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Telecom policy projections: Wireline services and enterprise customers

Thumbnail image for Picture 16.pngSeveral matters before the FCC could have substantial dollar and technology impacts for enterprise customers.  The FCC’s special access services and USF contribution reform proceedings could significantly affect pricing for enterprise services, beginning sometime in 2014.  

A more open-ended proceeding focuses on whether the FCC will move aggressively in granting AT&T’s wish list included in its proposal to convert its local telephone networks to all-IP platforms. 

One matter that should be addressed this year is the appeal of the FCC’s Open Internet Order currently pending before the D.C. Circuit.  Because this is such a prominent matter, we believe the non-prevailing parties likely will petition the Supreme Court for review.

FCC Taking a Fresh Look at Special Access Services.  In an earlier entry, we highlighted the FCC’s reassessment of the interstate special access services market.  Subsequently, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, setting out a comprehensive data request to price cap ILECs and other services providers to determine the extent of competition among providers of special access services, principally, DS-1, DS-3 and Ethernet special access services.

Ethernet service broadly is undergoing rapid growth.  The FCC is taking a direct approach to determine whether special access rates are competitively priced.

We propose to perform a one-time, multi-faceted market analysis of the special access market designed to determine where and when special access prices are just and reasonable, and whether our current special access regulations help or hinder this desired outcome. We do not propose to conduct a simple market share or market concentration analysis.  Rather, we will use the data we are collecting in this Report and Order to identify measures of actual and potential competition that are good predictors of competitive behavior, for example, by demonstrating that prices tend to decline with increases in the intensity of various competition measures, holding other things constant.  In undertaking that analysis we will consider evidence as to what leads firms, including competitive providers, to undertake infrastructure investments.

Clearly, a fresh look at the special access services market (data for years 2010 and 2012 are being requested) is warranted. 

Two points merit further note.  First, the FCC is seeking comment on whether Internet access service is a competitive alternative to special access services.  Hopefully, the FCC will conclude the services are not substitutes.  Internet access service is not an “access service,” rather it is part and parcel of an end-to-end best efforts shared transport and information access and retrieval service.  

Special access is basic transport between defined physical locations.  Second, the FCC is requesting comment on the “Petition to Reverse Forbearance Determinations,” filed late last year by an enterprise customer group, Sprint and several interexchange carriers that requests the FCC to reverse decisions issued prior to 2010 in which the FCC elected to forbear from (i) imposing certain Computer Inquiry requirements on the price cap ILECs, and (ii) regulating non-TDM based special access services offered by price cap ILECs, particularly Ethernet services.

Elevated USF Contribution Factors Will Accelerate Migration to IP Technology.  The USF contribution factor for the 1st Quarter 2013 is 16.1%, all too close to the 17%+ levels that prevailed throughout most of 2012.  We previously highlighted the dynamics of declining USF-assessable services and the principal alternatives for implementing a more sustainable contribution scheme.

Enterprise customers, as well as SMBs, buying TDM-based wireline voice and data services bear the full brunt of today’s elevated USF assessments (via carrier USF recovery pass-through charges).  Consistent with the migration to IP services, enterprise customers are compelled to explore strategies to minimize the USF burden.  

Two ideas come to mind: (1) migrate voice as well as data traffic to Multiprotocol Label Switching (“MPLS”); and/or (2) where feasible, migrate data traffic to high speed Internet access service.

The manner in which services providers assess USF on MPLS revenues varies considerably.  MPLS services providers have sought a declaratory ruling that would impose a uniform, relatively modest USF contribution burden on MPLS revenues.  Moreover, as intra-corporate voice traffic is shifted to MPLS, a customer’s overall USF costs should decline as expenditures for standalone voice services decline.   

Subject to reliability and security considerations, migrating some portion of enterprise data traffic (alternatively, converting as many locations as feasible) to Internet access service yields several economic benefits.  Internet service is the least cost data communication option for a given capacity or data rate and, as an information service, is not subject to USF revenue contribution obligations at this time. 

AT&T Seeks a “Regulatory-Lite” Path to Deregulated, All-IP Networks. The National Broadband Plan viewed the transition to all-IP networks as a critical step to nationwide broadband deployment.  Local wireline networks have lagged in this transition. 

In its “Petition to Launch A Proceeding Concerning the TDM-to-IP Transition” filed on November 7, 2012, AT&T requests the FCC grant local exchange carriers the option to conduct “trial runs of the transition to next-generation services, including the retirement of .  .  . [TDM] facilities and offerings and their replacement with IP-based alternatives.”

AT&T is looking to eliminate regulations it believes impede this transition or extend legacy telecom regulation to the all-IP services environment. On the same date, AT&T announced “Project Velocity IP”, a series of multi-billion dollar investments intended to deliver broadband (either wireline or wireless) to all customers served by its legacy local telephone networks. 

In many respects, AT&T is looking for deregulation (classifying most, if not all, IP services as information services, not extending carrier interconnection obligations to IP services, etc.) and preemption of state regulation, including carrier of last resort (“COLR”) obligations.  

A more conservative proposal for regulatory flexibility to support the migration to all-IP networks for local exchange carriers was offered by the National Telecommunications Communications Association.  The two petitions diverge on multiple points, including interconnection obligations of ILECs with regard to IP traffic.

Not surprisingly, most competitors to AT&T (for local and interexchange services) opposed multiple aspects of its proposal. The adverse impact of a rapid migration to an all-IP network on the Nation’s air traffic control network was highlighted by Harris Corporation

Verizon offered vigorous support for AT&T’s petition.  A large corporate user group opposed AT&T’s deregulatory proposals, arguing that AT&T and other price cap ILECs remain dominant in the local exchange and access services markets. Sprint supported the more measured suggestions offered by NTCA.

A more dispassionate view supporting the transition is offered by Steven Cherry in his interview with David Berninger.  In this regard, the FCC recently exercised its forbearance authority regarding several legacy reporting issues raised in 2012 by USTelecom.

Judicial Review of the FCC’s Open Internet Order. From most perspectives, the FCC’s Open Internet Order is reasonable and warranted.  All persons should have ready access to lawful Internet content; entrepreneurs, retailers and manufacturers should be permitted to engage in e-commerce without concerns over preferential access or surcharges; and, providers of lawful content should have non-discriminatory access to the Internet, subject to reasonable network management rules.

While the major facilities-based ISPs largely adhere to these concepts, the FCC’s underlying concerns and those of many stakeholders relate to the potential for substantial abuse by these ISPs.  In light of the breadth and nature of the rules adopted in the Order—an initial impression of the FCC’s decision was that it had fashioned a new “Title II.5, Broadband Competition” for the Communications Act, it was no surprise that Verizon and MetroPCS appealed this decision, maintaining the FCC lacks the statutory authority to adopt these rules.

Thus, the question is whether the D.C. Circuit and, potentially, the Supreme Court will affirm the FCC’s authority to adopt this order.  While the matter is now fully briefed, the D.C. Circuit has yet to set the date for oral argument. The recent D.C. Circuit decisions Cellco Partnership v. FCC(affirming the data roaming rules) and American Electric Power v. FCC(affirming substantially revised pole attachment rules) underscore the primacy of judicial deference to agency decision making under Chevron v. NRDC, suggesting the FCC may prevail in this instance, as well.  

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Categories: Data, Networks, Operators
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