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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.

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For better or worse, you decide, the FCC is challenged when adopting policies or making decisions that impact enterprise customers.  This is the first of two entries on enterprise customers and the FCC.


Open Internet Order
.  With no explanation, the FCC excluded high speed Internet access service sold to enterprise customers from the rules adopted last year in its Open Internet Order.  These customers do not benefit from the bright line rules, principally the rule that ISPs not block publication of or access to lawful Internet content, and the broadband Customer Proprietary Network Information (“CPNI”) rules.  By including mobile broadband service in the definition of regulated, mass market Broadband Internet Access Service (“BIAS”), the FCC appears to be saying that the Open Internet rules apply only when employees purchase wireless service directly, but not when purchased under enterprise wireless agreements.Assuming the Open Internet Order survives judicial review, the merits of two regulatory regimes for the same service will be determined in the marketplace.

Special Access Service Investigations.  Since at least 2002, the FCC has been investigating—with varying degrees of focus—whether the rates charged by the price cap ILECs for special access services (principally DS-1 and DS-3) are or are not “just and reasonable”  under Title II of the Communications Act.  (In other words, are special access rates too high?)  The high water mark came in 2012 when the FCC suspended its rules granting price cap ILECs special access pricing flexibility because the FCC determined that the “collocation triggers [for pricing flexibility] are a poor proxy for the presence of competition sufficient to constrain special access prices.”  To assess the extent of competition, the FCC sought data on both TDM and Ethernet-based dedicated access services.  With data collection now complete, the FCC and services providers are engaged in a lengthy data review process.

Concerns raised by competing carriers prompted the FCC in 2015 to open another proceeding to investigate price cap carrier special access tariff pricing plans.  The FCC noted that the competing carriers allege these pricing plans “incorporate a complicated web of all-or-nothing bundling, loyalty and term commitments, complex enforcing penalties, circuit migration rules and other provisions.”

That the FCC recognizes special access pricing is problematic is positive.  The remaining questions are whether, when and how the FCC will respond.

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As the Federal Government shutdown concludes and Congress takes the necessary steps to avoid a default on the Federal Government’s debts, the Senate is expected to confirm Thomas Wheeler as FCC Chairman and Michael O’Rielly as the Republican replacing former Commissioner Robert McDowell.

With substantial experience in Washington policy and legislative circles, it is anticipated that the pace of agency decision making will improve as Thomas Wheeler becomes Chairman.  Apart from multiple decisions to be made in connection with incentive auctions, the new Chairman will have ample opportunity to promote competition.  The major issues are already teed-up.

The most important is the omnibus Special Access proceeding initiated in 2012. The Wireline Competition Bureau recently clarified the scope of services providers’ data submissions, noting that due dates will be set as OMB grants its approval under the Paperwork Reduction Act.  While the telecommunications industry has changed dramatically since 1996, special access services (Ethernet or TDM-based) from the price cap ILECs remain indispensable for interexchange carriers looking to provide service to customers, particularly to customer locations outside of core metropolitan areas. Even as wireless carriers diversify backhaul technologies, special access remains the dominant/default option.

As long as AT&T and Verizon, the two largest interexchange carriers and wireless carriers, benefit from above-cost rates for special access services of their affiliated price-cap ILECs (whether they or their competitors acquire special access services from these affiliates), the markets for wireless and interexchange wireline services remain tilted in their favor.

An equally critical matter is USF contribution reform. As highlighted by the comments filed in response to the FCC’s 2012 NPRM, there is no consensus on a path forward.  Yet, it is apparent that the FCC’s reclassification of facilities–based Internet access services as information services, the ease with which IP-based services fall within the statutory definition of “information services,” and the migration to IP services will continue to drive the USF contribution factor up to and beyond 15%.

Another high profile item is judicial review of the Open Internet Order.  Based on assessments of oral arguments in Verizon v. FCC  by Scott Cleland  and Bryce Baschuk, the D.C. Circuit Court judges are concerned that former Chairman Genachowski’s legacy decision imposes Title II-like “nondiscrimination obligations” on broadband providers that the Commission and the same court emphasized could not be imposed on wireless data services providers in the  Data Roaming Order.

As President Obama’s nominee, the new Chairman likely will implement the FCC’s landmark decision if it is affirmed or push for Supreme Court review if the D.C. Circuit rejects major elements of the Open Internet Order.  In light of the virtual carte blanche discretion conferred on agencies to  determine the scope of their statutory authority in City of Arlington v. FCC, despite the compelling dissent of Chief Justice Roberts, the ultimate resolution of Verizon’s appeal of the Open Internet Order could have broad implications regarding the scope of judicial review of all Federal agencies’ decisions.

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Several 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.

Continue Reading Telecom Policy Projections for 2013 and 2014–Wireline Services and Enterprise Customers

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For over a decade, enterprise customers, 2nd tier interexchange carriers (“IXCs”), and many Wireless carriers have argued that special access rates are inflated, priced far above “just and reasonable” levels as required by Title II of the Communications Act. Unlike various broadband and spectrum initiatives, special access reform has garnered modest media attention and is not a “Top 10 item” on the FCC’s “Broadband Agenda” (actually, its No. 39). On the other hand, the FCC’s priorities beyond the AT&T-T-Mobile merger and USF/ICC reform can change quickly.

Special Access Services. Special access services are dedicated Wireline services (physical circuits, not virtual services) that connect a customer’s premise to its Wireline interexchange carrier’s network and are purchased in high volumes by Wireless carriers for connecting cell sites to mobile switching centers.   DS1 and DS3 are the most common special access services. Rates for special access services are itemized in services agreements between IXCs and enterprise customers.  Large enterprise customers have hundreds and, sometimes, several thousand locations, each having its own special access circuit linking the sites to the “corporate network.”   These customers include retailers, financial institutions, state governments and the Federal government.  Wireless carriers have thousands of cell sites.  Special access services are also extensively used by educational and healthcare facilities as “last mile” connectivity to their Internet access providers.

Special Access Providers. The principal providers of special access services are the regulated local affiliates of AT&T, Verizon, and CenturyLink (now that it owns Qwest) and other incumbent local exchange carriers subject to FCC price cap regulation (‘the price cap LECs”).  AT&T, Verizon, CenturyLink and all other IXCs acquire special access services principally from the price cap LECs. While there is some competition for special access services in urban areas, the extent of competition is limited.  In recent years, AT&T and Verizon have managed to fend off efforts to lower special access rates, vigorously maintaining that special access services are priced competitively.  According to Verizon’s recent 10-K Report, special access service is its only wholesale service generating substantial revenues and demonstrating strong demand—5% annual growth rates in recent years.

Advocates for Lower Rates. Sprint, the Ad Hoc Telecommunications Users Committee, smaller IXCs and numerous Wireless carriers are among the members of the most recent informal coalition Nochokepoints.org advocating reform of special access pricing.  Prior to becoming AT&T’s merger partner, T-Mobile was part of this coalition.

Apart from the obvious benefit of lower rates for a ubiquitous service used throughout our economy,  Wireless carriers—other than AT&T and Verizon—would secure needed cost savings, supporting their efforts to build out 4G networks.  Smaller IXCs, such as Level 3 and tw telecom, could compete more effectively for business from the largest enterprise customers.  In addition, the competitive advantage of AT&T, Verizon and Century Link (special access is a revenue source for these mega-carriers, not solely an essential cost ) over other IXCs would be mitigated to some extent.   Up to several $ Billion annually are at stake.