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This entry provides an overview of how enterprise customers shape the underlying business deals in telecommunications services agreements. In the previous entry, we discussed the primary objectives enterprise customers look to achieve in negotiating telecommunications services agreements.  In our initial entry in this series, we discussed the challenge counsel for enterprise customers face in confining telecommunications services agreements to the four corners of the customer contract.

Overview. There are two basic approaches for putting these deals together. The first is the default or “seat of the pants” approach in which the customer (telecom manager) limits discussions to the current provider(s), typically 3 to 6 months prior to expiration of the current contract and, based on informal discussions with consultants or other customers, asks for a “market-based” reduction in rates for a new three-year deal, maybe remembering to request pricing for replacement IP services. The second is to initiate a more structured process 9 to 14 months prior to the expiration of the current agreement by engaging an experienced consultant to develop a demand set for an RFP to issue to both incumbent and potential successor carriers and to advise on trends in carrier services and pricing, particularly the transition to IP-based services offerings. This entry focuses on the second approach.

Caveat: The incumbent often prevails even under a systematic, well-planned procurement. Transitioning to successor providers is resource-intensive and, for some period, entails the payment of services to the incumbent and the successor provider during the transition process. Hot cuts are not the rule for major enterprises, particularly at critical locations. Caveat to the Caveat. If there is insufficient time to initiate a transition to a successor provider (and avoid a substantial increase in service pricing per the rates in the incumbent’s price guide), both the incumbent provider and its competitive providers likely will not propose market-based pricing and terms and conditions. Thus, the RFP should be issued in a timely manner to allow for competitive, responsive bids and for a doable transition to the successor provider(s).

Value of Telecom Consultants. There are several reasons for engaging a competent consultant. First, there are no published lists of market-based rates; carrier guide rates are rarely accepted by customers. There is no equivalent of published commodity prices (crude oil, corn or pork bellies) or web sites such as Edmunds or TrueCar for enterprise telecommunications service pricing. Even the “best of the best” telecom managers have a limited knowledge base of current market pricing; unless they have changed jobs (frequently), these persons’ pricing knowledge is limited to the company’s last agreement or competitive pricing review of 12 to 18 months ago. Experienced consultants have more insights into current market pricing.

Consultants offer two other value-added services. The first is the development of the enterprise’s demand set for its RFP. Telecom service pricing is based largely on volume, customer locations, and service mix. Two aspects of developing a demand set are determining current usage of existing services at current and planned locations (or anticipating a reduction in locations) and selecting the services (type and capacity) that the customer is looking to acquire. This entails a review of bills and invoices, existing network design, current services, expected growth or contraction of the enterprise’s requirements, and desired services. The two latter considerations are driven by the customer with input from the procurement consultants.

The second value-added is the consultant’s RFP templates. In addition to setting out the demand set and desired services, the RFP elicits information on pricing, other business considerations and legal terms and conditions. The RFP is the starting point for negotiations. The consultant’s RFP should be reviewed within the enterprise by the telecom/IT department, procurement group, legal, and, perhaps, risk management. A company may wish to incorporate the consultant’s RFP into its standard RFP documents or modify the consultant’s RFP. A related consideration to be determined upfront is the extent to which the consultant is the principal contact and whether the consultant will take the lead in discussions with the carriers.

Revenue Commitments and Pricing Reviews. Several other economic considerations are central to the business deal in addition to rates (recurring charges, non-recurring charges, waivers and credits). The first is the minimum revenue commitment which the customer commits to spend either annually or over the term of the agreement. Exclusive purchase commitments are rare. The minimum commitment level is based on projected expenditures at the proposed rates. Currently, term commitments with annual commitments for each renewal period are more common. The minimum commitment is increasingly supplemented by “incentive credits.” The best pricing or highest discount under the agreement is achieved only when expenditures exceed some dollar amount above the minimum commitment level, qualifying for the incentive credits.

Agreements also include a so-called “business downturn/downsizing” provision. This clause is triggered when unexpected reductions in projected expenditures occur due to downturns, divestitures or downsizing in the customer’s business. This clause addresses the risk of paying a hefty sum that is the difference between the minimum commitment and the actual (reduced) level of expenditures. The typical quid pro quo is an increase in rates or an increase in the term of the agreement or both.

The second major economic consideration is the competitive pricing review. These reviews are typically conducted annually or every 18 months. Involvement with consultants are often essential for the customer to have some insight into current market trends. For enterprises with stable or growing expenditures and general satisfaction with the incumbent’s services, services agreements may be extended based on the price negotiations that follow the path of competitive pricing reviews.

Updated May 2, 2018

Trends in wireline and mobile services strongly suggest a refresh to the FCC Forms 499-A/Q is warranted.  A shift to fewer revenue buckets (reporting categories and lines) consistent with the major services currently being offered to customers could reduce the time for services providers to prepare Forms 499-A, assist USAC staff in reviewing the forms, and help streamline USAC audits.  Other incremental steps are also suggested.  For purposes of brevity, this entry focuses on the Form 499-A.

Block 3: Carrier’s Carrier Revenue Information is a prime example of outdated and unnecessary revenue reporting obligations.  Several lines under Fixed Local Service could be aggregated or deleted; Line 308 (USF support revenues) should be a standalone category.  Toll services and all other wireline voice services should be consolidated on one line—Wholesale Wireline Voice Services, and all mobile voice services could be consolidated on one line (the toll distinction is irrelevant).  All wholesale private line service revenues should be reported on one line with special access service revenues expressly included or reported on a separate line as special access is the principal wholesale data service.

Consumers increasingly purchase service in bundles:

Wireless bundles: Voice, text and data (Internet access service); occasionally, voice-only

Wireline bundles: Voice, data and video: data and video; or increasingly data-only

Voice services are assessable services.  High speed Internet access and multi-channel video programming services are not.  Interconnected VoIP is rapidly displacing circuit switched wireline voice services.  Switched access service revenues are approaching inconsequential status.

The all-distance plans for wireline voice services may encompass unlimited domestic calls and an unlimited or an allotment of international minutes to select countries with the overage billed on a per minute basis; voice calling to other counties may be billed on a usage-basis.  All-distance voice plans are even more common for mobile services.  International calling card revenues remain cognizable.  Payphone services revenues are not.

The utility of separate USF reporting categories for wireline voice services, depending on how they are priced, is not apparent.  The same is true for mobile voice service revenues:  Despite a bewildering array of pricing plans, distinguishing between prepaid and postpaid voice revenues is irrelevant for determining USF assessable revenues.  The relevant USF contribution considerations for all mobile voice services are (1) apportioning revenues between assessable voice services from the revenues of bundled non-assessable services and products, and (2) determining the jurisdictional mix of voice services.

Enterprise customers often obtain a broader mix of wireline services:

Voice services (local, outbound and inbound (increasingly interconnected VoIP)) with multiple pricing options

Special access services

Private line services

Other non-Internet data services, such as MPLS-based services

High speed Internet access services

Enterprise customers, including the Federal government and many state governments, will have significant international revenues.

As with the wholesale service reporting under Block 3, all wireline retail voice services revenue reporting could be simplified.  All enterprise, small business and residential wireline voice service revenues can be reported on one line, the principal USF consideration is assignment to the correct jurisdiction (intrastate, interstate, international or foreign).  Again, mobile voice revenues should be reported separately with determining the correct jurisdiction being the principal USF contribution consideration.

Special access services should be reported separately from private line service, consistent with industry practice of offering and charging for these services separately. Private line service should be reported on one line as the distinction between “local’ and “toll” private line services is both confusing and irrelevant.  The critical issue for private line and special access services is determining the correct jurisdiction.

For physically intrastate private lines and special access services (almost all special access services have endpoints within a single state), services providers must follow the 10% de minimis rule to determine the jurisdictional nature of these revenues associated with these services.  The Bureau addressed several longstanding requests for review of USAC determinations involving the 10% de minimis rule in its 30 March 2017 Memorandum and Opinion and Order, but the decision is subject to Commission review that remains pending for over a year.

Another addressable issue raised in the 2012 USF Contribution Reform Further Notice of Proposed Rulemaking is the disparity between the “safe harbors” for interstate/international mobile service (37.1%) and interstate/international VoIP service (64.9%) on the one hand, and the noticeably lower assessable percentages reported for these services (based on actual traffic or traffic studies) on the other.

The Commission or the Wireline Competition Bureau could take the pragmatic step of issuing a Public Notice to refresh the record to align the safe harbors with services providers’ reported data. This could ease reporting burdens for filers and reduce administrative burdens on USAC staff.  The safe harbors could be updated every three years to reflect shifts in usage, if any.

This entry discusses the primary objectives that enterprise customers look to achieve in negotiating telecommunications services agreements. In a recent entry, we discussed the challenge counsel for enterprise customers face in confining telecommunications services agreements to the four corners of the customer contract. In a future entry, we will look at how the underlying business deal is put together.

Invariably, the customer’s objectives include the following:

  1. Improved pricing
  2. Desired, reliable services (core transport services and non-core services)
  3. Sufficient capacity for services at customer locations
  4. Timely provisioning
  5. Meaningful service level agreements (SLAs)
  6. Customer support

These objectives are not static; rather, the intention is that these objectives be met for the duration of an agreement that typically includes an initial term for 3 years, at least a single, one-year renewal option for the customer and a transition period.

Improved Pricing. The constant underlying interest is that the customer wants to finalize the agreement “yesterday” because in almost all cases the new agreement provides improved pricing. This is often coupled with the deployment of new services and, sometimes, the transition to a successor carrier’s services. Carriers leverage this customer interest in negotiations, not offering the optimum terms; obligating the customer to request or forego requests for better terms and conditions, subject to commitments made in its response to the customer’s RFP.

Customers often request a competitive pricing review clause that calls for one or more reviews of current rates. The purpose of this clause is to “refresh” the pricing to secure “market-based” rates. Because there is no public repository of current pricing for enterprise services agreements, customers often look to telecom consultants to assist in pricing reviews

Services. There are five core services:

  • Voice services, either TDM, VoIP or both as carriers are transitioning their networks from TDM to VoIP (Call center services are often included as a subset of voice services)
  • Special access service
  • An MPLS-based data service
  • Private line service
  • High speed Internet access service

These services are provided in the United States and to varying degrees within its territories and possessions. Depending on customer requirements, voice services, private line services and MPLS-based data services connect U.S. locations to and from foreign destinations and between foreign points. Special access services are acquired in other countries, but pricing for these services are not always included in the enterprise services agreement.

Customers often request a technology upgrade clause, the purpose of which is to allow a customer to secure a more advanced service (a problematic definition) in lieu of an existing service provided under its current agreement. The advanced service may be offered by the current provider or another services provider. This clause is invoked far less than competitive pricing review clauses.

The primary non-core services include network management (router management), firewall and encryption (security), data center (collocation) and content delivery services.

Sufficient Capacity. In both fast and slow growing organizations, the demand for services is increasing; it is not a matter of whether, but by how much. Services agreements often include pricing schedules for higher capacity MPLS-based service ports, special access and private line services.

Provisioning. Whether IP-based or TDM wireline services are being provided, physical circuits must be extended from a services provider’s network (its closest point of presence (POP)) to customer locations. A local services provider—sometimes an affiliate of the customer’s carrier—provides the special access circuits connecting customer locations to its services provider’s network. Services agreements include specific procedures for ordering, testing and accepting new circuit/service installations and discontinuing services.

Provisioning is a resource-intensive process for carriers and customers. It is one of, if not the most significant, hurdle for switching from the incumbent provider to a successor carrier.

Service Level Agreements (SLAs). These are carrier commitments that a given service will meet performance metrics, such as jitter, latency, availability, and mean time to repair (MTTR).  Some SLAs apply to service between carrier endpoints; others apply to service between customer locations. SLAs are also offered for provisioning. SLAs are not always published in the carrier’s Service Guide; if not, the SLAs will be attached to the agreement. One criticism of carrier SLAs is that chronic or recurring issues are either ignored or inadequately addressed. Some customers look to negotiate “custom” SLAs that more fully reflect the adverse impact of significant service issues on the customer’s business.

Many SLAs provide credits for non-compliance that extend beyond a minimum period. As a rule, customers must report the trouble and submit a separate request for a credit.

Customer Support. Carrier processes for ordering, provisioning and testing circuits and services, and acting upon service termination requests are well-established and work most of the time. Recurring problems in either service ordering, provisioning, testing or significant SLA violations can arise and, from the customer’s perspective, cannot be addressed soon enough. In addition, there is a likelihood of hiccups as carriers transition from TDM to IP-based services, as this can entail service/circuit transitions at every customer location.

The customer is not necessarily looking for credits, but assurances that these issues are addressed as they arise and procedures implemented to minimize their recurrence. These concerns are often addressed by adding provisions to the services agreement calling for scheduled discussions pertaining to one or several of these areas between knowledgeable carrier staff and the customer.

A guiding principle for attorneys and their clients when negotiating telecommunications services agreements is the four corners defense.  No, not the end-of-game defensive strategy devised by the legendary Dean Smith for his UNC basketball team, but the straightforward strategy of keeping the terms and conditions of telecommunications services agreements within the four corners of an agreement.

Due to deregulation and migration to IP-based services, telecommunications tariffs have largely disappeared.  The process started over twenty years ago.  In the United States, local exchange TDM voice services, DS-1 and DS-3 special access services and some intrastate interexchange voice and private line services remain tariffed.  Consistent with FCC decisions dating back to the 1990s, the major wireline and wireless carriers and the MSOs have replaced tariffs for telecommunications services with a combination of end-user (consumer, small business and enterprise) agreements and online service guides.  Broadband services have always been offered through some combination of end-user agreements and online terms and conditions.

These service guides were initially required by the agency to disclose standard prices for de-tariffed services and to be made available to the public at the carriers’ principal offices or online.  The scope of the terms and conditions in online services guides has expanded substantially and, in many cases, replicates the one-sidedness of tariffs.  For enterprise customers, service guides currently offer the services providers’ service descriptions, service level agreements (SLAs) (sometimes), standard rates and charges, and policies such as the Authorized User Policy (AUP) for Internet access service.  Several services providers also post a comprehensive set of general legal terms and conditions and related definitions.

Several online service guides are almost impossible to search.  URLs in customer agreements related to potentially relevant online web pages often prove to be dead-ends.  However unfriendly the online design and integration of service guides, the overarching concern is that services providers reserve the right to modify unilaterally all aspects of their service guides including service descriptions, SLAs, pricing schedules, privacy and authorized user policies (AUPs) and, as applicable, the provider’s online general terms and conditions.  Some services providers insist on an indemnity from customers for violations of the provider’s AUP for which the provider reserves the right to modify at any time.  In some instances, the general terms and conditions in the services guide not only conflict with the terms and conditions in the executed agreement, but may impose additional or supplemental customer obligations and conditions that are not readily trumped (excuse the pun) by a standard precedence clause in the executed agreement.

Some services providers push the envelope even further, asserting that the customer’s sole remedy for services providers’ unilateral changes to the service guides that are “material and adverse” to the customer is the customer’s right to discontinue the affected service on sixty (60) days-notice.  Apart from excluding the customer’s right to damages, replacement services to multiple customer locations (sometimes a hundred or more sites) cannot be sourced, provisioned, and tested and the customer’s traffic cannot be reliably migrated to replacement services in sixty (60) days.

This brings us back to the four corners defense.  The agreement executed by the customer and the services provider should provide for fixed rates, as opposed to percentage discounts of the rates in the online services agreements; services providers invariably reserve the right to change the rack rates in their service guides with virtually no notice.  The written agreement should also exclude “shadow” general terms and conditions in the service guide as opposed to relying on a precedence clause.  The minimum response to the services providers’ provision authorizing changes to the service guide that are “material and adverse” to the customer is to secure a six-to-twelve-month transition period to migrate to replacement services, not sixty (60) days.

There is one caveat on changes in wireline services. The major telecommunications carriers are now transitioning their networks from TDM technology to IP-based services.  (The MSOs’ networks are largely IP-based.)  The FCC is accommodating the carriers’ efforts to minimize regulatory delays and burdens on ILECs in implementing this transition and in replacing copper loops with fiber or fixed wireless technologies.  The core networks of the major services providers are well along in this transition, but the transition in special access services varies considerably in terms of location and the ILEC provider.

Enterprise customers should press their wireline services providers on (i) the status and projections for completing their IP-transitions, and (ii) the transition plans for the ILECs from which the services provider will be acquiring special access services.

This is the second of two entries on dark fiber arrangements.  Dark fiber is a realistic option for high-bandwidth requirements of businesses, medical and educational institutions, and state and local governments (collectively “enterprises”).  This entry focuses on the two principal types of dark fiber arrangements: indefeasible rights of use (“IRUs”) and leases.  The IRU agreement is different from a telecommunications services agreement, but the dark fiber lease resembles a services agreement.

Under an IRU or a lease, the customer is obtaining a “facility,” not a service such as broadband or VoIP.  The term of an IRU often tracks the useful life of the fiber—at least 20 years.  A dark fiber lease extends up to 5 years, often with renewal options.  Under generally accepted accounting principles, an IRU is typically treated as an asset and a dark fiber lease is treated as an expense.  In addition to different accounting treatment, state property and transactional tax implications may be different.

Indefeasible Rights of Use

Pricing.  IRU customers (“grantees”) typically make two payments to IRU network operators:  the one-time charge for access to and use of the fibers for the duration of the IRU and an annual maintenance charge.  The latter covers “routine” maintenance that is typically scheduled during off-hours and emergency restoration of a fiber cut or other damage to the dark fiber cable or strands. The IRU fee is often paid in two installments:  50% at contract signing and 50% upon acceptance.  The “cost per fiber per mile” is the principal metric for comparing IRU pricing.

In major metro areas, dark fiber network operators (that may also offer telecommunications services) extend their network to customer locations.  This network extension is typically expressed as an agreed-upon, one-time charge that includes the splicing of customer’s fibers at agreed upon demarcation points.

Outside of major metro markets, the network operator may construct all or a portion of a fiber route for a customer (retail services provider, another dark fiber network operator or a technology company).  Network design and construction costs typically are built into the IRU fee.  A newly constructed fiber route invariably includes more fiber strands than a given customer requires.  Network operators often view the initial IRU customer as its “anchor tenant” from which it looks to recover most of the construction costs for a given fiber route.  The total fiber count for a route is a major decision for a network operator; however, other costs of dark fiber network construction (see initial entry) typically exceed significantly the incremental cost of additional fibers along a route.

Business Risks in IRUs.  Customers bear three principal risks in IRU agreements: the fiber network operator’s bankruptcy; loss of underlying rights; and fiber cuts.  The network operator’s bankruptcy poses the most significant risk.  This is due to the term of IRU agreements being 20+ years, the IRU fee typically being paid in full during the initial year, and the relative modest capitalization of dark fiber network providers (as compared to the major telecom and cable service providers).

Continue Reading Enterprise Customers and Dark Fiber: An Important Connection (Part 2)

This is the first of two entries on dark fiber arrangements for the dedicated, high-bandwidth requirements of businesses, medical and educational institutions, and state and local governments (collectively “enterprises”).

Enterprises should consider dark fiber arrangements for local and regional high capacity requirements. High-bandwidth, dedicated services (Gig-Ethernet and higher) within metropolitan areas are relatively expensive on a cost-per-mbps basis; special access service rates are not competitive and the major carriers are not aggressively competing for dedicated high capacity services in regional markets.

The second entry focuses on the two principal agreements under which enterprises may acquire dark fiber: indefeasible rights of use (“IRUs”) and leases.

Dark Fiber—In Brief

Dark fiber is a facility, comprised of glass fibers, placed in a loose tube with filler and strength members; multiple tubes may be placed within a sheath (collectively “fiber optic cable.”)  The unlit glass fibers are universally referred to as “the dark fibers.” The “fiber counts” in a fiber optic cable vary. Fiber optic cable may be installed in underground conduit (“underground”) or extended along utility poles and other aboveground infrastructure (“aerial”). Most dark fiber arrangements are between dark fiber providers and telecommunications carriers.

In dark fiber arrangements, the customer (carrier or end-user) is responsible for “lighting the fiber”—installing and maintaining the electronics, principally the transmitters to convert electrical signals into light and the receivers that convert the light back into electrical signals for processing and conveying communications. A dark fiber provider terminates its fiber optic cable in connectors or performs fiber splices between their dark fibers and its customer’s cabling or fiber at mutually agreed upon demarcation points (patch panels that may contain connectors or splice boxes or both).

Dark fiber customers typically do not physically access the dark fibers, but often require providers to perform tests to confirm the glass fibers meet end-to-end connectivity measures and that all splices connecting network fiber to the customers’ cables meet industry standards at delivery (acceptance) and that these measures and standards are maintained for the duration of the agreed upon term.

The Merits of Dark Fiber Connectivity

                  Dark Fiber is a Durable Asset. Fiber optic cables have useful lives of 20–30 years, or more.  Fiber optic technology (the cable and the electronics) is a building block of telecommunications networks throughout the world; wireless and wireline. Annual maintenance costs are modest, though fiber cuts do occur and permanent restoration is a significant undertaking that dark fiber providers price into their charges.

                  Derivable Bandwidth Will Increase Over Time. The electronics that “light” the dark fibers are part of a very large, well-funded technology ecosystem. Over the useful life of a fiber optic cable, the derivable bandwidth/capacity should increase substantially due to advances in the underlying technologies embedded in the electronics. This is why one major wireless carrier opts for dark fiber connectivity between its small cell sites and network.

                 Fiber Deployments Are Capital-Intensive. The “sunk costs” of fiber networks are substantial: right-of-way and easement acquisition, construction and other land use permitting, the installation of the fiber optic cable—underground or aerial, the fiber optic cable, and the splicing and testing of the fiber. Splicing is necessary throughout a fiber network because cable lengths are limited by amount of cable that can be rolled around spools for transport and ready deployment. Regenerators must also be installed in fiber networks as the signal must be regenerated to reach distant endpoints.

For these reasons, enterprise customers and technology companies rarely construct fiber networks extending beyond the contiguous real estate of their facilities. The major exceptions are electric utilities that have deployed fiber optic networks for years to support their operations. Utility easements and rights-of-way typically accommodate dark fiber installed for a utility’s internal telecommunications requirements.

                 Major Telecommunications Carriers Typically Do Not Offer Dark Fiber Arrangements. The three largest domestic wireline carriers: AT&T, Verizon and CenturyLink do not typically offer, if at all, dark fiber options to end user customers. It is doubtful this practice will change significantly despite Verizon’s acquisition of XO Communications and CenturyLink’s proposed acquisition of Level 3 Communications. The three largest cable operators—Comcast, Charter-Time Warner and Cox may prove more flexible.

Zayo is probably the largest, independent (as of the date of posting for this entry at least) dark fiber provider (that also offers services) in the United States. There are other metro-area fiber networks in the larger metropolitan areas. Service providers offering dark fiber arrangements exist in less densely populated areas as well, particularly along the Nation’s major North-South and East-West fiber routes.

                 Total Cost of Ownership. The full cost of dark fiber arrangements includes the cost of the electronics, the lease/use charges for the dark fibers, the dark provider’s one-time costs particularly extending facilities to a customer’s locations, and the customer’s costs in managing the electronics and monitoring network connectivity. On the other hand, the USF charges are not imposed on dark fiber transactions and sales, use and gross receipts taxes applicable to “telecommunications services” may not apply though other state taxes may apply (to be confirmed by state transaction tax counsel).

This entry highlights the consequences of the FCC’s IP Transition orders for business customers and competitive carriers in terms of costs, changes in customer premises equipment (CPE), operational impacts and, for competitive carriers, interconnection agreements.

As noted in our 1st Entry in this two-part series, each ILEC sets its own plans and time lines for implementing its IP transition. There are no FCC mandated deadlines or due dates for initiating or completing the IP transition. Subject to the FCC’s rules and policies, the ILECs may implement their IP transitions locally, state-wide or throughout all of their service territories as they see fit. The same is true for copper loop retirements.

Business Customers

For business customers with locations having relatively modest voice and data requirements, such as many retail outlets, commercial and MDU property managers, and small government offices, the transition to IP voice services is the priority concern. For higher traffic locations, including major enterprise locations, call centers, hospitals, large government facilities and data centers, the transition to IP special access services may prove the most challenging.

Wireline Voice Services

1. The IP transition may disrupt (likely accelerate) enterprise planning for deploying IP-based CPE, including IP-PBXs, to implement VoIP and SIP trunking.

2. VoIP and SIP trunking customers must manage their CPE and business processes so that their end users can complete wireline 9 1 1 calls consistent with FCC rules and comply with state and, possibly, Federal versions of “Kari’s law” that require emergency calls be completed with three-digit “9 1 1” dialing and not “9 + 9 1 1” dialing. Compliance with local wireline “emergency phone service” regulations must also be addressed.

3. Wireline voice service rates should become more competitive for all business customers as VoIP services are not subject to federal or state legacy rate or tariff regulation and as the ILECs roll-out cloud-based VoIP service offerings.

a. Points of origination and termination for wireline voice pricing will be displaced by “all-distance” pricing comparable to mobile voice pricing, encompassing  local, intrastate, interstate and, increasingly, international voice communications.

b. Thus, business customers should become familiar with the pricing for VoIP services and SIP trunking in order to compare the rates for these services to the familiar pricing for circuit-switched voice services and PBX trunks

Special Access Services

1. The vast majority of end users acquire special access services (DS-1, DS-3, OCn and Ethernet equivalents) bundled with interexchange voice or data services provided by wide-area network (WAN) service providers (a/k/a interexchange carriers.)

2. The “reasonably comparable” standard of rates, terms and conditions for replacement Ethernet services adopted in the 2015 IP Transition Report and Order provides a reasonable measure of price stability. And, based on the latest Special Access Further Notice of Proposed Rulemaking, this standard should remain in place throughout the IP transition.

3. Except for very low latency applications, Ethernet special access service should be a functional equivalent to TDM dedicated access circuits.

4. The mechanics of converting to Ethernet service could prove challenging. Copper loops may support lower speed Ethernet services, but fiber or hybrid fiber-coax may be required for higher capacity services.

a. One point of reference as to what users might expect is the transition from one WAN service provider to another. This is probably the best case scenario.

b. The IP transition will be different from WAN service provider transitions (from incumbent to successor WAN service providers) in which customers and services providers share the objective of converting customer locations to the successor provider’s network in a timely manner. In the IP transition, the process will be driven by individual ILECs each transitioning to Ethernet service per its plans and timetable.

c. In theory, customer locations served by an ILEC affiliate of the WAN service provider should have a smoother transition, assuming closer coordination between the two affiliates.

Competitive Service Providers 

In many respects, the FCC’s IP Transition orders limit the ILECs’ discretion to do as they please. At this juncture, the rules governing the IP transition are set and the competitive service providers have limited opportunity to protest or delay the process—assuming the ILECs follow the rules. Competitive service providers must be prepared to act as the ILECs implement the transition to IP-based services.

Wireline Voice Services

1.  CLECs relying on ILEC copper loops and TDM-based wholesale platform services face the challenge of migrating to different facilities and technologies to operate in all-IP environments. The ILECs may transfer/sell their abandoned copper loops to requesting CLECs, but are not required to do so.

2. The status of local service interconnection remains an open question. CLECs will benefit from the FCC’s resolution of whether IP VoIP interconnection arrangements between ILECs and CLECs are voluntary commercial agreements or interconnection agreements subject to the Section 251/252 framework.

Special Access Services

1. WAN service providers (aka “interexchange carriers”) have either implemented or currently operate IP voice and data networks. Customer transitions to these interexchange IP services are ongoing. The IP transition poses the challenge of coordinating deployments of IP special access services to customer locations based on the ILECs’ timetables and schedules.

2. WAN service providers will benefit from the FCC’s requirement that ILECs’ Ethernet special access services be made available under rates, terms and conditions that are “reasonably comparable” to the corresponding ILEC TDM services.

The “reasonably comparable standard” likely will be retained as the FCC adopts its decision in the special access proceeding.

3. Competitive Access Providers that have deployed facilities in metro areas may offer more compelling IP special access services as compared to those of the ILECs.

The ongoing challenge/question is whether competitive access providers do or will extend their networks to an end-user’s location.

For several years, the major incumbent local exchange carriers (ILECs) have been heralding the benefits of transitioning their networks to IP technology. The FCC has supported this transition. Agreeing that “less is often more” and reviewing related decisions in one entry may be helpful, this entry highlights the FCC’s recent decisions on policies and procedures for implementing the IP transition.

This is the 1st entry in a two part-series. Implications for end users and competitive carriers will be the focus of the 2nd entry.

The rules on copper loop retirements and the IP transition for retail voice services apply to price cap and rural rate-of-return ILECs with minor distinctions. The rules on wholesale services pertain principally to the price cap ILECs as these carriers offer the vast preponderance of special access and wholesale platform voice services. The FCC deserves a “tip-of-the-hat” on these decisions; the agency evaluated the merits of numerous positions and made reasonable decisions on countless issues.

An important caveat is that each ILEC sets its own plans and time lines for implementing its IP transition. There are no deadlines or due dates. Subject to the rules adopted in these FCC decisions, the ILECs may implement their IP transitions locally, state-wide or throughout all of their service territories. The same is true for copper loop retirements.

The procedural paths that include notices to customers or competitors vary.

Copper Loop Retirements. The FCC updated copper retirement rules that had been in effect for years.  Importantly, the copper replacements are subject to notice obligations, but not FCC approval. Two major changes are (1) the agency declined to allow oppositions or objections to notices of copper loop replacements, but imposed a “good faith communication requirement” on ILECs to provide additional information so that interconnecting services providers can implement changes in their networks without service disruptions, and (2) increased the notice period to just over 180 days.

Each ILEC is required to provide notice of a copper loop retirement to the Commission on the same date it provides notice “to each information service provider and telecommunications service provider that directly interconnects” to the ILEC’s network as well as changes in prices, terms or conditions associated with a copper loop retirement. The Commission then issues a Public Notice announcing the filing, effectively starting the 180-day period. Within 90 days of the date of this Public Notice, the ILEC must submit a certification that attests to timely notifications and other matters.

In addition, an ILEC must provide 180 days written notice (via mail or e-mail if authorized by the customer) of copper retirements being replaced by FTTP services to business customers and schools and libraries, and 90 days to residential customers. The FCC declined to require the ILECs to make available retired copper loops to CLECs, but encouraged ILECs to negotiate the sale of abandoned copper loops.

The rules are now in effect. Among others, Verizon and CenturyLink, are implementing copper loop retirements, identifying retirement projects by reference to affected wire centers.

Wholesale Services. In order to discontinue wholesale services (special access services and wholesale voice service platforms), each ILEC must file applications to discontinue service under Section 214 of the Communications Act. In addition, the FCC denied USTelecom’s Petition for Reconsideration of the declaratory ruling in which the FCC concluded that the term “service” in section 214(a) is defined functionally and not solely by service definitions in ILEC tariffs.

Broadly speaking, ILECs must establish that replacement IP wholesale services are “reasonably comparable” to the existing TDM services in terms of capacity, price and quality of service. For example, 100 Mbps Ethernet access service priced at market rates is not a reasonably comparable replacement for DS-1 special access service; substantially more bandwidth priced at a noticeably higher rate is not “reasonably comparable.” Importantly, “price-per-Mbps” and the net cost of the IP replacement special access service cannot be significantly higher than the pricing for the DS-1 or DS-3 service being replaced.

As a Section 214 discontinuance application is filed with the FCC, a copy must be served on the ILEC’s customers—CLECs, IXCs, wireless carriers and end users that acquire special access services directly from ILECs—as well as government offices specified under Section 214. Assuming the ILEC’s application meets the “reasonably comparable” standard, the FCC will “automatically grant” an ILEC’s Section 214 discontinuance application thirty (30) days after the application is placed on Public Notice.

This “reasonably comparable” standard is an interim rule, subject to the outcome of the FCC’s ongoing investigation into the price cap ILECs’ rates, terms and conditions for special access services—particularly DS-1 and DS-3 services. A final decision in the FCC’s multi-year special access investigation is expected this fall.

Rather than move forward under rules that will expire as the IP transition concludes, USTelecom filed a petition for review with the D.C. Circuit. Pet. for Review, United States Telecom Assoc. v. FCC, et al., Case No. 15-1414 (D.C. Cir., Nov. 12, 2015). USTelecom maintains that Section 214 does not require ILECs discontinuing wholesale TDM services to consider the impact on competitive carriers’ customers, the FCC’s Declaratory Ruling is inconsistent with Section 214 and applicable precedent, and the “reasonably comparable standard” should not apply pending the outcome of the FCC’s special access investigation.

Retail Voice Services. The FCC’s decision to facilitate the IP transition for retail wireline voice services also establishes a series of rules for “automatic grants” of ILEC Section 214 applications to discontinue TDM retail voice services. If the requisite showings are made, the ILECs may begin the transition to IP services 31 days after the applications are filed. In addition to customer notices (via mail or e-mail as authorized by a customer), the ILECs must engage in community outreach activities on the IP transition.

In support of this flexible approach, the FCC determined that the market interstate switched access services (which is tied to TDM technology) is competitive, noting the migration to wireless voice services and VoIP services have largely eroded the relevance of ILECs’ switched access services.

In addressing retail customers’ concerns, the FCC requires that replacement IP wireline voice services must (i) have substantially similar network performance metrics (latency of 100 ms or less for 95% of all peak period round trip measurements and data loss not worse than 1% for packet-based networks); (ii) maintain service availability at 99.99%; and (iii) cover the same geographic footprint as the discontinued TDM service. These criteria are intended to be technology neutral; thus, a fixed wireless replacement that meets these criteria is an acceptable replacement technology. Each ILEC must certify that each IP service “platform” meets these requirements; in order to do so, the ILEC must follow the FCC test procedures, except ILECs having 100,000 or fewer subscribers may use other test procedures.

The cost of the replacement IP service cannot be substantially more than the TDM voice service being discontinued. The IP replacement services must support critical applications such as 9 1 1 and access for persons with physical disabilities and must be interoperable with widely adopted low-speed modem devices, such as fax machines and point of sale terminals, through 2025.

This is the second entry in a series on the “Industrial Internet,” focusing on the basic elements, legal issues and procurement implications, principally from the perspective of the end user.

Distinctions between the Industrial Internet and consumer IoT are not hard and fast. For example, many consumer IoT applications are implemented through smartphone apps.  On the other hand, some operating systems and related applications are intended for industrial settings such as General Electric’s Predix (which, in turn, may be accessible through smartphone/tablet based apps).  Telematics is one area in which the line between the Industrial Internet and consumer IoT is unrecognizable.  This entry looks to highlight several distinctions and areas of overlap.

Cyber Threats and Data Privacy.  Participants in the Industrial Internet are focused on insulating their “Industrial Intranets” from cyber threats and responding swiftly to cyberattacks. The consumer IoT focuses on personally identifiable information (PII) and other data collected from consumers that are subject to cyberattacks and other vulnerabilities.  The industrial sector is concerned with the Administration’s 2013 Executive Order—Improving Critical Infrastructure Cybersecurity, sharing cyber threat information without risk of litigation, and implementing industry-specific standards such as NERC Critical Infrastructure Protection (CIP) Cyber Security Reliability Standards.  In the context of the consumer IoT, protection of PII and other sensitive data is addressed under federal and state privacy, data security, and data breach notification laws and regulations, including sector-specific laws such as HIPPA, and industry guidelines.

Enhanced Analytics.  The Industrial Internet exists to acquire information from physical assets and implement real time response, make predictive judgements on wear and tear, adjust maintenance and replacement cycles, and to modify equipment design, materials or components based on increasingly sophisticated and powerful data processing capabilities.  This feedback will be implemented rapidly over the next several years as the software components of industrial machinery become more central to equipment design and operation.  Parallel developments in the consumer IoT are most apparent in the manufacture and maintenance of automobiles as car manufacturers send software updates to vehicles via wireless communications.  Presently, the consumer IoT is more focused on real time feedback (wearables) and operations such as app-based home security systems and smart thermostats; more in-depth analytics are on the horizon.

Industrial Intranets v. Consumer IoT — Communications.   The consumer IoT relies on unlicensed spectrum having varying propagation and coverage characteristics, commercial mobile service and, in most cases, backhaul via the public Internet to or from smart phones.  In some instances, consumer IoT applications may be routed from the mobile services provider to an entity’s MPLS port for delivery to its destination/data center.

Communications over Industrial Intranets are more diverse.  Critical infrastructure industry communications from the RF device to enhanced analytics resources may never traverse mobile wireless networks (but conveyed over privately licensed wireless networks), the public Internet or any carrier-provided service.  The challenge for critical infrastructure companies is that mobile broadband services and public Internet services are “best efforts” services.  SLAs for availability and latency, for example, are not offered.  Mobile services providers decline to set aside capacity to provide the wireless equivalents of private line or MPLS offerings.

In manufacturing and petrochemical facilities, communications to and from devices may be conveyed via fiber optic lines for on–premise, real- time review and response, and then  conveyed over carrier-provided services to the company’s enhanced analytics resources.  In other use cases, transport over the mobile broadband service is essential, such as data communications to and from farm machinery operating in fields or monitoring assets in transit.

Data Ownership.  Federal and state privacy laws presume that individuals own their on-line data that companies may collect. The myriad state and federal privacy laws dictate how online companies may acquire, use and share this data, and how this data must be secured, managed and discarded.  The questions of ownership and confidentiality of data generated on Industrial Intranets are more nuanced and will likely be a focal point for negotiations going forward.

Consider the operation of heavy equipment, such as jet engines or escalators used in rail commuter networks, such as the DC Metrorail system.  The escalator manufacturer and WMATA, respectively, have strong interests in acquiring the performance data of the Metrorail station escalators.  The “crunched data” could provide insights into whether recurring downtime events are attributable to improper or insufficient preventive maintenance; design, material or manufacture defects; or improper installation.  The data are important to the manufacturer (to implement changes in design or materials) and to end users (to implement changes in maintenance and for purchase decisions for replacement equipment).

A purchaser of capital equipment may also want to know how the performance of its equipment compares to the performance of the same or comparable equipment of other operators.  This “relative data” will indicate whether any significant maintenance/down time experienced by the operator are related to design, materials or manufacture defects or to operations or maintenance issues that the operator can address.  Over time, equipment warranties could be based on a given product’s performance relative to the performance of the same equipment sold to other companies.

 

This is the first entry in a series on the “Industrial Internet,” focusing on the basic elements, legal issues and procurement implications, principally from the perspective of the end user. The term is used to distinguish industrial and critical infrastructure applications from consumer “Internet of Things” applications, but similar concepts apply.

The unifying characteristic is that information on attributes of physical objects (or the human body with regard to wearables and medical telemetry) is acquired by sensors that digitize, analyze (to varying degrees) and transmit this data. Based on software programmed rules, the sensors may issue commands to actuators to change or modify the operation of physical assets.  Sometimes the data is simply displayed and stored locally. An important function of the Industrial Internet is that the data is almost always subject to more in-depth analysis.

In over-simplified terms, in the Industrial Internet information is acquired from physical assets (electric generators) or local environments (refrigerated trailers (“reefers”)), by sensors affixed to or embedded in physical assets to measure specific parameters such as vibrations, pressure or temperature. Sensors often consist of software, firmware and a CPU and are connected to an RF transceiver or to a fixed wireline network (local or wide area).

As digitized, the data from sensors (different sensors measure different physical attributes) are transmitted (via wireless or wireline connectivity) to a local gateway, collection point or node (“node’) that, based on programmed rules and the information received, may issue commands to actuators (switches or valves) to shut down or modify operation of the equipment, lower the temperature, adjust the humidity, or trigger alarms for management intervention. In time-critical applications, the sensors may communicate with other sensors to take specific action.

After initial processing and commands by sensors or nodes (“at the edge”), the data is conveyed (real-time or not) to a “backend” (data processing capability (cloud-based or not)) that may either issue commands to the actuators or perform more in-depth analysis or both. This analysis may suggest changes in the prognostics or other programmed rules in the sensors or nodes, in data sampling frequency, or in the maintenance, manufacture or operation of the physical assets.

Except in enclosed facilities (such as factories or electric substations), the sensors or the nodes are often connected by one or more wireless pathways.  The wireless data are typically routed to a wireline Internet connection, a MPLS port or a private network on to the backend.  Industrial Internet communications are typically encrypted.  Advances in operating system software and miniaturization (to accommodate local processing and issuance of commands by the sensors), IP connectivity, data management software, and “big data” processing capabilities enable the Industrial Internet.

The term “Industrial Internet” is something of a misnomer.  An entity’s physical assets, its use of sensors (and nodes), and encrypted connectivity to the backend are typically a company-specific operation, not intended to be widely accessible.  Thus, these networks may better be referred to as “Industrial Intranets.”

Footnote:  This series is not focused on computer-controlled equipment, processes or technologies, such as robotics, used to produce refined products and chemicals, industrial equipment and consumer goods, collectively referred to as Industrial Control System (“ICS”) technologies.  Auto assembly plants, refineries and soft drink bottling plants utilize ICS technologies.