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Regulation

FCC Prepares to Vote on Price Regulation

The relatively bland moniker for special access reform, now known as Business Data Services (BDS), does little to reflect the vicious battle underway at the FCC and throughout the telecom industry over how business networks are regulated, and specifically how access to those networks should be priced.

Make no mistake. The BDS vote scheduled to take place at the Federal Communications Commission (FCC) this Thursday is about pricing regulation, the same issue at the heart of Title II debates over whether Internet connectivity should be treated as a utility service. (See Industry Ignites Over Special Access Regs and FCC's Wheeler: We'll Move Fast on Biz Service Regulations.)

There will be winners and losers with the BDS ruling, and who ends up on which side depends on how much control the FCC exerts.

Background
As described by the FCC, "BDS refers to the dedicated point-to-point transmission of data at certain guaranteed speeds and service levels using high-capacity connections." It includes network connections sold to support business services, carrier backhaul and systems like ATMs and credit card machines. It also includes network access sold to third-party telecom providers who want to add value to these connections and use them to sell their own retail connectivity services.

The BDS industry is a $45 billion market. Even network operators who build their own fiber-optic networks in metro areas, as many are doing, count on buying last-mile access into specific buildings from the incumbent telecom providers who have those connections, which are significantly expensive to duplicate.

Under current regulations, incumbents have to provide unbundled access to their networks for business data services. They also face taxes and price caps that, in theory, determine what they can charge customers for that access.

Over many years, however, incumbents have sought and received forbearance from pricing controls, and the FCC now says that: "As a result of these forbearance actions, the Commission's dominant carrier safeguards requiring tariffs and regulating the rates of business data services now have limited application."

Stated more plainly, incumbents can largely set their own prices for local business network connectivity, and in the many regions where competition is limited, those prices are high; sometimes even higher than the rates set for retail network access.

As for the state of competition, according to FCC research, 73% of all US markets have only one special access provider, while 24% have two providers, and only 3% have three or more.

The FCC's proposal for reform
The FCC says its goal with BDS reform is to deregulate the industry where competition exists, and re-regulate it where more competition is needed. As a result, the agency has put forth a proposal that includes the following recommended actions:

  • No more tariffs
  • No more classifying telecom providers as either dominant or non-dominant carriers
  • Implement a new Competitive Market Test to determine where competition exists
  • Ensure that any regulations imposed are technology neutral, i.e. apply equally to networks powered by copper, fiber, hybrid fiber-coax, etc.
  • Institute price caps on access to legacy TDM networks in non-competitive markets
  • For all networks in non-competitive markets, use as a guiding principle and general rule that wholesale prices should be set in relation to retail prices for any given service

When the Commission votes on the proposal this week, it is expected to approve the order with a 3-2 majority. Democrats Tom Wheeler, Mignon Clyburn and Jessica Rosenworcel are expected to vote in favor of the ruling. Republicans Ajit Pai and Michael O'Rielly are expected to vote against it.

Winners and losers
Ironically, while the FCC has come down along party lines with regard to BDS reform, the telecom industry has split into uncharacteristic alliances. Incompas , the trade association serving competitive telecom networks, and Verizon Communications Inc. (NYSE: VZ), an incumbent provider, have teamed up in support of reform, while other telecom providers including AT&T Inc. (NYSE: T), CenturyLink Inc. (NYSE: CTL) and Frontier Communications Corp. (NYSE: FTR) have aligned with the cable industry in opposition. The first group says reform will stimulate competition and accelerate the transition to new network technologies. The second group argues that new BDS regulations will cause more harm than good, discouraging further network investments, costing jobs and reducing economic output.

Perhaps unsurprisingly, the divisions in the industry have less to do with regulatory principle than they do with good old-fashioned economic self-interest.

"It goes to demonstrate that the market is changing," says Incompas CEO Chip Pickering, speaking on why Verizon is now in line with Incompas on the BDS issue. "For Verizon, the very high prices for backhaul was something that would slow their drive to be a leader on 5G. And as they go out of region for their wireless services, they were encountering the same problems that our member companies, who serve all parts of the market from business to backbone to backhaul, that we were facing -- these high monopoly rents and prices. So the changing the needs of a company like Verizon, the strategies of a company like Verizon, did give us enough common business ground."

While Verizon and many of today's smaller telecom providers think they will come out economic winners if BDS reform passes, several other incumbent telcos see economic losses ahead if BDS reform goes through. As an example, Frontier put out a statement last month saying that if the FCC imposes new pricing caps, the telco could see a $10 million drop in revenue in 2017, with losses potentially reaching $20 million in both 2018 and 2019.


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And then there's the cable industry. Cable operators are relatively new to the business services market and argue that as new entrants, they shouldn't be subjected to burdensome regulations. In a statement in April, the National Cable & Telecommunications Association (NCTA) asserted that: "Cable's entry into the market for business data services over the last few years has resulted in improved services and lower prices for businesses all across America. It is disappointing that Chairman Wheeler is responding to this unquestionably positive development by asking the Commission to consider imposing onerous new rate regulation on these competitive services."

As an important clarifying point, the passage of BDS reform is likely more of a long-term issue for cable operators than a short-term one. As new market entrants that also don't rely on legacy TDM infrastructure, they should be less of an immediate target for price controls than some of their telco counterparts. In fact, the FCC has specifically stated in a BDS fact sheet that "rates of new entrants and parties with smaller market shares are unlikely to be questioned."

However, regardless of timing, the cable industry would prefer not to be subject to price regulations at all. In a blog post in September, the NCTA argued that "the undisputed evidence is that BDS investment is growing, prices are declining and competition is increasing." And has added NCTA added that the complexity of the BDS industry makes it more likely that regulation will have an adverse effect on investment and growth.

What happens next?
The BDS debate would be difficult enough to navigate in a non-election year, but it's even more so now with a change in power coming to the White House. After President-elect Donald Trump takes over in January, the FCC will also make a shift to new Republican leadership, and that could have a direct impact on how business data services are ultimately regulated. The assumption is that the BDS vote will pass this week, but whether it sticks in 2017 is another question altogether. (See Trump Win Will Reshape FCC .)

Asked whether he thinks BDS reform will stay in place after this year, Pickering says, "We'll take it one day at a time."

But Pickering acknowledges that the fight over business data services isn't likely to end with Thursday's FCC vote. "I'm sure that come January we'll need to have another conversation and see where we are."

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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