By Doug Bonner
This article originally was published by Law360.com.
FCC Chairman Tom Wheeler has released an October 7, 2016 “Fact Sheet” summarizing key points of his draft Business Data Service (“BDS”) Reform Order to regulate the leased, dedicated high capacity circuits that are used for everything from the transport of data center Internet traffic to ATM banking transactions, to connecting dispersed cell sites from wireless carrier switching centers. While reforming outdated and ineffective methodology for granting special access pricing flexibility, the proposal has disappointed supporters of BDS reform and relieved some incumbent LEC opponents. In a proceeding in which longtime incumbent LEC allies like Verizon and AT&T have been bitterly opposed, a prominent Verizon/CLEC alliance emerged with a leading compromise proposal, and cable television providers were threatened with BDS price regulation for the first time, Chairman Wheeler’s Fact Sheet suggests that actual BDS reforms will be far more limited than many hoped or feared. Legacy data services (known as TDM) are subject to more modest, phased-in discounts over three years rather than higher discounts over two years, and high-speed packet-based BDS services such as Ethernet are not subject to any ex ante pricing regulation. So no interest group got everything it wanted, though some parties’ advocacy seems to have been successful in limiting potential regulation. An order could be voted on at the Commission’s October 27, 2016 Open Meeting now that this order is on circulation with the Commissioners.
AT&T and US Telecom will win, as will other Ethernet providers, because they avoid price regulation of packet-based Ethernet services, which they actively opposed. They also win by avoiding the larger and more immediate price cap reductions to legacy TDM services of the Verizon/INCOMPAS proposal, which had proposed a two-step 15% rate reduction, plus a 4.4% annual X factor adjustment to reflect productivity gains adjusted for inflation. Instead, the proposed order provides a more modest 11% onetime reduction of price caps on BDS –phased in over 3 years– plus an annual X factor of 3%, offset by inflation. On the other hand, incumbent LECs with large scale, legacy copper-based TDM BDS services are unhappy that those facilities are singled out for price cap regulation, while newer technology fiber-based facilities are not.
Cable providers will be big winners by avoiding price cap regulation of their packet-based BDS, including hybrid fiber coaxial (“HFC”) service, which the NPRM tentatively proposed to regulate. Incumbent LECs wanted cable BDS to be equally subject to price cap regulation. Instead the Commission, proposed a “light touch” regulatory approach to encourage continued investment with no pricing regulation, but some Title II oversight of Ethernet services through a “robust complaint process” if rates are challenged as not being “just and reasonable”.
Enterprise customers probably find these reforms underwhelming, because the discounts are small and phased in over a longer period than they had sought. And they must be disappointed by the exclusion of any price cap regulation of packet-based BDS such as Ethernet. The Ad Hoc Telecommunications Users had sought 22 per cent rate reductions, substantially higher than the Verizon/INCOMPAS proposal.
CCA/Independent Wireless Carriers
Independent wireless providers generally supported the Verizon/INCOMPAS proposal, and would get less discounts than they sought, and no price reductions for packet-based BDS services. And for those wireless carriers who have already transitioned most of their existing wireless backhaul for 4G LTE to Ethernet over fiber and other packet-based services, and will rely on packet-based services for new, higher speed 5G services, the proposed Order offers no immediate financial savings. The Title II robust complaint process for any unjust and unreasonable pricing might eliminate pricing extremes, but the real savings will be for the legacy TDM facility users.
Other incumbent LECs, which lack competitive CLEC or wireless operations that use significant BDS services of other carriers, but do sell substantial TDM facility BDS services, will face revenue shortfalls without compensating BDS cost decreases. The phase-in of these TDM pricing reductions should avoid any dramatic flash cut of lost revenues from price cap adjustments as their non-price cap regulated fiber and other packet-based BDS service offerings are offered more widely. This could also incentivize increased deployment of fiber facilities to avoid this ongoing price cap regulation of TDM facilities.
Once again, the FCC will be the winner if the rules, as proposed, are adopted, and if they withstand likely judicial review. Just as it did under the Open Internet Order, the FCC expands its regulatory reach to previously unregulated services, by maintaining its view that packet-based BDS is also a “telecommunications service” subject to Title II regulation. While forgoing any ex ante pricing regulation such as price caps or benchmarking for packet based services, the FCC has stamped its jurisdiction over previously-unregulated packet-based BDS offered by competitive providers by establishing a “robust complaint process” for Ethernet and other packet-based services, and by announcing certain outlying presumptive triggers when such rates will be considered unreasonable.