Five Reasons Why the FCC Should End Its BDS Rate-Control Proceeding

The FCC's rate regulation proceeding for business data services (BDS), a source of special interest pleading for a decade, already has caused significant harm by its seemingly unending life. The BDS market is fast changing and now competitive. New rate controls on these broadband services would harm the development of further competition and undermine investment in new technologies.

The Commission should at long last close its wayward BDS proceeding.

BDS services – also called special access services – use dedicated broadband network facilities to deliver high volumes of data, usually with performance quality guarantees. Such services are typically used by business enterprises, not residential consumers. Often, BDS providers and business customers negotiate over prices and other terms of service.

Here are five reasons why new FCC rate controls on BDS providers would be bad policy and why the Commission should close its BDS proceeding:

1. Competition in the BDS market makes new rate controls unjustifiable. Encouraged by a series of FCC forbearance orders that exempted advanced BDS technologies like Ethernet from legacy regulations, incumbent BDS providers have made significant investments in BDS network upgrades. Cable operators have entered the market, gained significant market share, and compete effectively with incumbent BDS providers. Non-cable competitors also provide BDS services. Not surprisingly, the Commission has made no findings of market power abuse that would provide analytic support for rate controls—a particularly intrusive form of regulation. And while certain specific locations may be less competitive than others, as competition continues to develop more ubiquitously, it would be inordinately costly and administratively infeasible to regulate rates on a building-by-building basis.               

2. The BDS proceeding is mired in special interest pleading. Continuous lobbying by certain mostly non-facilities-based BDS competitors spurred and sustains the Commission's ongoing dalliance with possible new rate controls. Special interest pleaders seek regulation-induced price cuts on wholesale access to their market rivals' network facilities for resale to business customers. The Commission, if it values competitive neutrality and institutional integrity, should not needlessly give special pleaders opportunity to obtain rent-seeking privileges at the expense of their market rivals. 

3. New rate controls will discourage competitors from investing in their own networks. When BDS competitors are able to lease access to their rivals' facilities at below-market rates mandated by regulators, such competitors are discouraged from investing in their own networks. Rate controls thus threaten to induce scarcities in the supply of advanced network infrastructure and create artificially high prices. 

4. New rate controls will reduce BDS provider investment in fiber broadband network upgrades.  By requiring BDS providers to give market rivals access to their network facilities at artificially low prices, rate-regulated providers will have reduced ability to recover costs. With lower returns, such BDS providers will have fewer resources to invest in fiber and other network upgrades that would better serve customers and provide critical backhaul support for 5G wireless deployments. 

5. The BDS competitive landscape is advancing too quickly for the FCC even to gather and assess up-to-date relevant data. With new entrants, new technologies, and new deployments, the BDS market has changed significantly over the decade-plus lifespan of the Commission's proceeding.  And the BDS market will continue to change. The Commission will be unable to maintain up-to-date comprehensive BDS data that reflects actual competitive realities. Its prior massive burdensome data collection effort required incumbent and competing cable BDS providers to submit enormous amounts of specific proprietary data concerning facilities, locations, and the like – for 2013. That data is already becoming outdated, and will surely become more so even if the Commission decides to impose new rate controls. 

The Commission should not pursue new rate controls for BDS providers. Instead, it should let market competition, innovation, and investment continue unimpeded. The BDS proceeding has dragged on far too long. It's time for the Commission to end it.

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Prior FSF publications on the FCC's BDS rate-control proceeding:

Seth L. Cooper, "FCC Should Finally Close its Proceeding on Business Data Services," FSF Blog (March 22, 2017).

Seth L. Cooper, "Proposed BDS Rate Controls Are Anti-Investment, Arbitrary, and Fact-Challenged, "Perspectives from FSF Scholars, Vol. 11, No. 40 (November 14, 2016).

Reply Comments of the Free State Foundation, Regarding Business Data Services in an Internet Protocol Environment (August 9, 2016).

Randolph J. May and Seth L. Cooper, "The FCC's Special Access Proposal Is Infected With Special Pleading," Perspectives from FSF Scholars, Vol. 11, No. 26 (July 15, 2016).

Seth L. Cooper, “FCC's New Regulations Threaten Broadband Investment,” The Hill (October 17, 2016).

Comments of the Free State Foundation, Regarding Business Data Services in an Internet Protocol Environment (June 28, 2016).

Michael J. Horney, "The FCC Cannot Proceed in the BDS Proceeding with a Flawed Analysis," Perspectives from FSF Scholars, Vol. 11, No. 17 (June 6, 2016). 

Randolph J. May, "The FCC's Flawed Understanding of Competition," Real Clear Markets (March 11, 2016).

Seth L. Cooper, "FCC Should Finally Grant CenturyLink Forbearance on Broadband Enterprise Services," FSF Blog (July 22, 2014).

Randolph J. May, "Special Access: A Special FCC Debacle in the Making," FSF Blog (December 17, 2013).

Seth L. Cooper, "FCC Inviting An Especially Big Mess On Special Access," FSF Blog (October 31, 2012).

FCC Should Finally Close its Proceeding on Business Data Services

In late January, FCC Chairman Ajit Pai wisely withdrew the Commission’s proposal for subjecting certain business data services (BDS) to onerous price controls. As described in my Perspectives from FSF Scholars paper, “Proposed BDS Rate Controls Are Anti-Investment, Arbitrary, and Fact-Challenged,” the misguided proposal would have diverted financial resources of regulated BDS providers away from construction of new fiber facilities. Although withdrawal of the BDS price control proposal is highly commendable, the BDS proceeding remains open. A problematic recent order by the FCC’s Wireline Competition Bureau points to the need for the Commission to finally close its BDS dockets.

The March 15 order granted California Public Utility Commission (PUC) staff’s significantly-belated request for access to confidential proprietary data collected by the FCC in the proceeding. Previously, the FCC required BDS providers turn over massive amounts of information regarding their service locations and facilities. But now that the rate control proposal has been withdrawn and no new rounds of comments are scheduled, the FCC should at long last close the BDS proceeding. At the very least, the confidential data access request should be held in abeyance until such time as the FCC makes a more definitive decision about what to do next regarding BDS.

The request for confidential data is rather dubious given that the California PUC never requested access to that information during the proceeding’s comment periods. Nor did the California PUC file public comments with the FCC. Why seek such data now? The California PUC staff request for access to confidential BDS data is also odd given that California Public Utilities Code Section 710 provides that the state regulatory agency “shall not exercise regulatory jurisdiction or control over Voice over Internet Protocol and Internet Protocol enabled services,” except in certain limited circumstances.

FCC closure of its BDS proceeding will prevent future dubious requests from other parties for access to sensitive proprietary data. FSF President Randolph May and I have previously described how “The FCC’s Special Access Proposal Is Infected With Special Pleading.” The FCC should not expand opportunities for special pleading by prolonging other parties’ ability to access BDS providers’ confidential information.

Moreover, closure of the BDS dockets constitutes the soundest policy approach to promoting investment and competition in the market. As the Free State Foundation’s comments in the BDS proceeding explained:

Given market advancements and ongoing competitive entry and investment, the wisest and preferred course of action is for the Commission to refrain from imposing new regulatory burdens on BDS services. Cable operators are investing significant amounts of private capital to compete in the BDS marketplace. Such investments pose far better potential for enhancing BDS competition and consumer welfare than new regulation.

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Prior FSF writings on the FCC's BDS regulatory proceeding:

Seth L. Cooper, “Proposed BDS Rate Controls Are Anti-Investment, Arbitrary, and Fact-Challenged,” Perspectives from FSF Scholars, Vol. 11, No. 40 (November 14, 2016). 

Reply Comments of the Free State Foundation, Regarding Business Data Services in an Internet Protocol Environment (August 9, 2016). 

Randolph J. May and Seth L. Cooper, “The FCC’s Special Access Proposal Is Infected With Special Pleading,” Perspectives from FSF Scholars, Vol. 11, No. 26 (July 15, 2016). 

Comments of the Free State Foundation, Regarding Business Data Services in an Internet Protocol Environment (June 28, 2016).

FCC Analysis Shows No Evidence of Market Power in BDS Market

This week, George Ford, Chief Economist at the Phoenix Center for Advanced Legal & Economic Public Policy Studies, published a paper entitled “How (and How Not) to Measure Market Power Over Business Data Services (BDS).” Dr. Ford finds that the analysis of the FCC’s white paper “Empirics of Business Data Services” by Professor Marc Rysman “is unsupported by basic economics and good econometrics, and is thus incapable of providing any meaningful evidence regarding the presence or absence of market power.” 

I wrote in a June 2016 Perspectives from FSF Scholars that the FCC’s analysis lacked consistent data collection and a robust understanding of the variables that impact BDS prices. Moreover, FSF President Randolph May and Senior Fellow Seth Cooper stated in a July 2015 Perspectives from FSF Scholars that the FCC’s Notice of Proposed Rulemaking is infected with special pleading and rent-seeking. If adopted, the FCC’s NPRM may have the unintended consequence of creating market power in the BDS market.

Thinking Things Through IV: Competition and Regulation

Five years ago I did a series of posts – actually only three – which I titled “Thinking Things Through.” I no longer recall why I abandoned the title after “Part III.” But I’ve decided to resurrect it now for a new series of posts with the idea that it’s an appropriate time to reflect on where matters stand as the Tom Wheeler-led Federal Communications Commission (presumably) draws to a close – and to look ahead.

In these “Thinking Things Through” posts, I intend to engage in such thinking at a fairly high level – a “macro” level if you will – rather than to address the nitty-gritty details that typify argumentation in particular proceedings. I understand, of course, that in many instances the nitty-gritty details are important, perhaps even determinative, and that they necessarily are a subject of dispute. But often, in the context of such back-and-forth dueling arguments, larger principles and ideas get lost – or deliberately ignored – in the minutiae.

So, at least for the purpose of these “TTT” posts, I propose to address some matters of importance in the context of the larger ideas and fundamental principles involved. And I propose to do so with a commitment to brevity consistent with my purpose.

So, I begin first with the topic of “Competition and Regulation.”

Early in his tenure as FCC Chairman, Tom Wheeler regularly touted what quickly became a mantra, “Competition, Competition, Competition.” And in his maiden speech at Ohio State University in December 2013, Mr. Wheeler articulated his so-called “see-saw” rule: “When competition is high, regulation can be low.” A couple of months later at the University of Colorado Law School, he repeated the see-saw rule in the exact same words: “When competition is high, regulation can be low.”

And to boot, Mr. Wheeler quoted Abraham Lincoln’s Second Inaugural Address to the effect: “As our case is new, so we must think anew, and act anew.”

I submit that when it comes to “competition and regulation,” the FCC’s actions under Mr. Wheeler’s leadership have been characterized by anything but “thinking anew.” Rather, they have been characterized by old thinking more fitting for the long-gone age of Ma Bell.

When I hear Mr. Wheeler’s “competition, competition, competition” mantra, or his “see-saw” rule, a different Lincoln quote comes to mind. In his April 1864 “Address at a Sanitary Fair,” Lincoln said: "We all declare for liberty; but in using the same word we do not all mean the same thing."

Like “liberty,” the word “competition” is accorded near universal approbation. But it should now be clear that in declaring for “competition” – even in triplicate! – Mr. Wheeler has a particularly narrow definition of the word in mind, a definition that does not comport with that of many respected regulatory economists and experts. And Mr. Wheeler has a particularly seductive purpose in mind as well: By adopting the narrowest, most restrictive view of the relevant market, he tilts his self-constructed see-saw towards more regulation.

We have seen this strategy play out over and over again during Mr. Wheeler’s tenure. A few examples:

• In adopting the Open Internet order, the Commission concededly did not perform any meaningful analysis of the Internet access market in a traditional sense, for example, by determining the number of competitors, their market shares and market trends, the prospects for additional competition, and the like. The agency did not conclude a real market failure existed. Instead, it rested its findings regarding Internet service providers’ claimed market power on a flimsy “gatekeeper” theory premised on the asserted difficulty and costs subscribers confront in switching from one ISP to another. Note that this theory necessarily is premised on the fact that there is actually more than one competitor in the market.

•  In proposing to regulate Business Data Services (formerly Special Access), the Commission suggests the relevant market for assessing competition may be as narrow as a single building, even though, as former FCC Chief Economist Tim Brennan explained in a recent Free State Foundation Perspectives, defining a geographic market as a building location does not make sense as a matter of market analysis. Moreover, the Commission appears intent on downplaying cable operators’ expanding BDS offerings in assessing marketplace competition, and downplaying the prospects for even further competition attributable to cable operator offerings.

•  Aside from all its other problematic aspects, the Commission’s proposal to adopt a new “open standard” mandate regulating the design functions and capabilities of video navigation (set-top box) devices ignores the plethora of choices consumers now have for receiving video programming from new video distribution services, devices, and apps. And, while the Commission considers a new government-imposed technical mandate, additional choices for distributing and viewing video programming become available almost every week.

•  As the Commission engages in what has become an ongoing charade of completing congressionally-mandated reports assessing competition in the mobile services and video services markets, and assessing the timeliness and reasonableness of broadband deployment, it consistently departs from past practice by simply refusing to determine the relevant markets are competitive. Among other devices, it does this, as pointed out in a recent Free State Foundation Perspectives by my colleagues Seth Cooper and Michael Horney, by refusing to acknowledge the substitutability of wireless and wireline services. And with regards to determining the reasonableness of broadband deployment, the Commission simply continually redefines “broadband” to narrow the extent of its reach in order to prevent the agency from making an affirmative reasonableness finding. This ploy, however divorced from the reality of actual consumer demand and expectations, allows the agency to claim a justification for further regulation.

Other examples could be provided. But the ones I have highlighted above show how the Commission all too frequently employs the stratagem of improperly constricting a relevant geographic or product market in an effort to portray a lack of competition – and thereby the need for maintaining or increasing regulation.

I have always acknowledged that there may be some specific geographic and product markets that, because of a lack of effective competition, should be subject to proper regulatory oversight by the Commission. But to go back to Mr. Wheeler’s metaphor, I do mean, emphatically, to say that the see-saw should not be artificially tilted towards regulation by misusing or misconstruing marketplace data in efforts to conclude competition does not exist where it surely does.

Finally, this note on a fix: With a relatively modest change to the Communications Act, Congress could prevent the invocation of mantras such as “competition, competition, competition” from substituting for rigorous economic analysis that fairly accounts for the dramatic changes that have taken place – and continue to do so – in most segments of the communications marketplace. As I first suggested in a Free State Foundation Perspectives five years ago, in recognition of the increased consumer choice that has occurred in the last two decades, Congress should require the FCC to presume, absent clear and convincing evidence to the contrary, that effective competition exists in those instances in which the agency assesses market competition.

This simple rebuttable evidentiary presumption would not itself determine the outcome of any particular proceeding. But it would make it more difficult to avoid evidence-based findings of effective competition by stratagems designed to tilt the see-saw in the regulatory direction.

FCC Regulations Are Pushing ISPs out of Broadband Infrastructure Market

Today, Hal Singer, a principal at Economists Incorporated, published an op-ed in Forbes discussing how Internet service providers (ISPs) are investing in capital outside of the broadband infrastructure market due to the FCC’s 2015 Open Internet Order. Mr. Singer shows that AT&T, Verizon, and Sprint have all decreased their capital expenditures by $1.9 billion, $1.2 billion, and $1.5 billion, respectively, from the first half of 2014 (before the FCC adopted the Open Internet Order) to the first half of 2016.

Mr. Singer also says that other FCC proposals are discouraging ISPs from investing broadband infrastructure. The proposal to pursue price controls for business data services would stifle the deployment of fiber. The FCC’s privacy NPRM would harm ISPs’ ability to sell targeted advertisements and offer “free” services to consumers. (See my Perspectives from FSF Scholars from earlier this month.) And the FCC’s set-top box NPRM would create barriers for ISPs to integrate themselves into the pay-TV market. Mr. Singer makes a convincing case that the FCC’s assault on broadband (he calls it “The Wheeler Tax”) is pushing ISPs out of the broadband infrastructure market and into the edge market. Do not be surprised if ISPs continue to purchase edge providers, like we have seen with Verizon’s recent purchases of Yahoo and AOL.

Senators Ask FCC to Update Data in BDS Analysis

On Tuesday August 2, 2016, a group of nine U.S. Senators from rural states submitted a letter to FCC Chairman Tom Wheeler asking him to use the most up-to-date data when analyzing competition in the business data services (BDS) market. The Senators stated: “As you work toward a final rule, it is especially important for rural states like ours that the Commission use all the available data, including the data submitted earlier this year by the major cable operators, to both measure competitive markets accurately and ensure that the regulations for noncompetitive markets are based on the real cost to provide service.” They added that regulations adopted through the use of outdated or inaccurate data will harm robust investments in BDS and “rural constituents will face significant challenges in accessing the 21st century global economy.”

In June 2016, I wrote a Perspectives from FSF Scholars entitled “The FCC Cannot Proceed in the BDS Proceeding with a Flawed Analysis,” where I raised concerns about the inaccuracy of the FCC’s BDS data collection and its poor analysis in which it estimates how competition among BDS providers impacts BDS prices but fails to acknowledge the impact that consumer demand has on BDS prices.

Additionally, FSF scholars submitted comments regarding the FCC’s BDS proposal and President Randolph May and Senior Fellow Seth Cooper co-authored a Perspectives from FSF Scholars entitled “The FCC’s Special Access Proposal Is Infected With Special Pleading,” where they discuss how the FCC’s proposal is essentially regulatory-capture by a few BDS competitors pleading to obtain special rent-seeking treatment.