FCC Helps Verizon's Enterprise Game

People in Washington Tuesday were still weighing the potential effects of the Federal Communications Commission (FCC) 's broad deregulation of Verizon Communications Inc. (NYSE: VZ)'s enterprise broadband business.

Verizon had asked for the regulatory relief in a petition dating back to 2004. The commission faced a Sunday deadline to grant or deny the petition, but commissioners were bitterly divided on their decision. When time ran out, Verizon’s petition was “deemed granted by order of law,” under FCC operating procedure.

Verizon was immediately excused from a host of regulations in such areas as pricing, privacy, and the unbundling of enterprise broadband facilities. (See Verizon Gets FCC Relief.)

Various industry groups lined up Monday and Tuesday to gauge the effects of the petition grant on the enterprise market, and generally get their licks in.

Critics of the FCC's inaction said Tuesday the commission now has left Verizon's large enterprise business almost completely unregulated. The government, they say, now has little control over contributions to the Universal Service Fund (USF) from Verizon's enterprise revenues, its enterprise broadband pricing, or its facilities unbundling practices.

Smaller, regional carriers have perhaps the most to lose from Verizon's new regulatory freedoms. The CLECs' interest group, COMPTEL, was predictably upset at what looked to them like a gift from Little Kevin to Uncle Ivan.

"The Chairman's action yesterday represents the height of irresponsibility by a federal official," said COMPTEL CEO Earl Comstock in a prepared statement. "As a result, competition and consumers are now at the mercy of Verizon's financial self-interest."

The passage of Verizon's request is the latest in a string of broadband deregulation actions by the FCC. The commission last August ruled that carriers no longer must share their consumer broadband facilities with competitors. Verizon has now won similar relief, among other things, for its enterprise broadband facilities. (See FCC Zaps Broadband Carriage Regs.)

Verizon was naturally pleased at its good fortune. “The impact of this petition, which became effective today is that outdated regulation on broadband services is lifted allowing greater flexibility in offering sophisticated high-capacity services in the highly competitive enterprise market,” Verizon regulatory affairs VP Susanne Guyer said in a statement Monday.

Since the FCC didn't issue an order, the exact effects of the petition grant depend in large part on Verizon. If Verizon were to take to extremes its “relief” from regulation, it could stop paying a portion of its enterprise revenue into the USF, sources say. Notably, Verizon pledged in a February letter to the FCC that it would continue paying USF fees on its enterprise revenues.

More likely, Verizon is more free to deny competing CLECs, cable, and wireless providers access to its high-capacity metro access rings. Verizon also no longer must file its high-capacity service rates with the FCC, freeing it to charge enterprise customers on an account-by-account basis.

The granting of Verizon’s petition is all about Verizon’s competitiveness in the enterprise market against the backdrop of a rapidly consolidating telecom industry. (See Ma Bell Is Back!.)

Verizon claimed in its petition that competition is fierce in the enterprise market, and that smaller carriers have the advantage because they are relatively unregulated. Verizon claimed to need relief from pricing and unbundling requirements in order to compete effectively.

The losers in all this may be the large enterprises that buy Verizon's high-capacity services. “I can tell you that for the people who actually have to go out there and buy services, it’s not competitive,” says Colleen Boothby, a Washington attorney representing a consortium of large corporate telecom buyers called the AdHoc Telecommunications Users Committee (AdHoc).

Boothby says prices for high-capacity services have been going up steadily over the last few years as the Bells seek more revenues from the enterprise segment. UBS AG analysts estimate that the high-capacity service market represents roughly a $14 billion business for the Bells -- $5 billion for Verizon, $5 billion for AT&T Inc. (NYSE: T), $2 billion for BellSouth Corp. (NYSE: BLS), and $2 billion for Qwest Communications International Inc. (NYSE: Q).

Meanwhile competition from CLECs and cable companies has been insufficient to control prices, Boothby says.

Boothby says her organization would be the first to ask for deregulation if competition was vibrant in the high-capacity services market. “Every time they deregulate them the price goes up, and we’re kind of sick of that because the prices have been going up steadily,” she says.

Others believe the competitiveness of the enterprise market is exactly why Verizon’s request for deregulation was allowed to go through. “The Verizon/MCI business unit is getting its ass kicked by all these other little guys that can basically sell at any rate, and since they have lower overhead they can charge those lower rates and still make money,” says Hunter Newby, chief strategy officer at carrier connection specialist Telx Group Inc.

“So Verizon had to shed some of those obligations to fund rural and USF-type telephone service plans, and the funding for that was tied to the tariffed rates,” Newby says.

Regardless, many commission watchers and some inside the commission are surprised at the curious way Verizon’s request for forbearance was granted.

As time was running out to grant or deny Verizon's petition, Chairman Kevin Martin circulated a draft order that would have relieved Verizon of some but not all of the regulations on its enterprise broadband business.

Martin apparently agreed that Verizon deserved to be freed of certain rules, but did not want to relinquish all regulatory control. But Commissioners Copps and Adelstein bitterly disagreed with Martin's sympathetic approach to Verizon, and promised to vote against the order. So Martin pulled back his draft order rather than bringing it to a vote in which he had no chance of winning a majority.

With no order issued, Verizon won a broad deregulation of its high-capacity line business for enterprises.

“No doubt in the days and weeks ahead this Commission will be compelled to seek promises from the petitioner and issue follow-on orders in a reactionary attempt to clean up the wreck,” Commissioner Copps wrote in a statement Monday.

“Such are the costs of this abdication of our responsibilities,” Copps wrote. “It is unfortunate that consumers are the ones who will pay the price.”

— Mark Sullivan, Reporter, Light Reading