeding will be complicated and highly adversarial, but the regulatory trend looks favorable for competitors like Level 3 and introduces new enterprise regulatory uncertainty for cable operators.