Sparks Fly in FCBA Debate on Special Access Reform

“Competition? There isn’t any,” said Colleen Boothby, counsel to the Ad Hoc Telecommunications Users Committee. In the meantime, prices for a typical special access link, for example a 10-mile DS-1, have gone up measurably under the FCC’s “pricing flexibility” program, she said. That’s not right, said Robert Mayer, U.S. Telecom Association vice president. If anything, the FCC should further deregulate special access because prices have been dropping and there are many kinds of competitors willing to sell those links, he said.

Neither side appeared willing to back down in a debate that reflected the kind of polarized lobbying that’s occurring at the FCC on this issue. With Congress urging the FCC to move forward on the issue, the agency is expected to act as soon as Oct. 1. At issue is how much incumbent local exchange carriers charge for high-capacity “last mile” network links used by wireless providers, big businesses and competitive LECs. Customers and competitors have asked the FCC to roll back a program that gives incumbents “price flexibility” in metropolitan areas where they can show competition exists for these services.

Opponents of special access reform point to various alternative special access providers, such as cable and CLECs, said Boothby. However, Boothby said, “cable is only in residential neighborhoods,” BPL isn’t close to fruition for special access purposes and CLECs are just as dependent on the Bells for last mile links as the companies she represents.

The FCC developed the pricing flexibility program in 1999 on an assumption that competition would develop and it hasn’t, she said. She said her members are among the nation’s largest companies, with 20 of them spending $2 billion to $3 billion a year on telecommunications. ILECs say these big companies are sophisticated and can negotiate price breaks, she said, but “if there is no competition, there are no price breaks.”

There’s an average of 10 competitive networks in Verizon’s top MSAs, said Mayer. At least 10 competitive providers are present in Embarq’s top four markets, he said. Yes, the pricing flexibility program was based on the FCC’s “predictive judgment” that competition would develop and the prediction proved true, Mayer said. Both the FCC and analysts have deemed the market competitive.

There’s a lot of talk about high prices but “no party has made a credible showing of substantial and sustained price increases or that existing rates are above competitive levels,” Mayer said. The large ILECs offer discounts of up to 50 percent and most customers buy special access at these reduced prices, he said. “The bottom line is the amount customers actually pay for both DS-1 and DS-3 special access circuits has consistently declined since 2001.”

The FCBA debaters even disagreed over the validity of data the FCC compiles from ARMIS (Automated Reporting Management Information System) reports the phone companies file. The ARMIS reports show a lack of competition and very high rates of financial return by the incumbents, said Boothby. Because the ARMIS process is outdated, the data is misleading and has been “misused” by those seeking special access reform, said Mayer. ARMIS data was never intended to be used to determine returns on a service- specific basis, but rather was devised to evaluate company-wide returns, Mayer said. It’s “an outdated regulatory mechanism.”

FCC Chairman Kevin Martin has indicated reservations about the need for changing the pricing flexibility system, but this summer agreed to “refresh” a proposed rulemaking on special access that has been pending since 2005. House Telecom Subcommittee Chairman Edward Markey (D-Mass.), reflecting the House’s growing interest in the special access debate, has asked the commission to report soon on what progress is being made. He originally asked for evidence by Sept. 15 that the agency was planning action, but now has indicated Oct. 1 is the new date.

Little Agreement on Issues

Nearly everything about the proceeding is disputed. Incumbents say there are dozens of competitors in some areas, not just traditional wireline providers but also fixed wireless and cable companies. “Fixed wireless is very effective for wireless backhaul,” said the Washington representative of a mid-sized ILEC. Verizon recently gave the FCC a list of 58 competitors, including FiberTower, a fixed wireless provider that’s considered a leading contender. Incumbents say customers even have the option of “self-provisioning” last mile links to save money over time, though customers say that would be too expensive. There are “significant upfront costs” to self- provisioning, such as digging up streets and getting rights-of-way, said a Sprint official.

Customers say competition only exists in densely populated areas, and they have little choice in rural areas. Wireless carriers have been especially vocal about not having a choice of competitive carriers for connecting cell towers to the public switched network. “The special access docket is the top regulatory priority for our company,” the Sprint official said in an interview. “In over 90 percent of cell sites there are no competitors” to the Bells, she said. Fixed wireless and cable companies don’t provide the needed high-capacity service in most of Sprint’s cell sites, she said.

The Bells say they offer special access service at deep discounts and have lowered rates overall but wireless carriers complain the Bells either “jack up” retail rates before applying the discounts or offer discounts only if customers enter long-term contracts, which lessens a company’s incentive to build out its own facilities. Not so, according to Bells who argue they haven’t raised rates for several years.

Ironically, Verizon has pointed out in FCC filings that it doesn’t even have price flexibility in some of its most competitive areas such as New York City and Washington, D.C., because of an oddity in the way FCC rules were written. The pricing flexibility rules judged competition by the number of carriers colocating in incumbent wire centers. However, some of the new competitors don’t colocate in highly competitive areas, the Bells have told the FCC. Companies like FiberTower and Cox don’t have to colocate to provide service, said another industry representative. “Measuring competition by colocations is not as meaningful as it once was.”

“Artificially” lowering rates could stifle investment in both the incumbents and new competitors, Bell representatives said. “When you have multiple providers, is it fair to regulate only a few of them?” asked an AT&T official. Caught in the middle of the debate are mid- sized telecom companies like Embarq that have told the FCC they don’t have the kind of market power customers and competitors complain about. “The fight doesn’t really involve us,” an Embarq official said.

Incumbents large and small said the real debate is about new construction of special access circuits, not the “legacy” facilities. When you look at new construction, “we're all starting out in the same place,” said an official at another incumbent phone company.