Wednesday, October 31, 2012

FCC Inviting An Especially Big Mess On Special Access

The FCC is now preparing what it calls a "comprehensive data collection order" in an effort to establish a new regulatory framework for special access services. New regulations apparently would replace the modest deregulatory approach that the FCC dumped in August.
The FCC's special access data collection endeavor presents a set of complex and compounding problems that, as much as anything else, serve to illustrate the misguided nature of the agency's re-regulation bent. Fights are already brewing over what data should be collected. And disputes are also taking place over how to define the data that should be considered relevant in the first place.
There's plenty of reason to be concerned by the new re-regulatory FCC's special access policy. The agency dropped pricing flexibility triggers even while admitting it lacked the necessary data for a comprehensive analysis of the market – hence the pending data collection order. And once it has collected the data, the FCC hinted it will analyze it under a decidedly pro-regulatory framework like the one it adopted in its 2010 Qwest Phoenix MSA Order. So, the likely result would be a significantly re-regulated market for special access services.
Special access services employ dedicated facilities running directly between the end user and the physical point where an interexchange carrier connects its network with a local network. (By contrast, switched access services use local exchange switches to route originating and terminating interstate traffic.) Competitive carriers, including those offering services to enterprise businesses, often rely on special access lines to reach customers. And large businesses also directly purchase special access services to meet their needs.
Starting in 1999 the FCC permitted incumbent local exchange carriers (ILECs) offering special access services to receive pricing flexibility. Under what the FCC termed a "market-based approach," the FCC established a pair of "competitive triggers" based on the extent that competitors had collocated facilities in ILEC's wire centers within a particular metropolitan statistical area (MSA). Where the lower competitive collocation trigger was met, ILECs were permitted to offer services at discounts off the capped prices. And where the higher trigger was met, ILECs could offer services outside of price cap regulation but subject to tariffs. Through the FCC's Enterprise Broadband Orders, ILECs have also been granted forbearance relief from special access regulation for enterprise broadband services such as Ethernet.
FCC put a sudden stop to its modest deregulatory approach in its August Special Access Order. The FCC suspended the automatic pricing flexibility triggers for special access services. The agency preemptively took this action – that is, it changed policies even while expressly acknowledging the lack of data concerning special access services.
For instance, the Special Access Order gave nods to claims by various parties about the supposed lack of competitiveness in the market. Such claims appear to have helped prompt the order, at least in part. This despite the FCC's admission it "cannot yet evaluate these claims of competitive harm based on the evidence to date in the record." The FCC said a "comprehensive evaluation of competition in the market for special access services is necessary." But then the agency insisted it lacked the necessary data for such an analysis. By the same token the FCC admitted: "…we currently lack the necessary data to identify a permanent reliable replacement approach to measure the presence of competition for special access services."
So the Special Access Order concluded: "[I]n the absence at this time of clear evidence to establish reasonable and reliable proxies to determine where regulatory relief is appropriate, we will collect necessary data and undertake a robust competition analysis that may identify reliable proxies for competition in the market for special access services going forward. We will issue a comprehensive data collection order within 60 days to facilitate this market analysis." Release of the FCC's comprehensive data collection order apparently is now imminent.
That the FCC changed policy regarding special access services without the data necessary for a robust competition analysis is dubious in its own right. But it is evident that there are other reasons why the FCC's forthcoming data collection order is not likely to inspire confidence. And they have as much to do with the increasingly competitive nature of the marketplace as anything else.
Deciding what data should be collected poses serious dilemmas, especially in markets that are changing and technologically dynamic. For example, in order to determine whether specific geographic areas are competitive or not, the FCC will likely need to collect data on the number and location of existing facilities. But requiring disclosure of such information imposes significant compliance costs on providers. Some smaller providers have argued they should receive de minimis exemptions from any such disclosure requirements. But this would mean ignoring real existing facilities and their competitive effects. And, not surprisingly, providers may be reluctant to disclose such information because they consider it to be commercially sensitive.
Pricing information regarding special access services also presents problems for the FCC. In ex parte filings with the FCC, competing providers have indicated they also consider pricing data to be commercially sensitive. ILECs often enter into commercial arrangements with carriers or business enterprises at discounted prices. Nonetheless, providers, again, not surprisingly, have suggested they would rather not disclose data regarding price offerings or privately negotiated arrangements.
Similarly, the kind of forward-looking analysis that the FCC insists it will undertake will require information not only about existing competition but also about sources of potential competition. However, providers, still not surprisingly, have indicated reluctance to divulge their strategic plans for future deployment.
Presumably, the FCC must also define the kinds of services, facilities, and business practices that are relevant or otherwise within the scope of its data collection order.  In particular, any serious data collection order would need to include – and therefore to define – those kinds of services that are reasonably close substitutes to special access services. As I blogged about previously, broadband enterprise services relying on Ethernet technology offer an alternative for handling wireless backhaul traffic and for meeting the needs of large businesses. Of course, some competitors have already complained that Ethernet and other broadband enterprise services aren't adequate substitutes.
Disputes already have arisen in ex parte filings over what competitor facilities should be counted in any competitive analysis. That is, the FCC will have to settle whether its data collection and analysis should include facilities where competing providers possess "indefeasible rights of use" (IRUs) through lease agreements. This includes settling on a minimum term of years for recognizing such IRUs, whether 5, 10, or even 20 years time.
As I have written about on prior occasions, the framework adopted in the Qwest Phoenix MSA Order disregards close substitutes, such as wireless. And it makes evidence of price reductions in large networks with substantial up-front fixed costs and subject to extensive regulations a pre-requisite to any regulatory relief. For such reasons, that framework poses a near insurmountable barrier to obtaining regulatory forbearance relief. Extending that kind of framework to the special access market would likely result in a highly re-regulated special access market. This despite the prevalence of competitive and potentially competitive alternatives posed by enterprise broadband services and other alternatives.
Resolving the data collection and definitional dilemmas that confront the FCC will be no easy task. This is not so much because there are not a lot of capable people at the agency. Instead, it is because, in essence, the FCC has now taken upon itself the task of trying to assemble the type of market data that would be required in an old-fashioned analog-era rate case in a competitive era not suited to old fashioned rate case data production.
As it now stands, the brouhahas surrounding the agency's attempt to delineate the parameters of its information collection effort are simply foreshadowing the big mess the FCC's new pro-regulatory policy almost certainly will create.