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In late August, the FCC adopted a Report and Order suspending new grants of interstate special access pricing flexibility for the “Price Caps ILECs”—principally Verizon, AT&T and CenturyLink (formerly Qwest)—adopted in the agency’s 1999 Pricing Flexibility Order.  The Report and Order is a breath of fresh air in terms of acknowledging that a predictive agency judgment proved incorrect and in terms of being a concise, well-written decision.

The FCC summarizes the pricing flexibility principles established in 1999 as follows:

The Commission developed competitive showings (also referred to as “triggers”) designed to measure the extent to which competitors had made irreversible, sunk investment in collocation and transport facilities. Price cap carriers that demonstrated the competitive showings were met in their serving areas could obtain so-called “pricing flexibility,” namely the ability to offer special access services at unregulated rates through generally available and individually negotiated tariffs (i.e., contract tariffs).

Not only were the competitive triggers poorly crafted, the geographic areas of relief—entire Metropolitan Statistical Areas (“MSAs”)—were too big.  That is, while some collocation arrangements arose in densely developed areas, these competitive facilities were nowhere to be found throughout the balance of MSAs.  The author finds a measure of vindication in this aspect of the Report and Order. On behalf of an enterprise user group and in multiple special access proceedings, we argued these ILECs are the only facilities-based carriers offering special access services.

This decision also provides a cogent summary of the arguments raised by IXCs, Wireless carriers and enterprise customers that special access services are not subject to competition and the rates for these services are inflated, particularly the compelling points and arguments raised by AT&T in 2003, two years prior to being acquired by SBC.

The Primacy of Special Access Services.  These services provide dedicated transmission paths between customers’ premises to IXCs’ POPs.  Special access services also connect customer locations within a local area, function as backhaul circuits for wireless carriers, and connect enterprise locations to ISPs.  The principal services are DS-1s and DS-3s and, increasingly, Ethernet-based services.  Almost all special access services are subject to the FCC’s exclusive jurisdiction.

Typically, IXCs and ISPs acquire special access circuits from ILECs to connect their services to their customer’s premises.  Enterprise customers—businesses and state and Federal governments—may have hundreds or several thousand sites all of which must be connected via special access to their IXCs’ and ISPs’ networks.  As compared to the rates for interexchange services (voice and data) and dedicated high speed Internet access services, the rates for special access services have not declined to any measurable degree over the last decade.

Multiple Issues Associated with Inflated Special Access Service Rates and Pricing Flexibility.  The litany of issues associated with special access pricing issues bears repeating.

  • Foremost, as the ILEC units of AT&T, Verizon and CenturyLink acquired pricing flexibility they often increased the rates for these services.
  • For these three mega-carriers, in-region, special access services are revenue generators, but for competitive ISPs and IXCs acquiring (and paying for) these services constitute  unavoidable costs.
  • While enterprise customers benefit because the revenue generated by in-region special access services may support lower overall rates for all services being acquired from a mega-carrier, the rates for special access services remain inflated.
  • Were special access rates available “at cost” more competitors could offer more services at better rates.

These points highlight a basic consideration often overlooked by policy makers and the Department of Justice (in assessing mergers): Because special access services are used in connection with virtually all non-residential services, the rates for these services directly impact the profitability of all carriers and ISPs.

Underlying Problems Remain.  As positive and as grounded in marketplace dynamics as it is, the Report and Order does not confront the reality that the three mega-carriers have deftly dodged and delayed close scrutiny and reductions in special access rates for well over a decade. The FCC is committing only to collect additional data in 60 days to determine whether a more realistic “market analysis” for assessing special competition can be developed.  There is no indication that the more important issue raised by the Report and Order—the current, generally available rates for special access services offered by these Price Cap ILECs are excessive—will be addressed by the FCC.