FCC Revisits Special Access Rules

Published December 1, 2007

The long-simmering struggle over special access fees is heating up as the Federal Communications Commission (FCC) begins accumulating industry input on whether business or technology conditions have changed enough to warrant alterations in how it sets these rates.

FCC’s mid-July call for comments and replies–which were due by the end of October–is part of a comprehensive review of demand, market position of the players, and the current special access rates. Carriers want greater price flexibility and negotiated contract deals where FCC has mandated price caps and fixed tariffs.

Tariffs Problematic

Special access tariffs are the last vestige of FCC’s Unbundled Network Elements Platform (UNE-P) plan, designed to create local competition by forcing the incumbent telephone companies to lease portions of the network to competitive local exchange companies (CLECs). Most of the UNE-P scheme was struck down in the courts, but the portion pertaining to special access has remained.

Special access covers large, dedicated transmission connections between end-user locations and interexchange carrier (IXC) switching centers. FCC requires incumbent local exchange carriers to make the facilities that support these connections–essentially large transmission pipes–available to competitors at regulated, discounted rates. States set the rates according to complex formulas based on historical infrastructure costs, depreciation, and other factors.

Generally, special access rates are capped–that is, incumbents cannot charge rates above a specific ceiling for unbundled elements. Incumbents, citing the cost of new investment and faster depreciation, want more flexibility built into the caps.

More Deregulation Ahead?

The rationale for continuing special access regulation has been that while the market offers choice for basic local exchange service, the incumbent phone companies still dominate the market for wholesale bandwidth connections. The incumbents have long contested this, pointing to bulk bandwidth providers such as Level 3 and Sprint that compete nationwide.

CLECs and large enterprises, arguing for special access rate regulation, say that’s still not enough. They say carrier consolidation in the past several years, especially the acquisitions of MCI and AT&T by Verizon and SBC (which adopted the AT&T name), respectively, have kept competitive choices limited.

In line with this contention, FCC specifically asked about the impact on special access from telecom mergers and other industry consolidations, as well as the impact of the expansion of “intermodal” competition from wireless and Voice over Internet Protocol (VoIP) services and other technological alternatives to special access.

More Info Wanted

FCC also appears to be looking for better ways to estimate costs of special access facilities, which in turn would change the formula states use to set special access rates.

Noting a number of carriers have embarked on significant upgrades to networks to provide high-capacity services to customers, the commission has sought information on projected costs per customer to deploy these facilities, how much capacity competitors believe is necessary to justify building new facilities to serve customers, vendor prices (for high-capacity transmission equipment, outside plant, fiber, and fiber installation), and prices for non-regulated services that provide similar or equivalent capabilities to special access, such as Ethernet and packet-based offerings.

Some Fight for Caps

Since raw bandwidth has become largely a commodity–differentiated only by price–incumbents say CLECs simply use the government-mandated discount to underprice them. CLECs, while not shy about exploiting the facilities-sharing mandate, quietly acknowledge they are relying on the quality of the incumbents’ infrastructure, and the incumbents’ willingness to invest in it, for their success, if not survival.

Greater competitive conditions can trigger FCC and state agency granting of pricing flexibility options as a form of relief from price cap regulation. The onus is often on the incumbents to demonstrate a high level of local competition for special access, but they have been successful, particularly in larger markets.

As of November 2006, only three of the largest 100 metropolitan statistical areas in the United States had no pricing flexibility, according to the National Association of Regulatory Utility Commissioners.

Call for Market Orientation

One early submission to the FCC special access proceeding came from Randolph J. May, president of the Free State Foundation. He told the regulatory agency it should “give heavy weight” to market-oriented regulatory principles. He noted his June 2007 report, “Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” shows how ongoing developments “are rendering the communications marketplace, including the special access segment, increasingly competitive.”

“It would be a mistake for the FCC at this time to take a backwards step by re-regulating special access markets it already has found competitive,” wrote May.

Frank Barbetta ([email protected]) writes from Little Falls, New Jersey.

For more information …

Federal Communications Commission, “Parties Asked to Refresh Record in the Special Access Notice of Proposed Rulemaking,” July 9, 2007: http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-123A1.pdf

Randolph J. May, “Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” published by the Free State Foundation on June 4, 2007, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #22297.