Developing a New Regulatory Framework for Business Data Services (Special Access), 36029-36075 [2016-12058]
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Vol. 81
Friday,
No. 107
June 3, 2016
Part V
Federal Communications Commission
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47 CFR Part 69
Developing a New Regulatory Framework for Business Data Services
(Special Access); Proposed Rule
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Federal Register / Vol. 81, No. 107 / Friday, June 3, 2016 / Proposed Rules
FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Part 69
[WC Docket Nos. 16–143, 15–247, 05–25 and
RM–10593; FCC 16–54]
Developing a New Regulatory
Framework for Business Data Services
(Special Access)
Federal Communications
Commission.
ACTION: Proposed rule.
AGENCY:
In this document, the Federal
Communications Commission seeks
comment on replacing the existing,
fragmented regulatory regime applicable
to business data services (BDS) (i.e.,
special access services) with a new
technology-neutral framework, the
Competitive Market Test, which
subjects non-competitive markets to
tailored regulation, and competitive
markets to minimal oversight.
DATES: Comments are due on or before
June 28, 2016; reply comments are due
on or before July 26, 2016. Written
comments on the Paperwork Reduction
Act proposed information collection
requirements must be submitted by the
public, Office of Management and
Budget (OMB), and other interested
parties on or before August 2, 2016.
ADDRESSES: You may submit comments,
identified by WC Docket Nos. 16–143,
15–247, 05–25 and RM–10593, by any of
the following methods:
• Federal Communications
Commission’s Web site: https://
apps.fcc.gov/ecfs/. Follow the
instructions for submitting comments.
• People With Disabilities: Contact
the FCC to request reasonable
accommodations (accessible format
documents, sign language interpreters,
CART, etc.) by email: FCC504@fcc.gov
or phone: 202–418–0530 or TTY: 202–
418–0432.
For detailed instructions for
submitting comments and additional
information on the rulemaking process,
see the SUPPLEMENTARY INFORMATION
section of this document. In addition to
filing comments with the Secretary, a
copy of any comments on the
Paperwork Reduction Act information
collection requirements contained
herein should be submitted to the
Federal Communications Commission
via email to PRA@fcc.gov and to Nicole
Ongele, Federal Communications
Commission, via email to
Nicole.Ongele@fcc.gov.
FOR FURTHER INFORMATION CONTACT:
Christopher Koves, Pricing Policy
Division, Wireline Competition Bureau,
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SUMMARY:
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202–418–8209 or Christopher.Koves@
fcc.gov. For additional information
concerning the Paperwork Reduction
Act information collection requirements
contained in this document, send an
email to PRA@fcc.gov or contact Nicole
Ongele at (202) 418–2991.
SUPPLEMENTARY INFORMATION: This is a
summary of the Commission’s Further
Notice of Proposed Rulemaking
(FNPRM), WC Docket Nos. 16–143, 15–
247, 05–25 and RM–10593, FCC 16–54,
released May 2, 2016. The summary is
based on the public redacted version of
the document, the full text of which is
available here: https://apps.fcc.gov/
edocs_public/attachmatch/FCC-1654A1.pdf. To request alternative formats
for persons with disabilities (e.g.
accessible format documents, sign
language, interpreters, CARTS, etc.),
send an email to fcc504@fcc.gov or call
the Commission’s Consumer and
Governmental Affairs Bureau at (202)
418–0530 or (202) 418–0432 (TTY).
Pursuant to Sections 1.415 and 1.419 of
the Commission’s rules, 47 CFR 1.415,
1.419, interested parties may file
comments and reply comments on or
before the dates indicated on the first
page of this document. Comments may
be filed using the Commission’s
Electronic Comment Filing System
(ECFS). See Electronic Filing of
Documents in Rulemaking Proceedings,
63 FR 24121 (1998), https://www.fcc.gov/
Bureaus/OGC/Orders/1998/
fcc98056.pdf.
• Electronic Filers: Comments may be
filed electronically using the Internet by
accessing the ECFS: https://apps.fcc.gov/
ecfs/.
• Paper Filers: Parties who choose to
file by paper must file an original and
one copy of each filing. If more than one
docket or rulemaking number appears in
the caption of this proceeding, filers
must submit two additional copies for
each additional docket or rulemaking
number.
Filings can be sent by hand or
messenger delivery, by commercial
overnight courier, or by first-class or
overnight U.S. Postal Service mail. All
filings must be addressed to the
Commission’s Secretary, Office of the
Secretary, Federal Communications
Commission.
Æ All hand-delivered or messengerdelivered paper filings for the
Commission’s Secretary must be
delivered to FCC Headquarters at 445
12th St. SW., Room TW–A325,
Washington, DC 20554. The filing hours
are 8:00 a.m. to 7:00 p.m. All hand
deliveries must be held together with
rubber bands or fasteners. Any
envelopes and boxes must be disposed
of before entering the building.
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Æ Commercial overnight mail (other
than U.S. Postal Service Express Mail
and Priority Mail) must be sent to 9300
East Hampton Drive, Capitol Heights,
MD 20743.
Æ U.S. Postal Service first-class,
Express, and Priority mail must be
addressed to 445 12th Street SW.,
Washington, DC 20554.
People with Disabilities: To request
materials in accessible formats for
people with disabilities (braille, large
print, electronic files, audio format),
send an email to fcc504@fcc.gov or call
the Consumer & Governmental Affairs
Bureau at 202–418–0530 (voice), 202–
418–0432 (tty).
I. Introduction
1. Business data service (BDS) is
critical to the delivery of innovative
broadband services for businesses and
government institutions and is a major
contributor to the nation’s economy.
Incumbent LECs and competitive
providers reported revenues of almost
$45 billion for 2013 for the sale of
dedicated services. It is, however,
important to recognize that BDS is an
important input (sometimes selfsupplied) in the broader market for
enterprise services, which include
voice, Internet, private network, websecurity, cloud connection, and other
digital services. Available information
suggests that the annual revenues for the
broader enterprise services industry
could exceed $75 billion annually.
2. In this FNPRM, we provide our
analysis to date of the 2015 Collection.
We then seek comment on a number of
proposals to establish a new regulatory
paradigm for BDS to more appropriately
address the technological changes
occurring today and to facilitate the
continued evolution of the type of
robust competition that will result in
ever-improving services for American
businesses and consumers. To that end,
the FNPRM seeks to develop a
technology-neutral framework that no
longer classifies BDS through the legacy
prism of traditional services and
company classifications. Rather, the
Commission seeks to enter a new era
where regulatory determinations are
made based on whether a market is
competitive and the concomitant
regulatory obligations apply to all
providers, looking to legitimate
differences in products, places, and
customers. The goals of this FNPRM are
supported by the joint principles
recently announced by INCOMPAS and
Verizon urging the Commission to
‘‘adopt a permanent framework for
regulating all dedicated services in a
technology neutral manner.’’ That two
of the entities who were once
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diametrically opposed have joined
together urging the Commission to
adopt such principles is further
evidence of the evolution in the BDS
market today and the need for this new
paradigm to harmonize regulation with
the changing technology.
II. Further Notice of Proposed
Rulemaking
A. Competition Analysis
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1. Our Approach
3. We analyze the data collected and
the evidence submitted in this
proceeding to reach preliminary
evaluations as to the degree of
competiveness in BDS markets. Our
public interest evaluation necessarily
encompasses the ‘‘broad aims of the
Communications Act,’’ which include,
among other things, a deeply rooted
preference for preserving and enhancing
competition in relevant markets with
increased private sector deployment of
advanced services. In conducting this
analysis, we take a forward-looking
view of technological and market
changes.
4. We examine the effectiveness (and
likely effectiveness) of competitive
restraints, to identify where market
power exists in BDS markets. We focus
our analysis on BDS prices, and terms
and conditions, and consider the
effectiveness of current competitive
restraints and whether market power,
where it exists, has enabled
unreasonable pricing or other practices
or an ability to unlawfully exclude
competition.
5. To distinguish product markets, we
generally look to include products in
the same market if they are reasonably
interchangeable, with differences in
price, quality, and service capability
being relevant. In the case of geographic
markets, we look to supply, rather than
demand substitution. For both product
and geographic markets, we do not
believe it is necessarily required to
engage a formal hypothetical
monopolist test considering likely
consumer substitution if a hypothetical
monopolist imposed at least a small but
significant and non-transitory increase
in price (SSNIP), taking a more direct
approach to demonstrate the use of
market power.
2. Product Markets
6. In our data collection we defined
BDS as a dedicated end-to-end
telecommunications service. Leading
technologies of this type are DS1s and
DS3s, typically carried over copper
pairs, which account for the majority of
the BDS revenue in 2013 according to
these data. DS3 lines carry about 30
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times the bandwidth of a DS1 line,
which is a symmetric 1.5 Mbps service.
It is also possible to achieve higher
bandwidth levels over other circuitbased technologies. An alternative to
circuit-based technology is packet-based
service, more commonly delivered over
fiber optic cable or HFC cable using a
standard called DOCSIS. Fiber can
deliver higher bandwidth and service
levels, and most new investment is in
fiber optic and coaxial cable, and in
next generation DOCSIS 3.1 electronics.
Cable companies also provide BDS at
competitive rates over the coaxial-fiber
hybrid technology, commonly referred
to as ‘‘Ethernet over DOCSIS,’’ that have
characteristics of BDS carried over fiber:
It can be used to provide access to the
Internet and point-to-point
communications (such as a virtual
private network); it is generally
available at symmetric bandwidths up
to 10 Mbps; and is often supplied with
service reliability guarantees, even if not
at the same level as what is typically
offered over fiber. We agree with several
commenters recognizing that since this
proceeding began in 2005, there has
been significant innovation, investment
and deployment of IP-based
technologies, and DOCSIS relied on by
cable companies, and that increasingly
business customers purchase these
technologies instead of TDM services.
However, many business customers
continue to rely on TDM services.
7. We described best efforts services
above. Several commenters, including
certain competitive LECs, claim that
best efforts Ethernet over DOCSIS
provided by cable companies does not
provide the requisite dedicated access
needed by certain, notably mid-sized
and larger business customers and
carriers, even if it meets other demands.
Other commenters contend the
Commission should include best efforts
DOCSIS cable service within a broader
product market definition.
8. We believe it is likely that best
effort services may not be in the same
product market or markets as BDS. The
prices of best efforts services are
considerably lower than the prices of
roughly comparable BDS. Compared
with BDS, best effort services are less
reliable, notably in terms of guaranteed
uptime, and other service level
guarantees; in some cases do not offer
higher bandwidths; and
characteristically lack upload/down
symmetry. Although fit for many
customer purposes, best efforts services
do not meet the requirements of all BDS
purchasers, nor is it offered by sellers as
a product intended for all customers.
Sellers generally distinguish best effort
services from other BDS products to
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meet customer needs at the right price
point, and organize sales efforts
accordingly. Finally, underlying
characteristics of the way best efforts
services are supplied can make it hard
for certain higher quality BDS to be
supplied on the same network as best
efforts services. We seek comment on
this view.
9. If two readily available services
have substantially different prices, then
they are likely dissimilar (otherwise
buyers would prefer the cheaper service
which would constrain the price of the
other service). Best efforts services are
uniformly the least cost alternative
offered by carriers, with the lowest
functionality. Prices for best efforts
services typically start at levels
consistent with residential broadband
service, increasing as service speed,
capacity and reliability increase. For
example, ‘‘Comcast’s Business Internet
service is available for purchase online
starting at $69 per month for its 16/3
Mbps service.’’ Verizon similarly offers
a variety of best efforts services under
$100, beginning with a ‘‘Starter’’
package with speeds up to: 1 Mbps
download/384 Kbps upload (‘‘Best for:
Single—person business, Light Internet
use’’) to the ‘‘Fastest’’ with speeds up to
10–15 Mbps download/1 Mbps upload
(‘‘Best for: Multiple employees, Onlinebased business eCommerce with
orders’’), with prices ranging from
$39.99 to 94.99 per month. Verizon’s
Fios ranges from 50/50 Mbps to 500/500
Mbps, with prices from $49.99 to 269.99
per month. TWC offers six best efforts
products online, ranging from $14.99 for
(‘‘up to’’) 2 Mbps download/1 Mbps
upload to $64.99 for (‘‘up to’’) 50 Mbps
download/5 Mbps upload. In contrast to
these best efforts services, TWC’s
average monthly BDS pricing ranges
from [REDACTED].
10. That demand exists for symmetric
[REDACTED], and customers do not
switch to available best efforts services
with at least as much bandwidth in both
directions that are priced at
approximately one tenth of that level
(compare with the FiOS 50/50 price of
$49.99), implies some customers must
value certain characteristics of BDS
highly relative to best efforts service.
This suggests such customers would be
unlikely to be tempted to switch to a
best efforts service even if its price were
to fall by a significant amount. It also
suggests a customer currently
purchasing a best efforts service would
not switch to a BDS with a price of
several multiples of the best efforts
service, even if the BDS price were to
fall significantly.
11. In fact, the characteristics of best
efforts service and BDS appear to be
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very different. BDS comes with
substantial reliability guarantees and
functionality that do not accompany
best efforts services, leading us to the
view that the two services do not play
important roles in constraining the
quality-adjusted prices of each other.
Consistent with the observed price
differences between the different types
of services, some end users do not
require ‘‘mission critical’’ connectivity,
and prefer best efforts services to BDS,
prioritizing cost savings over reliability
and specific functionality. Other end
users are willing to pay considerably
more for services that include greater
(particularly upload) speeds, are more
reliable, and come with more rigorous
guarantees. Sprint, for example,
[REDACTED]. Best efforts services do
not satisfy these requirements.
12. BDS uptime reliability is also
generally higher than with best efforts
services. For example, Windstream on
its Web site contrasts an Ethernet
Internet service with a 99.99% uptime
guarantee with cable (presumably) best
efforts services, while best efforts
services do not typically come with
such guarantees. AT&T’s best efforts
Broadband SLA applicable to its High
Speed Internet Business Edition family
of services (AT&T U-verse® HSIBusiness Edition; AT&T High Speed
Internet Business Edition; and
FastAccess® Business DSL) comes with
a guarantee of 99.9% uptime. The AT&T
‘‘three nines’’ service (99.9%) service
permits approximately 8.76 hours of
downtime a year, plus disclosed
allowances for many other downtime
events, which are material to the
offering and, as discussed immediately
above, would not be acceptable for
many users. ‘‘Comcast best efforts
Business Internet service is sold without
SLAs or contractual performance
objectives.’’ Comcast best effort offers
include seven Internet packages online
ranging from a 3 Mbps, ‘‘Economy Plus’’
service to a 2000 Mbps, ‘‘Xfinity Gigabit
Pro’’ service; each of the seven Comcast
services include a disclaimer, ‘‘Actual
speeds vary and are not guaranteed.’’
And in contrast Comcast BDS, like those
of Windstream and AT&T, come with
considerably greater reliability
guarantees. Comcast ‘‘business class
data services come with a variety of
performance metrics and assurances,’’
which for Ethernet transport services
include an SLA ‘‘committing to
[REDACTED] for fiber-based service and
[REDACTED] for HFC-based service,
with penalties for failure to meet those
service levels.’’ Similarly, without a
guaranteed throughput speed, ‘‘Time
Warner Cable offers six Internet speed
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options, up to 50 Mbps in most
locations and up to 300 Mbps in select
areas.’’ Time Warner Cable guarantees
for its Business Internet Access (BIA)
service vary slightly from Comcast,
‘‘[w]hile TWC’s BIA service may be just
as [REDACTED], leading certain
customers to choose one service over
the other.’’ Moreover, as discussed
above, the price differences for these
services are large, suggesting customers
highly value the product differential
BDS has over best effort services.
13. We seek comment on these
analyses. We ask whether the
Commission should consider alternative
factors or aspects of the market and
invite parties to submit alternative
evidence in the record.
14. Some commenters argue that
packet BDS place competitive pressure
on TDM BDS. TDM BDS offers point-topoint connectivity in essentially the
same way that packet BDS does. Since
each technology can be used for the
same purposes, this suggests that they
are in the same product market. This is
not to say that there are no differences
between packet and TDM services. For
example, while both perform similar
roles, Ethernet is more easily scaled.
15. But Existing Customers Can Face
High Switching Costs. Record evidence
suggests that once a customer has
installed a business data service, it faces
high costs in switching. Consequently,
switching most commonly occurs when
a customer outgrows its service, for
example, requiring a demand not
available on their current service, or
because they need the functionality of a
different technology (most usually
leading to a switch from TDM to packet
BDS). In particular, high switching costs
can both slow the transition from TDM
to packet BDS and limit the potential
market for packet BDS which could in
turn limit investment.
3. Customer Markets
16. Carriers organize how they market
around distinct fairly similar customer
groups. These customer groups also
have their own distinct characteristics,
and hence distinct service requirements.
As Comcast explains, ‘‘although all of
Comcast’s business class data services
may be used by various types of
customers, the unique needs of certain
customers may make one service more
appropriate than others.’’ Put together
these facts suggest the possibility of
separate customer markets. In
particular, if supply to a first customer
group cannot be readily extended to
supply to a second, then supply to the
first customer group may not place
material competitive constraints on
supply to the second. We seek comment
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on whether such customer markets are
possible in the supply of business data
services, and if so, what these are. We
are particularly interested in the extent
that multisite customers may fall into
such a category as we propose below.
17. At a high level, possible customer
categories are retail purchasers of
business data services and carrier
purchasers. These groups, in turn, could
be further subdivided. Retail purchasers
of business data services come in all
shapes and sizes, and include retail
businesses, governmental and
educational institutions, and other
enterprises that require dedicated
enterprise services. Their needs vary
depending on, among other factors, the
number of employees and locations they
have, the volume of their traffic, and the
technological sophistication of the
services they require. Many call for a
competitive wholesale BDS access
market. Large businesses are especially
likely to require ‘‘high quality phone
and Internet services’’ that ‘‘depend
upon special access services as the
building blocks of their corporate
networks, from workhorse DS1s to the
growing number of Ethernet
connections to the highest capacity
OCns.’’ Medium-sized and small
businesses also require ‘‘advanced IP
and fiber connections,’’ which are
‘‘mission critical.’’ Retail banks, for
example, ‘‘rely heavily on broadband
service’’ to enable ‘‘financial
transactions and provide [customer]
support in a timely fashion.’’ Reliable
broadband connections also allow brick
and mortar companies to meet customer
needs ‘‘as efficiently and effectively as
possible’’ and to ‘‘enhance the customer
shopping and buying experience.’’
18. Most larger, sometimes called
enterprise, customers require
connections to more than one site, and
some, such as retail banks, and large
retail sales outlets, may require many
sites in diverse locations, often in areas
with limited business density.
Moreover, at many of these locations
such large customers may only have low
bandwidth requirements, even if each
connection must have a high degree of
reliability (for example, in the case of a
retailing outlet, to ensure rapid credit
card processing) and/or be highly secure
(in the case of a retail bank). Larger
customers are typical users of dedicated
fiber-based, symmetric services; some
have service demands for a limited
geographic area while others require
service for any number of locations
within the country. Multi-location
customers are often provisioned by BDS
providers that ‘‘have a broad regional
footprint without significant gaps in
coverage to serve large enterprises with
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multiple sites across given geographic
regions effectively.’’ Such providers
may be relatively rare. We seek
comment on our implicit finding below
that such ‘‘spread-out’’ multi-site
customers may be sufficiently distinct
from other customers to constitute a
separate market (below we find that
competitive supply to other customers
may not place a competitive constraint
on supply to these ‘‘spread-out’’ multisite customers), especially to the extent
that such customers require lower
bandwidth, highly reliable, services in
areas with lower business densities,
may not face the same competitive
choices as other customers.
19. Carrier purchasers are different
again. They are typically large and
sophisticated buyers, with substantial
capacity to leverage scale, for example,
in seeking tenders to supply. Wireless
carriers rely on business data services to
connect their radio towers to their
mobile switching centers. Mobile
carriers purchase business data services
often with bandwidths of around 50
Mbps and greater, but small cell
demands, which look set to grow, may
generally require lower bandwidths, and
may require backhaul to many locations
with low levels of business density.
Sprint, a purchaser of wireless backhaul
transit services, explains that it requires
a specific BDS capable of more than
traditional copper twisted pair and
coaxial cable can support. Even where
next-generation HFC is available, it is
more suitable for mid-range demands.
Sprint, for example, describes Ethernet
over HFC as a poor substitute for fiberbased services because [REDACTED].
Sprint specifically notes that its
macrocell sites [REDACTED] and a
service level guarantee not available for
generally best efforts or mid-tiered
products.
20. Competitive LECs purchase BDS
wholesale to sell retail services to end
users. They do this where the
purchasing competitive LEC does not
currently have network and where
extending their networks would not be
profitable. While competitive LEC
demand reflects end-user demand and
so is highly diverse, competitive LECs
again have the ability to leverage scale.
We seek comment on whether carrier
purchasers have countervailing power
even when dealing with an entity that
may otherwise have market power, and
whether they need different protections
than end users.
4. Geographic Markets
21. In this section, we express the
view that the likely BDS geographic
market, even for lower bandwidth
services, likely extends beyond the area
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of the average Census block in which
there is BDS demand. We come to this
assessment by focusing on supply-side
substitution, and seek comment on how
we might refine this definition.
22. Relevant geographic markets are
often determined by estimating demand
side response if a hypothetical
monopolist in a specified region, facing
competition from beyond that region,
tried to set prices above competitive
levels. In this industry, given that most
BDS customers would not shift their
location to purchase special access from
a different carrier, we focus on the
supply response, that is—under what
circumstances, if any, will nearby
suppliers geographically extend their
existing facilities distances to obtain
new consumers. If suppliers were
generally willing to extend their
networks to meet nearby demand, then
they would place a degree of
competitive pressure on the prices
nearby customers would face.
23. Geography also impacts product
substitution. In certain areas, higher
bandwidth services are not available
due to the lack of technical capability.
Available service could be limited in
speed and capability to best efforts and
similar, lower-level service levels that
are provisioned over copper and coaxial
lines. Increased service speeds,
capacity, and guarantees are not
available unless and until a BDS
provider builds or extends new facilities
(such as fiber or a hybrid technology) in
a range close enough to the customer to
readily extend a service that replaces
best effort. Sprint points out, for
example, that Ethernet over HFC ‘‘is not
yet available in all business locations
served by ILEC special access—nor at
most cellular tower sites.’’
24. We consider it unlikely that BDS
supply in one part of an MSA would
constrain the provision of BDS where it
is demanded everywhere in the MSA.
However, we also see good evidence
that the presence of fiber competition
not only could be expected to impact,
but actually can impact, supply of lower
bandwidth services over the whole
Census block in which that fiber is
located. This suggests a geographic
market definition for lower bandwidth
BDS lies somewhere above the average
area of the Census block with BDS
demand and below the MSA. We seek
comment on these assessments and how
to refine them. We seek this information
for the purpose of developing an
administratively feasible test for
determining where we can replace
regulation with market forces.
25. In the Suspension Order, the
Commission explained that ‘‘demand
varies significantly within any MSA,
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with highly concentrated demand in
areas far smaller than the MSA’’ and
some areas with little or no demand.
Our record reinforces that view. The
Commission stated that competitive
entry is considerably less likely to occur
in areas of low demand, regardless of
whether other areas within the MSA
contain sufficient demand to warrant
competitive entry. The Commission also
observed that ‘‘competitors have a
strong tendency to enter in concentrated
areas of high business demand, and
have not expanded beyond those areas
despite the passage of more than a
decade since the grant of Phase II
relief.’’
26. The distances competitive LECs
are generally willing to extend their
facilities to reach potential customers
beyond the locations they currently
reach are quite short. These distances,
which vary among competitive LECs
and business opportunities, typically
range from [REDACTED]. In fact, the
distance Comcast will generally build
within [REDACTED]. Similarly, TDS
Metrocom estimates the average length
of its competitive LEC’s fiber laterals is
[REDACTED]. Most [REDACTED]. If an
end point of a ‘‘transport facility is
outside a [central business district], and
perhaps the first ring of suburbs . . . the
competitive presence is far less. . . . As
a result, these non-[central business
district] areas are largely served only by
ILEC facilities.’’ Buildouts of
[REDACTED] and farther occur, but
variables, including cost and demand
factors, entailing traditional return-oninvestment calculations, become
increasingly determinative as the
distance from a cost-effective and viable
fiber junction point increases, which
‘‘are often collocated at or housed near
ILEC central offices.’’ Incumbent LECs
have similar buildout criteria. AT&T, for
example, ‘‘engineering guidelines
demonstrate that AT&T engineers its
network to maintain lateral distances at
or below about [REDACTED].
27. Responses to the data request
indicate that competitive buildout to
customers becomes increasingly less
likely with a potential customer at a
location [REDACTED] or farther away.
Narrative descriptions of how far
competitive carriers will buildout
broadly align with observations of data
submitted. For example, Cbeyond
reported its ‘‘maximum build distance’’
is a ‘‘distance of [REDACTED] from
existing lit fiber of a competitive fiber
provider.’’ TDS METROCOM explained,
‘‘If the location is beyond [REDACTED]
experience has shown us that customers
are not willing to pay the extra monthly
cost that would be required to pay for
such an expensive build.’’ Cablevision
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Lightpath reported [REDACTED]
buildout parameters, requiring a
potential customer ‘‘be within
[REDACTED] of a splice point in [its]
core network,’’ excluding certain areas
of density, and ‘‘[i]f [REDACTED] from
splice point, no business case is
required [while] [b]uild[ing]
[REDACTED] from splice point involves
ROI [analysis].’’ XO similarly notes that
‘‘[REDACTED] or less from its existing
fiber infrastructure’’ is most attractive,
while ‘‘buildings that are 200 feet or less
from exiting fiber assets are of particular
interest.’’ The distances and build
criteria reported by Submitting Parties
are generally in-line with that the
Department of Justice in 2006. Beyond
these general distances (and to a lesser
extent within these distances), carriers
typically rely on long-term loyalty
agreement to guarantee a return-ofinvestment.
28. These buildout distances, which
rarely exceed [REDACTED] are orders of
magnitude less than those encountered
in an MSA. For example, the smallest
MSA, Carson City, Nevada has a land
area of 144.7 square miles. If
competitive fiber is deployed in the
center of Carson City, it will be 6.9
miles from Mound House, Nevada, or
5.8 miles from Indian Hills, Nevada.
Moreover, the Carson City MSA is quite
small. The land area of the average
MSA, 2,494.5 square miles, is 17.2 times
larger than the Carson City MSA. In fact,
the largest MSA, Riverside-San
Bernardino-Ontario, California, has a
land area of 27,263.4 square miles. If
competitive fiber is deployed in the
center of Riverside, it would be 20.6
miles from Chino, California. Indeed,
MSAs are large geographic areas that
‘‘often contain smaller geographic areas
across which competitive conditions are
widely disparate.’’ As the Commission
has observed, ‘‘MSAs are comprised of
communities that share a locus of
commerce, but not necessarily common
economic characteristics as they relate
to telecommunications facilities
deployment . . . Due to the wide
variability in market characteristics
within an MSA, MSA-wide conclusions
would substantially over-predict the
presence of actual deployment, as well
as the potential ability to deploy.’’
29. Census tracts are large relative to
the deployment distances discussed
immediately above. If the median
Census tract in which we observe BDS
demand were a circle, it would be
approximately 1.5 miles across.
Moreover, the geography of Census
tracts vary significantly. A circular tract
at the 75th percentile would be around
2.6 miles across. In contrast, if the
median Census block were a circle, then
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it would be approximately 0.2 miles
across. Again Census blocks can be
significantly larger than the median. If
the Census block at the 75th percentile
were circular, then it would be around
0.4 miles across. This analysis suggests
that a supplier’s presence anywhere in
most, if not all, Census blocks could
have a material competitive effect on
other suppliers. It also suggests that a
supplier’s presence anywhere in smaller
Census tracts could have a material
competitive effect on other suppliers.
This is consistent with the analysis
contained in the Rysman White Paper,
and in the Baker Declaration, which
suggests that the presence of a fiber
competitor can have material
competitive effects on lower bandwidth
services in Census blocks in which we
see BDS demand.
30. We seek comment on how close
competition must be to place material
competitive pressure on supply at a
given location, and whether this
distance might vary with the nature,
most notably the bandwidth, of the BDS
in question. We also seek comment on
how such analysis might be developed,
and call for that analysis to be
undertaken. For example, recognizing
that Census tracts and Census blocks
vary in size, we recently placed in the
secure data enclave information on the
distance from all locations with BDS
demand to the nearest competitive
providers’ fiber networks. Consequently,
regression analysis might be used to
identify the range over which distant
networks no longer have material
competitive effects.
5. Concentration by Any Measure
Appears High in This Industry
31. In this section, we report several
measures of geographic concentration,
including at the national level. What
these measures show are uniformly high
levels of concentration. While we
remain agnostic as to what the right unit
or units of geography are for measuring
concentration (noting these might also
vary for different services and customer
groups), we expressly reject the idea
that many, if any, BDS markets are
national in scope (it is unlikely that a
supplier’s presence in Miami constrains
prices in Seattle). To the extent that
markets are not national, national
measures of concentration likely
understate both market concentration
measures and the shares of incumbent
LECs. While national revenue shares
make sense from the perspective of
incumbent LECs, whose territories do
not overlap, and which, in aggregate,
cover all price cap territories, national
shares greatly exaggerate competitive
LEC presence, since there are many
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geographically diverse, and in some
cases very small, competitive LECs,
none of which competes across all the
incumbent price cap LECs’ footprints.
32. As part of our data collection,
carriers reported their aggregate BDS
revenues. These provide an approximate
indication of the revenue shares of
different provider types supplying
sophisticated services to end users, that
is, of revenue shares in the supply of
BDS and more complex managed
services. As the pie chart below shows
independent competitive LECs, that is,
competitive LECs not affiliated with
incumbent LECs, only capture 18% of
BDS revenues. However, this estimate is
subject to three biases, which in
aggregate overstate the shares of
independent LECs. First, a greater
proportion of incumbent LECs’ sales of
BDS and managed services are BDS as
compared with competitive LECs, a bias
that likely overstates incumbent LEC
revenue shares. Second, because a valid
measure of concentration would
measure facilities-based revenues, rather
than resale revenues, and because a
substantial proportion of incumbent
LEC BDS sales are to competitive LECs
who then resell those services, the
preceding bias is likely to be more than
offset (managed service revenues earned
on the resale of incumbent LEC BDS
will be greater than the LEC BDS sales
to the resellers). Third, there is the bias
identified immediately above from
measuring national shares.
33. In 2013, cable companies reported
nearly two billion in BDS sales (or less
than 5% of all sales). However, because
cable BDS revenues have been growing
at around 20 percent per year, by the
end of 2016 cable BDS revenues will be
close to $3.5 billion (likely still less than
eight percent of BDS revenues).
34. This section considers the extent
to which in 2013 there was competition,
as indicated by various measures of the
number of rivals (for example, by
counting or excluding competition
based on UNEs and/or HFC with
DOCSIS 3.0) at the level of the unique
location, Census block and ZIP code.
We take this broad approach because, as
discussed above, we are agnostic as to
the exact geographic range of BDS
markets. In particular, we do not yet
know is how much competitive pressure
different forms of supply place on other
suppliers, or how many suppliers,
accounting for their differences, are
sufficient to make prices effectively
competitive (matters we have sought
comment on above). Moreover, the
Rysman White Paper suggests that
competitive effects may occur at the
level of the building, even when there
are additional competitive effects from
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more distant competition. Under all
these measures, market concentration is
large. For example, when counting fiber,
and DOCSIS 3.0 over HFC and UNE
supply as forms of competition, we find
more than ten percent of unique
locations with BDS demand are
supplied by one provider, and that
slightly over half of such locations are
only supplied by two providers (so
2⁄3rds of such locations have only a
choice of one or two suppliers).
35. Table 3 considers how many
unique locations have one through six
suppliers in the location, under two
measures of competition. In both cases,
the incumbent LEC is considered
ubiquitous, and ILEC-affiliated supply is
counted as competitive, but in the first
case (the left side of the table), only
competitors with fiber in the building
are counted, while in the second,
competition over UNEs is also counted.
Under both cases, more than half of all
unique locations only have one
supplier, and less than five percent have
three or more.
36. In 2013, cable companies reported
being able to serve something just over
150,000 unique locations (or less than
15 percent of unique locations with BDS
demand), almost entirely on their own
facilities (cable companies make limited
use of UNEs). Looking forward, if cable
adds 20 percent more lines every year
(in line with historic BDS revenue
growth), then at the end of 2016 cable
would be able to serve over 260,000
unique locations. However, in 2013,
cable provision of BDS was much more
limited than it is today. In particular,
BDS was not typically supplied over
HFC. Looking forward, it may already be
or soon will be the case that cable
companies are able to supply BDS
everywhere they have deployed DOCSIS
3.0. We seek comment on this. Counting
cable supply as being capable of
reaching every unique location with
BDS demand in every Census block that
cable reports as being able to serve
greatly increases the extent of
competition at the level of unique
location. Table 4 shows the resulting
number of providers that can supply
one through six buildings. More than
half of unique locations are only
supplied by one or two providers, and
more than ten percent have only one
supplier.
37. Firm concentration falls as the
square areas of the geographic region
under examination increases. Table 5
provides the number of Census blocks
with BDS demand that have one
through six fiber suppliers (so is similar
to the left half of Table 3 in that it
excludes UNE competition). It shows
that around 16 percent of Census blocks
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with BDS demand are only served by an
incumbent LEC (compared with more
than 75 percent in Table 3), while more
half of such Census blocks have a choice
of two suppliers (compared with more
than 20 percent in Table 3). It remains
true that nearly 70 percent of Census
blocks with BDS demand have two or
fewer competitors capable of serving a
unique location in the block.
38. Table 5 also gives an indication of
the strength of different classes of
providers. For example, incumbentaffiliated competitive LECs have very
few facilities indeed. This is true even
if competition over UNEs is added in
(not shown in the table) and is
indicative of the extent to which
incumbent-affiliated competitive LECs
rely on other incumbent LECs’ BDS.
6. Entry and Entry Barriers
39. Similar to the antitrust
enforcement agencies, we consider entry
by competitors to be an important part
of our analysis of competition. The
viability of potential competition is
significantly affected by barriers to
entry, which are ‘‘cost[s] of production
that must be borne by competitors
entering a market that is not borne by
an incumbent already operating in the
market,’’ as well as conditions that
impact entry. Both costs and conditions
exist in the BDS market with enough
significance in any measure of a
geographic market to deter rapid
competitive entry or expansion,
including ‘‘high capital expenditures,
large sunk costs, long lead times, scale
economies, and cost disadvantages.’’
High barriers to entry at local levels may
particularly affect competitive entry or
expansion to service customers with
national and multi-region demand that
requires ‘‘an extensive network footprint
to be able offer services widely.’’ The
competitive provider’s footprint most
often includes a combination of locallybased facilities owned by the competitor
and network access purchased from the
regional incumbent or other
competitors, which may be available at
a regulated UNE- (by the incumbent
LEC) or unregulated wholesale-basis (by
a LEC or, in some instances, a cable
company or other competitive LEC).
Although there is evidence of potential
competitors becoming increasingly
relevant, commenters assert substantial
barriers limit the timelines, likelihood,
and sufficiency of entry to counteract
anticompetitive effects in BDS markets.
40. The passage of the 1996 Act
increased the Commission’s focus on
how barriers to entry impact
competitive buildout. Like incumbent
LECs, competitive LECs build facilities
to meet consumer demand. Deploying
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facilities requires incurring costs that
vary, ‘‘among other things, on the length
of the laterals and fiber rings built, the
nature of the electronics added, whether
the lines are buried, and local
regulations (e.g., a city may require
replacement of cobblestones on scenic
streets).’’ In addition to deploying
facilities, a provider frequently needs to
obtain building access and/or rights of
way to reach the building.
41. The barriers to entry do not
materially differ whether the technology
being deployed is TDM- or Ethernetbased. As Ad Hoc notes, ‘‘[t]he
underlying transport facilities for
Ethernet services are the same as the
underlying transport facilities for TDM
services,’’ which is consistent with
AT&T’s observation that ‘‘Ethernet is
simply a service that can be provided
over many different types of transport
facilities, including copper, fiber,
coaxial, and wireless facilities.’’ BT
adds that it is reasonable to conclude
that that the main Ethernet access cost
elements—duct, fiber, and electronics—
do not vary much across service speeds
up to 1 Gbps.’’ Legacy TDM services
require the same transport facilities and,
in most geographic areas, the incumbent
already provides TDM service and
therefore has an advantage over a new
entrant. That historical incumbent
advantage allows the incumbent LEC to
lower its costs through its ‘‘initial
control of all customers’’ and ‘‘us[ing]
the same rights of way, trenches,
conduit, wires, poles, building access,
riser, truck rolls, employees, outside
plant, central office equipment,
administrative expenses, and other
legacy inputs that they use when the
provision TDM-based special access
services.’’
42. One recent study asserts that
current barriers are sufficient to deter
new construction in most business
locations. Certain issues cannot be
easily overcome, such as ‘‘when the
building owner refuses to grant the
CLEC access or charges a high access
fee, or when it is difficult or costly to
obtain rights of way to a specific
building (e.g., pole access or costs of
burying lines).’’ Also, competitive
carriers can connect their networks to
‘‘customer locations that are near to
their fiber transport facilities, where the
customer at the location is suitable for
the competitive carrier’s service
offerings, and where the revenues
associated with the location are
sufficient to make loop deployment
profitable.’’ Areas of low BDS demand,
which would include most suburban
and rural areas, present additional
issues for those considering an
extension of facilities, principally a lack
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of a timely potential for a positive return
on investment. Charter, for example,
notes how in its [REDACTED].
Cablevision Lightpath also faced issues
outside of its traditional, denser, region
because [REDACTED]. Many simply
avoid higher-cost areas, such as,
[REDACTED].
43. In addition to deploying their own
facilities, competitive LECs extend their
network reach by purchasing incumbent
LEC facilities at a regulated price on an
unbundled basis or at non-regulated
wholesale prices. Obtaining UNEs often
is the most economical way to reach a
new customer for a competitive LEC,
and it is important to account for the
effects of UNE competition. However,
UNE competition has its limits. UNEs
are not always available ‘‘because of
insufficient or insufficientlyconditioned facilities, regulatory or
contractual constraints.’’ And even with
significant investment in facilities in an
area, competitors ‘‘must depend heavily
access to on the incumbent LECs’
facilities and services to serve its
customers.’’ When purchasing from the
incumbent LEC, proximity to a
collocation point near the customer
lowers cost, meaning costs increase the
farther the competitor’s facilities are
located from the potential customer.
UNE reliance, therefore, is successful
‘‘only in some locations, only for some
customers, and only to some extent.’’
44. Competitive LECs also lease
dedicated, non-regulated, wholesale
services to connect to commercial
buildings over non-UNE facilities from
incumbent LECs or other competitive
LECs. Even competitive LECs with welldeveloped regional fiber rings rely on an
incumbent or competitive LEC
wholesale inputs for last-mile
connections. Leasing last-mile dedicated
services from the ubiquitous incumbent
LEC oftentimes is the only option due
to a lack of competitive build-out. Level
3, for example, explains that it ‘‘usually
has no choice but to lease dedicated
services from the incumbent LEC in
order to reach locations that Level 3
cannot reach with its own network.’’
45. While wholesale access can be a
cost effective means for a competitive
LEC to expand its reach, such a
wholesale purchaser cannot place
competitive pressure on supply of the
underlying facility that it purchases, but
rather can only compete by being more
efficient at retailing. Thus, we do not
consider competition over resold lines
as a material competitive restraint on
any facility-based supplier with market
power. Moreover, we are told that in
some cases an incumbent LEC’s
wholesale prices can be near or above
retail levels (sometimes referred to as a
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‘‘price squeeze’’). Similarly, we are told
that rates below retail, available through
many incumbent LEC purchase
agreements, also can create barriers to
entry when they include ‘‘penalty
clauses and loyalty discount provisions
in their wholesale contracts’’ that are
not related to a competitive efficiency
and simply have the effect of raising the
rival’s cost. XO, for example, generally
declines to build facilities when doing
so will increase its risk of falling short
of a minimum purchase requirement
under an incumbent LEC commitment
plan. Level 3 similarly reports added
costs due to incumbent LEC loyalty
agreements, which forecloses an
opportunity to purchase from other
lower-priced wholesale inputs. In the
end, competition is constrained. A
motivated and efficient competitive
LEC, such as Level 3—the largest
competitive LEC and the third largest
provider of fiber optic internet access
(based on coverage area) in the United
States—only ‘‘deploy[s] new loops to
approximately 3,000 to 4,000
commercial buildings in the U.S. each
year.’’
46. Cable providers encounter similar
barriers to entry, even within their
incumbent franchise areas, although
their in-region networks present
economies of scale, similar to
incumbent LECs, and present lower
barriers for in-region expansion,
compared to other competitive LECs.
Nevertheless, for traditional competitive
LECs and cable companies alike, ‘‘loop
deployment costs are distancesensitive,’’ limiting competitive reach,
even if cable companies would likely
have ‘‘lower loop deployment costs in
areas where they have deployed
extensive transport networks.’’ As
CenturyLink notes, even cable
companies must incur significant
investment costs and rely on the
networks of others to expand their
footprints.’’
47. Efforts to enter and expand in
markets are being made with success,
however, which has required
investment and new networking
initiatives to address barriers to entry.
Comcast, for example, has recently
established a new business unit to target
Fortune 1000 businesses. But to reach
Fortune 1000 companies, and satisfy
their varying and broad geographic
requirements, Comcast could not rely on
its own facilities alone. To compete,
‘‘[i]t struck wholesale agreements with
other cable companies including
Charter, Time Warner Cable, Cox,
Cablevision, and Mediacom, and it
acquired Contingent Network Services—
a managed services firm with
‘‘aggregation or wholesale relationships
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with many other CLECs, ILECs, [and]
small cable providers.’’ Some
companies are more risk-adverse or
sensitive to barriers than others,
however. Charter, for example, notes
that a ‘‘partner model creates high
transaction costs, as multiple networks
and personnel must be coordinated, and
these costs impact the price at which
these services can be offered.’’
48. Incumbent LECs face lower overall
barriers within region and barriers
similar to independent competitive
LECs out-of-region. Within region, the
Commission has recognized that
incumbents can ‘‘increase capacity on
many special access routes at a
relatively low incremental cost (relative
to the total cost of trenching and placing
poles, manholes, conduit, fiber, and
copper, and securing rights and access)
by adding or upgrading terminating
electronics.’’ Carriers with incumbent
LEC and competitive LEC affiliated
entities confirm the lower incumbent
LEC barriers to entry. For example, TDS,
which operates both incumbent LEC
and competitive LEC subsidiaries, has
explained that ‘‘it is generally far less
expensive and more efficient for TDS
ILEC to deploy new fiber to business
customer locations than is the case for
TDS CLEC.’’ Windstream, which also
operates both incumbent LEC and
competitive LEC businesses, has found
that ‘‘ILECs continue to enjoy a dramatic
advantage over CLECs in the average
cost per building of new last-mile fiber
deployment—an advantage that is
largely attributable to the incumbents’
much larger market shares, which is 6+
a direct result of the ILEC first mover
advantage rooted in the monopoly era.’’
As TDS explains, this is because (1)
‘‘business customer locations are, on
average, located much closer to TDS
ILEC’s existing fiber plant than TDS
CLEC’s’’; (2) ‘‘TDS ILEC possesses many
advantages due [to] its operation of a
preexisting network along potential
fiber routes’’; and (3) ‘‘TDS CLEC must
incur much higher equipment and fiber
splicing costs than TDS ILEC when
deploying new fiber.’’
49. High barriers to entry and carrier
agreements that have the effect of
preventing switching over an extended
time create ‘‘low elasticities of demand
for the incumbent and low elasticities of
supply for competitors.’’ Such low
elasticities respectively mean few
customers switch away from a supplier
due to an increase in price, and few
suppliers are able to switch away from
resale to reliance on new network
deployment. If the service had lower
barriers of entry, customers would be
more able to switch carriers when faced
with higher prices or unfavorable or
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inefficient supply agreement terms and
conditions. Level 3, for example, reports
that it must purchase ‘‘a large
percentage of its overall dedicated
services requirements’’ under what it
terms ‘‘lock-in’’ agreements, which
mean it cannot switch to purchasing
from a lower-priced competitive
providers when a lower rate is available.
The resulting higher downstream prices,
therefore, offset any claimed efficiencies
brought by the so-called lock-in
requirements.
50. It would be a mistake to assume,
however, that all barriers to entry are
insurmountable, or that they exist to the
same degree everywhere. The record
and our data collection support the view
that competition is growing, and that
potential competition, appropriately
defined, is important. When
investments are made to self-provision
facilities to customers, competitors
typically first look to a region, such as
a metropolitan region, and then focus on
deploying facilities, such as fiber
construction, to reach specific
buildings. ‘‘[U]rban centers where costs
are low (e.g., zero or low mileage) and
demand is significant’’ are attractive to
competitive LECs. For many
competitive LECs, ‘‘the reach of an
embedded network can extend beyond
the location of its current connections to
serve additional customers in the
surrounding region.’’ XO, for example,
‘‘entered initially by building metro
rings in dense areas of major cities,
since these could aggregate traffic from
more users and hence were more
economical.’’ Many competitor carriers
prefer to provide services over their own
network facilities because it allows
greater efficiency and permits flexibility
to control the type and quality of the
competitor’s service offerings. After
deploying a ‘‘core fiber network . . .
extending laterals requires significantly
smaller capital expenditure per unit of
bandwidth’’ resulting in a lower-cost
expansion. Relying solely on
independent lateral facilities without a
core fiber presence, in contrast (by
carrying traffic from a single location),
limits scale of economies and requires
significant customer spend to justify
investing in facilities. Other advantages
with a region-first approach include
familiarity with local marketplace,
which can be useful for a local sales
force.
51. The great entry success story has
been that of cable. Less than a decade
ago cable largely provided no businesses
services of any kind that were materially
different from the services marketed to
residential customers. Yet, for more
than half a decade cable business
revenues have experienced compound
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annual growth rate of 20 percent,
starting with the smallest business
customers and working their way up to
the largest. More recently, cable began
offering BDS services over HFC, as well
as fiber, and has forced even the largest
incumbent LECs to focus on
maintaining market share. In addition,
Israel et al., estimate, based on our data
collection, that over the course of 2013,
competitive LECs’ ‘‘bandwidth grew at
six times the growth of the rate of the
ILECs’’.
7. Evidence of Market Power in the
Delivery of DS1 and DS3 Services and
Lack Thereof for Higher Bandwidth
Services
52. Our own analysis, the Rysman
White Paper, and the Baker Declaration,
provide direct evidence of market power
in the supply of various services. We
seek comment on validity of these
analyses, on how they might be
extended, or tested. At the same time,
we recognize that no analysis is ever
perfect, and look for comments on what
the broad evidence available to us
ultimately says about competition and
market power, even if alternative
theories cannot be entirely ruled out.
Key pieces of evidence before us are
regression analyses that show price
effects due to the presence of
competition, which imply that in the
absence of competition prices are higher
than they otherwise would be; the fact
the price capped incumbent LECs have
no headroom under our price caps, and
have been in that situation for at least
several years; that competition in areas
with pricing flexibility lowers prices
more than in price cap areas; and that
incumbent-affiliated competitive LECs
do not appear to be focused on facilitybased or UNE competition (with some
interesting exceptions). We also note
that the Rysman White Paper concludes
that there may not be market power in
the supply BDS at bandwidths in excess
of approximately 50 Mbps and seek
comment on this analysis.
53. A central finding in the Rysman
White Paper is that, in regressions
controlling for a range of other factors,
competitive supply in a unique location
is correlated in both statistically and
economically significant ways with
lower ILEC prices for DS1s and DS3s at
that location. Similarly, the Rysman
White Paper finds that competitive
supply in a unique location anywhere in
a Census block, and competitive supply
anywhere in the Census tract, is
correlated in both statistically and
economically significant ways with
lower prices within the Census block.
Analysis in the Baker Declaration comes
to similar conclusions, though others
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have criticized the Baker Declaration.
We seek comment on these analyses, on
how such analyses might be extended,
further verified or disproved, and
indeed for additional analysis from
interested parties.
54. As a result of the CALLS Order,
the price cap indices for BDS services
have been frozen (outside of exogenous
cost adjustments) since 2004. Over the
period since then, there has been no
evidence that the price caps have been
a source of any kind of financial stress
to the incumbent LECs. Yet, at the same
time, the price capped incumbent LECs
have essentially raised prices up to the
maximum allowed by the price caps. In
our view, this does not suggest that over
the last decade or more our caps were
too harsh, and rates as constrained by
the caps were too low, and this was the
reason the price capped incumbent
LECs kept their prices at the top of the
cap. Consequently, it is our view that
the fact that the price capped incumbent
LECs have kept their prices at the top of
the cap is additional evidence of market
power.
55. Price cap incumbent LECs file
their respective annual access charge
tariff filings to become effective on or
around July 1st of each year. In that
filing, price cap incumbent LECs file
Tariff Review Plans (TRPs) to
demonstrate that the carrier’s Actual
Price Index (API) does not exceed its
Price Cap Index (PCI). To the extent that
a carrier’s API is less than its PCI, the
difference, often referred to as ‘‘head
room,’’ is a measure of the extent to
which such a carrier is able to increase
its rates under the price cap rules. By
calculating the average ratio of the API
to the PCI, based on the APIs and PCIs
in each carrier’s TRPs, we can
determine how close each carrier is to
the maximum prices it is permitted to
charge overall. The ratios, based on the
TRPs, demonstrate that the six largest
price cap incumbent LECs have been
charging close to maximum prices for
the last four tariff years. This also
implies that if the price capped carrier
had any headroom in previous years,
then in or prior to 2012 took advantage
of that headroom and raised its prices
effectively eliminating that headroom.
56. As demonstrated from the table
above, the APIs of the six largest price
cap incumbent LECs are more than 99
percent of their PCIs. Therefore, the
largest carriers have almost zero
headroom under the price caps; even a
small rate increase would likely cause
the carriers’ APIs to exceed their PCIs.
57. The Rysman White Paper finds
evidence that prices in areas granted
pricing flexibility respond more to
competition than prices in pure price
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capped areas. We seek comment on the
validity of this finding, and whether it
might be evidence that granting
incumbent LECs the ability to offer
contract tariffs allows them to respond
more effectively to competitive
pressures in pricing flexibility areas,
and if so, does this support allowing
contract tariffs throughout areas we
might designate in a future order as noncompetitive. We also seek comment on
the Rysman White Paper finding that in
price cap only areas competitive effects
are smaller than in pricing flexibility I
and II areas. Is that a valid finding, and
if so does it indicate less competition in
pricing flexibility areas, or something
else?
58. The Approach to Competition of
Competitive LECs Affiliated with
Incumbent LECs. Competitive LECs
affiliated with incumbent LECs have
engaged in limited facilities-based
investment relative to certain other
competitive LECs and in some cases
have avoided the use of UNEs. In
particular, the [REDACTED].
59. The Rysman White Paper finds
little statistical relationship between the
presence of local fiber-based
competition and lower incumbent LEC
prices for BDS above 45 Mbps. At least
three possibilities could account for this
observation: (1) Competition broadly
exists for these services, (2) to the extent
any competition existed, it was too little
competition to produce material
competitive effects, or (3) there are too
little data and/or too many uncontrolled
for variables for a statistical relationship
to emerge. However, given limited
complaints in the record about higher
bandwidth services, and evidence that
competitive LEC market share of fibered
buildings is much higher than its
general share, we recognize that supply
of higher bandwidth services may often
be more competitive than supply of
lower bandwidth services. We, however,
seek comment on this assessment. Is it
correct generally? If so, could it be
incorrect in particular cases that are
sufficiently important that the
Commission should consider action
specific to those cases? How should any
conclusion reached in the future about
the nature of higher bandwidth services
be applied, given the data on geographic
areas, different categories of customers,
and other factors?
B. New Technology Neutral Regulatory
Framework for Business Data Services
60. The BDS market has changed
substantially since this proceeding was
initiated, both in terms of technology
and providers. While the price cap LECs
maintain substantial market power in
some areas for some services, it is clear
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the market will continue to evolve and
that market power and market positions
are likely to shift over the next ten to
fifteen years and beyond. The
Commission’s prior adoption of bright
line rules based on what turned out to
be a poor measure of the presence of
competition led to some of the problems
we start to solve today.
61. Some parties to the proceeding
have raised objections to being fully
included in the new framework. We
note that business data services are
telecommunications services, regardless
of the provider supplying the service.
BDS providers are therefore common
carriers. And as such, with the unique
exception of Verizon’s forbearance, the
providers are subject to Title II in the
provision of their services, including
packet-based BDS services such as
Ethernet. Sections 201 and 202 of the
Act require that the rates, terms, and
conditions under which common
carriers provide telecommunications
services, such as the broadband data
services we address herein, must be just,
reasonable, and not unjustly or
unreasonably discriminatory. These
requirements are enforced through
section 208 of the Act, which permits
any person to file a complaint against
any common carrier for acts or
omissions in violation of the Act or a
Commission rule or order.
62. The presence, and use, of market
power can inhibit the evolution of a
competitive market, both through prices
and terms and conditions. For example,
we examine certain terms and
conditions in the Tariff Investigation
Order and prescribe changes to address
terms we found to be unreasonable and,
in some cases, anticompetitive. This
Order and its findings in this and other
areas will provide substantial precedent
to guide the Commission in its
consideration of any section 208
complaints challenging the
reasonableness of conduct in the
provision of business data services.
Likewise, the Commission seeks
comment in this FNPRM on significant
issues such as the basis for determining
the presence of material competitive
effects that would support the removal
of direct rate regulation in some areas
for some services. Such analysis will
provide further guidance for resolving
the threshold question whether the
services are offered in a non-competitive
area, in any complaint asserting
unreasonable conduct under sections
201 and 202.
63. While a case-by-case adjudication
under section 208 is one option to
provide guidance for what is reasonable
conduct in light of the market analysis
conducted in this proceeding, we find
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clear rules of the road will be valuable
to all broadband data service providers
as the market evolves. Accordingly, in
this FNPRM, we propose a new
regulatory framework for broadband
data service that distinguishes between
broadband data service providers based
on market circumstances, rather than
technology or the happenstance of prior
Commission action and inaction.
64. The proposed technology-neutral
framework will apply depending on the
classification of a specific market as
either competitive or non-competitive.
This framework will depend on the
adoption of a new Competitive Market
Test to then determine whether market
power is present and we additionally
seek comment on such test below. As
another significant piece of the
technology neutral framework, we
additionally propose actions to change
the regulatory structure for the
historically dominant price cap LECs.
These proposed rules will establish a
path towards technology-neutral
regulation for broadband data services,
while protecting against harm from lack
of competition where it continues to
exist.
C. Statutory Authority for New
Regulatory Framework
65. Sections 201 and 202 of the
Communications Act are foundational
requirements for all telecommunications
services, designed to ensure that such
services are offered to the public on just
and reasonable rates, terms and
conditions, and that services are not
offered on an unreasonably
discriminatory basis.
66. These sections have served as the
statutory basis for a wide range of rules
and other actions over the years. In
addition to providing the substantive
authority for various rules and
requirements, section 201(b) states that
the Commission ‘‘may prescribe such
rules and regulations as may be
necessary in the public interest to carry
out the provisions of this Act.’’
67. We propose that sections 201 and
202 of the Act serve as an adequate basis
of statutory authority for actions that the
Commission would take to create and
implement the Technology-Neutral
Framework that we propose to apply to
BDS going forward. We have forborne
from tariffing provisions for many BDS
providers over the years. In this
FNPRM, the Commission proposes to
transition away from tariffing
requirements for the last portion of BDS
(incumbent LEC TDM), and to establish
benchmarked prices for non-TDM
services. We note that the Verizon/
INCOMPAS Joint Letter urges that the
Commission should make clear ‘‘that all
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providers offering dedicated services are
subject to Title II of the
Communications Act, including
Sections 201 and 202 of the
Communications Act.’’ The Commission
seeks comment on whether its authority
to ensure just and reasonable prices,
terms and conditions under sections 201
and 202, and its explicit rulemaking
authority in section 201(b), is adequate
to require price cap filings for TDM
services and benchmarked prices for
non-TDM services.
68. Commenters have noted that the
Commission’s existing price cap regime
was adopted with reference to section
204. If the Commission were to forbear
from tariffing provisions for incumbent
LEC TDM services, as it has with respect
to the incumbent LECs’ non-TDM
services and all BDS
telecommunications services of
competitive providers, could it continue
to require price cap filings for
incumbent LEC TDM services in noncompetitive markets based solely on the
statutory authority in section 201(b)?
Likewise, could the Commission use
benchmarked prices to ensure that nonTDM services in non-competitive
markets are offered on just and
reasonable prices, as required by section
201? If not, why not, and what
additional authority or action would be
needed?
69. The Commission’s proposed
Technology-Neutral Framework also
would place certain limits on terms and
conditions of BDS to ensure that they
are offered on just, reasonable, and not
unreasonably discriminatory terms,
especially in non-competitive markets.
We seek comment on whether sections
201 and 202 provide the Commission
with the statutory authority to take such
actions. If not, why not, and what
additional authority or action would be
needed?
70. A fundamental aspect of the new
Technology-Neutral Framework for BDS
would be the adoption of new triggers
to determine whether markets are
competitive or non-competitive. We
seek comment on whether sections 201
and 202 are themselves sufficient to
support the adoption of such triggers,
which could be used to determine
whether (and if so, where) regulations
are required to ensure that rates, terms
and conditions of BDS services are just
and reasonable. We note that such
triggers have been tied in the past to the
Commission’s authority under sections
201–205, and we seek comment on
whether the Commission should rely on
additional sources of authority.
71. Some entities have suggested that
the Commission address certain issues
such as wholesale pricing under section
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251, where Congress has imposed
specific resale requirements. However,
section 251 has an explicit savings
clause, which states: ‘‘Nothing in this
section shall be construed to limit or
otherwise affect the Commission’s
authority under section 201.’’ Does the
savings clause indicate that the
Commission has ample statutory
authority to address resale issues for
BDS under section 201 authority,
notwithstanding that the statute
imposes particular resale requirements
on certain types of providers in sections
251(b) (local exchange carriers) and
251(c)(4) (incumbent local exchange
carriers)? If not, why not, and what
additional authority or action would be
needed?
72. Are there any other statutory
provisions that the Commission should
consider invoking to support a
Technology-Neutral Framework for
BDS? For example, section 706 of the
1996 Act provides that the Commission
‘‘shall encourage the deployment on a
reasonable and timely basis of advanced
telecommunications capability to all
Americans (including, in particular,
elementary and secondary schools and
classrooms) by utilizing, in a manner
consistent with the public interest,
convenience, and necessity, price cap
regulation, regulatory forbearance,
measures that promote competition in
the local telecommunications market, or
other regulating methods that remove
barriers to infrastructure investment.’’
Does that section have any particular
applicability to the actions proposed in
this FNPRM, such as promoting
competition for BDS and removing
obstacles to technology transitions?
73. Finally, we seek comment on
whether any transitional or incremental
policy actions are appropriate as the
Commission considers and moves to
comprehensively reform the BDS
regulatory framework. Are there
incremental changes the Commission
could take as it evaluates broader
reforms and a Competitive Market Test
that furthers our goals? Should we adopt
any transition to a new Competitive
Market Test and, if so, how should we
structure the transition?
D. Competitive Market Test
74. We propose to replace the 1999
pricing flexibility regime with a new
regulatory framework for BDS. The new
framework, as proposed, builds on the
analysis of the 2015 Collection to
establish a comprehensive Competitive
Market Test to determine whether a
relevant market is competitive or noncompetitive. Where competition is
sufficient in a relevant market, based on
objective criteria to measure competitive
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effects, the Commission is proposing to
rely upon market forces to constrain
rates, terms, and conditions. That is, we
propose to subject markets determined
competitive to minimal regulation to
protect consumers as proposed in Part
V.E. The Commission would subject
relevant markets, determined noncompetitive, to specific rules as
proposed in Part V.F on the ground that
customers in those markets are being
harmed. A separate question concerns
the scope of regulation in a noncompetitive market, and whether it
should apply to all or some providers
and, if some, which ones and on what
basis (such as market power)—and we
seek comment on these questions below.
The ultimate goal going forward is to
apply regulatory obligations on a
technology and provider neutral basis
where it is necessary to protect and
promote competition.
75. On the criteria for the Competitive
Market Test, we invite comment.
Initially, we are proposing a test, which
focuses on multiple factors, including
bandwidth, different customer classes,
business density, and the number of
providers in areas consisting of census
blocks where each block in the relevant
market meets the specified criteria. As
described above, the data and our
analysis suggests that competition is
lacking in BDS at or below 50 Mbps in
many circumstances, and that
competition is present in BDS above 50
Mbps in many circumstances. Such
evidence will guide how the
Commission uses product market
characteristics in applying the
Competitive Market Test to a relevant
market. We seek comment on the
appropriate factors to include in the test
and, in particular, the appropriate
weight to attribute to the various factors
in application of the test. With any test
criteria and for application of the test as
a whole, we seek comment on how to
create a test that is simple to administer
and, to this end, ask about the
commercial practicalities and
administrative feasibility of any
particular approach. We also seek
comment on how any approach would
further our goals of promoting
competition and investment.
76. We propose to apply the
Competitive Market Test across all
geographic areas served by price cap
carriers. The Commission would use
publicly available information, the 2015
Collection, and other information in the
record to apply the test to create a list
of geographic areas that are deemed
competitive and non-competitive by
relevant product market. To provide
certainty but also ensure accuracy of the
data, we seek comment on whether the
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Commission should reapply the test
every three years for example, with
updated data to reflect changes in
business density or the number of
providers in a geographic area. Once the
initial competitive/non-competitive
determination is made, we seek
comment on a process to address
instances where a provider or purchaser
disagrees with the determination
finding and suggestions for the
appropriate standards and procedures to
govern that process.
77. The pricing flexibility framework
adopted in 1999 based regulatory relief
on the presence of third-party
collocations in the incumbent LEC’s
wire centers, which were considered
proxies for competition in the
marketplace. In 2012 the Commission
concluded after a substantial review
that, despite the many administrative
benefits to reliance on the triggers,
collocations are a poor proxy for
predicting the entry of facilities-based
competition and suspended, on an
interim basis, further automatic grants
of pricing flexibility. The Commission
found the 1999 regime retained
unnecessary regulation in areas that
were very likely to be very competitive
and deregulated over large areas where
competition was unlikely to occur.
78. Our review of the 2015 Collection
supports the Commission’s earlier
findings that the existing triggers do not
reflect the existing competitive nature of
the market. Specifically, in 97.9 percent
of the wire center territories where a
cable competitive LEC has reported
locations—where the connection to the
location is not a UNE obtained from an
incumbent LEC, a cable company has
not collocated in the wire center. Of
these wire centers, 62 percent remain
subject to price cap regulation without
pricing flexibility for channel
terminations. If we include census
blocks where a cable company reported
having DOCSIS 3.0 coverage for 2013 for
the National Broadband Map, the
percentage of wire center territories
without any collocations from the cable
company increases to 98.4 percent. Of
these wire centers, 66 percent remain
subject to price cap regulation without
pricing flexibility for channel
terminations. This strongly shows the
collocation triggers are substantially
underestimating the entry of facilitiesbased competition from cable
companies for last-mile facilities and
hindering deregulation.
79. When we look at all competitive
providers and remove locations with
UNEs, in 32.3 percent of the wire center
territories where the Commission has
granted the incumbent LEC pricing
flexibility for channel terminations,
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competitive providers have reported no
locations where they own or lease,
pursuant to an indefeasible right of use
(IRU), a connection to a location. If we
expand the inquiry to include census
blocks where a cable company reported
having DOCSIS 3.0 coverage for 2013 for
the National Broadband Map, this
percentage decreases to 24.7 percent.
This shows that collocations at a
substantial percentage of wire centers
do not accurately predict the entry of
facilities-based competition for last-mile
connections.
80. We now believe it is appropriate
to modernize our triggers to ensure we
capture all competitive entrants.
Therefore, we propose to abandon the
collocation-based competition showings
for channel terminations and other
dedicated transport services for
determining regulatory relief for
incumbent LECs. Instead, we propose to
apply a new Competitive Market Test.
Our intent, discussed in more detail
below, is to create a framework that is
provider and technology neutral. Our
goal is also to create a framework that
is simple and minimizes regulation only
to the extent necessary to ensure rates
are just and reasonable.
1. Business Data Service Definition
81. A definition for BDS is critical to
any new regulatory framework. We
suggest below a definition similar to the
definition used for dedicated services in
the 2015 Collection. Specifically, we
would define BDS as a
telecommunications service that:
Transports data between two or more
designated points at a rate of at least 1.5
Mbps in both directions (upstream/
downstream) with prescribed
performance requirements that typically
include bandwidth, reliability, latency,
jitter, and/or packet loss. BDS does not
include ‘‘best effort’’ services, e.g., mass
market BIAS such as DSL and cable
modem broadband access.
82. We seek comment on this
definition and ask whether the
definition should include minimum
performance guarantees, such as 99.99
percent reliability. Also we seek
comment on whether we should reduce
the minimum symmetrical speed to 1
Mbps to account for dedicated service
offerings below 1.5 Mbps.
2. Multi-Factor Competitive Market
Test—Relevant Market(s) and Test
Criteria
83. We are guided by traditional
economic principles in identifying
relevant market(s) and the competition
criteria for a Competitive Market Test.
We also consider, and seek comment on,
the administrative feasibility and
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commercial practicalities of any
particular approach both for providers
as well as the Commission. A proposal
under consideration, as discussed in
more detail below, is to define the
relevant market for applying a test along
customer classes and varying
bandwidths in geographic areas
consisting of census blocks, including
groupings of census blocks. The
proposed criteria for the test would
focus on business density and the
number of providers in the relevant
market area.
84. The Commission has traditionally
applied the pricing flexibility
competitive showings to two different
BDS segments, channel terminations
and other dedicated transport services.
There is little discussion in the Pricing
Flexibility Order as to why the
Commission chose these two particular
service categories. Historically,
incumbent LECs tariffed these services
separately, and the charges reflected
different traffic sensitivities. The
Commission explained in the Pricing
Flexibility Order that a lower
competitive showing was required for
other dedicated transport services
because these services, which move
traffic from one point of concentration
to another, require ‘‘less investment per
unit of traffic,’’ than channel
terminations. The Commission found
that competitors were more likely to
enter the market to provide other
dedicated transport services than
channel terminations. Looking at how
non-cable competitive LECs have
deployed their networks, we find this
approach holds true today for those
types of providers (and as discussed
above, appears as much driven by
bandwidth demand as it does by the
channel termination/transport
distinction).
85. Developing a new framework,
however, gives us the opportunity to reevaluate the triggers and product
markets used in the application of a
competitive test to ensure that they
reflect technology transitions and the
current market. Today, competitors, and
even incumbent LECs with their
forborne services, do not typically offer
consumers BDS by charging a customer
separately for transport, last-mile access,
and channel mileage. They instead offer
connectivity at certain bandwidth levels
and performance guarantees and
packaged communications solutions
that include a transmission component
to meet the demands of different types
of customers. Our framework should
reflect how the market operates today.
86. Moreover, the needs of the
customer dictate the service offerings.
As discussed in our competition
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analysis and as providers have told us,
different types of customers have
different needs. A small business with
less than 20 employees at one location
is unlikely to need the multi-office
networking connectivity, or even the
same level of bandwidth capacity, as
would a large enterprise customer. The
needs of a mobile operator to backhaul
aggregated traffic from cell sites are
different than the needs of a retail chain
wanting to securely process credit
transactions. The needs of competitive
LECs, as wholesale customers, for last
mile access as an input for their own
service offerings differ from the needs of
retail end users. And as the needs
change by customer class so do the
service substitutes, the economics of
providing service, and the likelihood of
facilities-based entry by competitors.
87. We therefore seek comment on
whether to apply our Competitive
Market Test based on different BDS
customer classes at varying bandwidths
and ask for comment on whether, and
if so how, the Commission should
separate the product market by
customer type and bandwidth. For
example, should the customer classes
consist of the following categories:
Small business with less than 20
employees, mid-sized businesses with
20–500 employees, national/enterprise
businesses with 500+ employees that
typically require service at multiple
locations? And should we adopt a
separate product market to address the
cell site backhaul needs of mobile
providers and another one for sales to
wholesale customers? We seek comment
on the benefits of segmenting product
markets by customer class and whether
the data supports such an approach. In
lieu of customer classes by size of retail
customers, should we instead have
fewer customer classes, such as just
wholesale, mobile backhaul, and retail?
Or are the benefits of using customer
classes outweighed by the burdens due
to the complexity and practicality of
implementing such a framework?
88. To the extent the Commission
adopts such an approach, we seek
comment on whether we should also
subdivide the relevant product markets
by bandwidth to capture the varying
demand and competition levels within
each customer class. For example, we
could divide the wholesale segment into
BDS ≤50 Mbps and >50 Mbps. In
developing the appropriate bandwidth
overlay, we can look to evidence in the
record and our own analysis of the 2015
Collection as to the level of competition
at different bandwidth levels. To what
extent, should evidence indicating that
the supply of BDS above 50 Mbps tends
to be more competitive than the supply
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of BDS at lower bandwidths factor into
this overlay? We seek comment on
whether 100 Mbps or some other
bandwidth level is better supported by
the evidence in particular market
segments? Should we recognize
different tiers of products (or distinct
product markets) based on differences
in speed? Should the bandwidth overlay
levels vary depending on a particular
customer class? Should the relevant
bandwidth level(s) be static or evolve
over time? For example, should product
market re-evaluation be made part of the
review conducted in light of future data
collections?
89. We seek comment on these issues
and encourage commenters to suggest
other alternatives for consideration.
Commenters should address whether a
customer class/bandwidth approach
would appropriately capture the nature
of competition in these markets,
whether the approach is
administratively feasible, the
appropriate bandwidth and/or productfeature categories, and whether we
should include additional customer
classes or make other modifications to
the classes identified. For example, is it
correct to base a product market
identification on speed or do we need
to factor in as well additional
performance features and, if so, which
ones should be used and how should
multiple product features be used to
identify different product markets? We
also seek comment on how various
approaches would further our goal of
promoting competition and investment
for BDS services.
90. In 1999, the Commission chose to
grant pricing flexibility on an MSA and
non-MSA basis with the intent of
defining ‘‘geographic areas narrowly
enough so that the competitive
conditions within each area are
reasonably similar, yet broadly enough
to be administratively workable.’’ The
Commission in the Suspension Order
concluded ‘‘MSAs have generally failed
to reflect the scope of competitive
entry.’’ In reaching this conclusion, the
Commission found ‘‘that business
demand can vary significantly across an
MSA’’ and that competitive entry tends
to occur in smaller areas with the
highest density of business
establishments. The GAO reached a
similar conclusion in 2006.
91. Our analysis of the 2015
Collection further confirms these
findings. According to our analysis, the
price regressions of incumbent LEC
rates for DS1 and DS3 lines show
consistent negative effects for the
presence of competition in the building,
and the census block, much of which is
both economically and statistically
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significant. In addition, the regressions
show some effects for the presence of
competitive fiber in the census block,
even if that fiber is not connected to any
buildings in the block.
92. Given our analysis, we seek
comment on using census blocks as the
geographic area for applying the
Competitive Market Test. We also ask
whether using a more granular area, e.g.,
the building or cell site location as the
relevant geographic market, or whether
a larger geographic area is appropriate.
For example, if the geographic area were
the building location, the provider’s
regulatory obligations could change
building-by-building, which could make
it difficult not only for regulators but
also for providers trying to offer services
to customers at multiple locations.
Could a building approach reduce the
challenges to determining the necessary
proximity to fiber, thereby simplifying
administration? A census block or even
census tract approach would create a
similar patchwork of geographic areas
with different regulatory treatment.
Census blocks in metropolitan areas are
also often very small in size. For
example, according to AT&T, ‘‘[t]he
average size of census blocks in MSAs
with demand for special access services
is only about one-seventh of a square
mile.’’ However, we anticipate that areas
adjacent to a census block will often
have similar business density and
facilities-based competitor
characteristics resulting in a similar
determination as to the level of
competition.
93. Our goal is to learn from past
experiences and to not repeat the errors
of the 1999 pricing flexibility regime by
granting relief too broadly to cover areas
where competition is not present or
unlikely to occur.
94. We seek comment on these
proposals. Commenters should address
the administrative feasibility of the
proposals and how each option would
impact the goal of promoting
competition and investment in the BDS
market. We also invite commenters to
suggest alternative geographic units and
ask commenters to explain how any
alternative is supported by the data and
furthers our goals.
95. Our intent, as with any of the
proposals under consideration, is to
focus regulation on areas where actual
or potential competition is insufficient
to ensure rates, terms and conditions are
at just and reasonable levels. We believe
that bright-line criteria are best suited to
meet these goals. Based on our review,
we have identified two possible criteria
for determining whether or not a market
is competitive, i.e., business density and
the number of providers in the relevant
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geographic area. We seek comment on
these criteria below and whether
alternative or additional criteria should
be incorporated into the test.
96. Our analysis shows there is a
significant correlation between business
density and the presence, or likelihood,
of competition. We therefore seek
comment on the appropriate business
density metric for the Competitive
Market Test. Should we use the number
of businesses establishments in a
defined geographic area, the number
employees, the level of payroll, or some
other variable that is readily available
and shown to be a good proxy for
business demand? For example, should
we look to any census block with more
than some number of businesses
establishments per square mile? Also to
what extent should a different density
standard apply when evaluating mobile
backhaul? The deployment of cell sites
may not necessarily correspond to
business density and may more likely
relate to population density or public
travel areas. Should the Commission
instead focus on the density of existing
cell sites in a census block area when
evaluating a mobile backhaul market? If
so, what is the appropriate cell site
density metric?
97. Our analysis further shows that
the competitive effect on pricing
increases as the number of competitors
in the area increases. How should we
incorporate this into a bright-line
trigger? The Commission in the Qwest
Phoenix Order found a market with only
two competitors, a duopoly, not
sufficiently competitive. Should we
require more than two facilities-based
competitors in any area for a
competitive trigger? Are there instances
where having just one or two
competitors is sufficient given the
bandwidth level and business density in
a given area? There is also the question
of whether the type of competitor in the
market makes a difference? Should we
weight competition from a cable
company differently than a non-cable
competitive LEC or vice versa? If so,
should this different weighting vary
with bandwidth levels? There is also the
question of how we identify the
presence of a competitor in the area. Is
it enough for a competitor to have one
served location in the area? Is it enough
for a cable company to just have
DOCSIS 3.0 coverage over their HFC
network in the area or should we weight
an HFC network differently based on the
presence of Metro-E capable nodes in
the area? Should we also base the
presence of a competitor on the
presence of their fiber in the area or is
it the presence of a competitor’s fiber
node in the area? For each customer
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class and bandwidth level, should we
only count competitors in the area that
are currently offering such services to
that customer class within the stated
bandwidth level?
98. We seek comment on the
administratively feasibility of using the
above test criteria, and encourage
commenters to suggest alternative test
metrics.
99. Our goal in creating the
Competitive Market Test is to adopt a
formula using available data, e.g.,
publicly available business density
information and information provided
in the 2015 Collection, and information
from the National Broadband Map on
the presence of facilities-based
providers in a given geographic area, to
determine whether or not a relevant
market in areas served by price cap
carriers is competitive.
100. The Competitive Market Test
matrix would generate lists of census
blocks or whatever geographic area the
Commission adopts for each relevant
market determined competitive and
non-competitive. The corresponding
regulatory obligations would then apply
to markets within the relevant
geographic area going forward, e.g.,
census block areas. We seek comment
on how to ensure that this information
is disclosed in a transparent, easily
accessible format. For example, should
the Commission create a central
repository for information on its Web
site that could contain an interactive
map, which reviewers could filter by
product class like the National
Broadband Map? Or alternatively or in
addition to a map, should the
Commission simply create a publicly
available database, which simply
contains lists of relevant geographic
areas by product market as competitive
and non-competitive? Commenters
should address which approach would
be the easiest to administer and simplest
for providers.
101. To provide certainty but also
ensure that data are accurate and
updated, we seek comment on reapplying the Competitive Market Test
across all areas served by price cap
carriers every three years to account for
example, for changes in business
density and the presence of facilitiesbased providers in geographic areas.
This periodic reassessment could
coincide with our separate proposal
discussed in Part V.J to collect data from
providers on their supply capabilities
every three years starting in 2018. The
re-application of the Competitive
Market Test matrix using updated data
would likely result in changes to the
market delineation established by its
prior application. For example, the
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Commission could subsequently
determine a relevant market area,
previously considered non-competitive,
as competitive based on the updated
data. And the opposite might also be
true.
102. A periodic reassessment reduces
burdens on providers as well as the
Commission and balances the need to
ensure accurate data. We generally seek
comment on the administrative
feasibility of this approach, both as a
whole and as to its individual parts. We
also welcome suggestions for alternative
approaches. We additionally seek
comment on whether we should provide
some implementation period to allow
providers to conform operations
following the application of the
Competitive Market Test before any new
regulatory obligations resulting from the
determination of a relevant market as
competitive or non-competitive are
effective? If so, how long of a period
should we provide? Commenters should
also address the commercial
practicalities of changing the regulatory
treatment of a relevant market area
every few years? For example, how
could this impact contractual
obligations with customers and to what
extent could commercial providers
adjust or account for a potentially
changing regulatory environment every
few years? Should the Commission reapply the Competitive Market Test less
frequently, like every five years?
3. Post-Determination Process
103. We ask to what extent and how
the Commission should give providers
and purchasers an opportunity to
challenge the determinations rendered.
We seek comment on how best to
structure such a process to minimize
administrative burdens on providers,
purchasers, and the Commission.
104. We seek comment on the timing
and frequency of such postdetermination challenges. Should the
Commission open a window to permit
challenges within a specified period of
time after the Competitive Market Test
determinations are rendered, e.g., 30 or
60 days? If commenters believe that
challenges should be permitted on a
rolling basis, how would that impact
market certainty and the transactions
between providers and purchasers of
BDS services?
105. We also seek comment on how
to build upon lessons learned from the
Connect America Fund challenge
process. Based on the Connect America
Fund experience, we believe a specific,
bright-line test is appropriate to ensure
that the Commission has data necessary
to evaluate the merits of any challenges.
We propose that parties seeking to
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challenge an area determined noncompetitive to be designated as
competitive should have the burden of
proof to provide data demonstrating that
the given area satisfies the Competitive
Market Test. Should the same hold true
of a challenge that a competitive market
is non-competitive? What standards or
showing should the challenger have to
make to overcome a Competitive Market
Test determination? For example,
should challengers be required to
submit new maps of fiber? In addition
to providing challengers with access to
data collection results subject to
confidentiality restrictions, should the
Commission give challengers a limited
right of discovery to obtain information
from providers to help make their
requisite showing? If so, should the
petitioner be required to meet a
threshold evidentiary burden to initiate
discovery and what should that be?
106. Should there be a different
process if a provider challenges that an
area determined competitive is noncompetitive? What standard should
apply? Is pricing data relevant or just
the number of providers? Should the
burden shift upon a prima facie
showing? If so, what should constitute
a prima facie case?
107. To the extent the Commission
adopts product markets, how should
such product markets factor into a
challenge process? For example, what
evidence would be necessary to show
that a certain class of business
customers face competition but smaller
businesses do not?
108. In evaluating any challenges,
should we limit filings to an affirmative
case and a response? Should all
challengers be required to submit
certifications from officers attesting to
the accuracy? We seek comment on how
the Commission could build upon
lessons from the Connect America Fund
challenge processes to improve the
implementation and reduce burdens for
providers and the Commission.
109. We also seek comment on the
how the Commission should implement
the results of a post-determination
challenge. If a challenge were
successful, we propose that any
determination for the relevant market
changed from competitive to noncompetitive as a result of the challenge
(thereby changing the regulatory
treatment of the relevant market area)
would apply prospectively. If a
successful challenge resulted in the
change of a determination in 2017 to
competitive, hypothetically, how should
the Commission treat this relevant
market area when it comes time to
reapply the Competitive Market Test in
a later year, like 2018? Should the
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Commission just reapply the test at that
time, which could then trigger another
round of challenges for that relevant
market depending on the outcome of the
determination?
110. Any post-determination process
that allows for challenges or even a
request for waiver raises serious
administrative feasibility and burden
concerns for the agency. The
Commission must weigh the equitable
benefits of allowing such a process to
prevent undue harm to providers and
customers in the relevant markets
against these concerns. We seek
comment on the above questions and
invite commenters to suggest
alternatives balancing benefit and
burden.
4. Regulation for Provider(s) in Areas
Determined Non-Competitive
111. Once the Competitive Market
Test is applied, we ask which
provider(s) should be subject to the
specific rules that apply to markets
determined non-competitive. Should
such rules only apply to the largest BDS
provider in the non-competitive market
as measured by network coverage,
locations served, revenues or some other
metric or metric combinations? If so,
how would we define the appropriate
measure of ‘‘largest’’ (e.g., share of
customers, share of revenue)? If we
borrow upon antitrust principles and
Commission precedent that focused on
dominance, should we focus on the
provider with the largest market share
and therefore market power? Should we
focus on the provider with the largest
market share? If so, what is the
appropriate measure of market share?
112. Alternatively, should we apply
specific rules to any firm in the noncompetitive market that has a near
ubiquitous network in the local territory
and rights of way? This could result in
specific rules applying to more than one
firm in the non-competitive area.
Another approach is to apply this
framework to all BDS providers in the
non-competitive area. However, such an
approach could apply additional
regulation to new entrants with little or
no market share. Given our desire to
promote new competitive entry, should
new entrants or providers with market
share below a certain threshold not be
subject to all or some of the proposed
rules applicable to non-competitive
markets? If so, what is the appropriate
market share where providers should be
exempt from such framework and why?
Is there a better way to encourage new
entrants?
113. We seek comment on these
questions. Commenters should consider
the regulation that would apply, as
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proposed in Part V.F where the
Competitive Market Test resulted in a
finding of a non-competitive service
area. For example, if it were merely that
our proposed benchmarks would apply
to disputes about whether a price is just
and reasonable, this may not impact
providers that currently price below the
benchmark. Other proposals, such as
limitations on terms and conditions,
may be more onerous.
114. Commenters should specifically
address the potential impacts on
infrastructure investment, innovation,
administrative feasibility, and
commercial practicalities of any
particular approach. We also ask
commenters to explain how each
approach minimizes regulation to where
necessary to ensure that rates, terms and
conditions are just and reasonable in the
absence of competitive pressures to do
so. Commenters should also address the
Commission’s ability to implement any
particular approach given the previous
grants of forbearance authority to
incumbent LECs for packet-based and
optical carrier transmission services.
E. Rules Applying to All Markets
115. We first propose limited
requirements that would apply to the
provision of BDS in all markets, both
competitive and non-competitive. All
BDS providers are common carriers and,
are subject to sections 201 and 202 of
the Act. The Commission has long
relied on these provisions to ensure just,
reasonable and non-discriminatory
conduct by competitive
telecommunications service providers
and we do so here. We have, however,
identified an area for which a general
prohibition could be valuable in our
effort to facilitate the evolution of
competitive markets. The proposed rule
would limit the use of NDAs to block
providers from sharing, subject to
appropriate protective orders, the terms
of business data services commercial
agreements with the Commission and
other government entities with oversight
responsibilities. Such agreements have
restricted competitive LECs from
providing information that we believe
would have been useful in the course of
this proceeding and we find that they
could inhibit the Commission’s
oversight of the business data services
market going forward. We additionally
seek comment on certain terms and
conditions we found unlawful in the
Tariff Investigation Order and whether
such provisions should be prohibited in
connection with the provision of BDS
either generally or more narrowly in
non-competitive markets. These
proposed requirements would be
technology neutral in nature and would
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form a part of our proposed overarching
framework for the regulation of BDS
generally.
1. Non-Disclosure Agreements
116. We seek comment on prohibiting
the use of NDAs or their functional
equivalents in business data service
commercial agreements that restrict
providers’ and purchasers’ ability to
disclose information to the Commission
or other government entities with
oversight responsibilities. Competitive
LECs have asserted that such
requirements preclude them from
sharing information with the
Commission that would inform the
Commission’s oversight of the business
data services market. We recognize that
such agreements contain commercially
sensitive information and underscore
our continuing commitment to ensure
the protection of confidential
information submitted to the
Commission through our protective
orders.
117. We acknowledge the important
role NDAs play in ensuring the
protection of confidential information in
commercial agreements. Parties to a
commercial agreement have the right to
seek protection of their confidential
information and would be unlikely to
enter into such commercial agreements
without reasonable assurance that their
sensitive business information would
not be compromised. The Commission
is fully cognizant of this need and
ensures confidential data submitted by
parties is accorded all necessary
protections, principally through the use
of protective orders. Protective orders
have almost universally fulfilled their
purpose. In the rare cases that
confidential information has been
misused by a party, the Commission has
undertaken appropriate steps to ensure
the protective orders are enforced.
118. While we respect the importance
of protecting parties’ confidential
information, the Commission must also
ensure its access to the information
necessary to discharge its core statutory
duties. NDAs that obstruct this access
may unreasonably interfere with the
core oversight functions of the
Commission and undermine the public
interest in a full and complete record on
which the Commission can base its
decisions. We therefore propose several
alternative prohibitions and restrictions
on NDAs for business data service
commercial agreements. First, we seek
comment on adopting a prohibition on
NDAs for commercial agreements that
bar the provision to the Commission of
any information regarding a commercial
agreement. While such NDAs may be
uncommon, should any such NDAs be
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permitted? We seek comment on the
effect allowing such NDAs would have
on the Commission’s fact finding efforts
and on its ability to base its decisions
on all relevant information. We also
seek comment on whether there are any
circumstances which would justify
precluding parties’ ability to share any
information in such a blanket fashion.
119. Second, we seek comment on
whether the Commission should
prohibit NDAs that effectively require
the Commission’s legal compulsion
before parties are able to produce
information from a business data service
commercial agreement. Do NDAs that
require parties to disclose confidential
information only when required to do so
by the Commission unduly restrict the
Commission’s access to information
necessary to discharge its statutory
functions? To what extent does this
kind of constraint in practice restrict the
Commission’s ability to access
information to the small number of
cases where it is both aware of the
existence of a commercial agreement
and can devote the time and resources
necessary for issuing an express
direction for the production of
information from the agreement? To
what extent do such NDAs place the
Commission in a quandary where it can
only access information it specifically
seeks, the existence and substance of
which the parties are bound not to
disclose?
120. Finally, we seek comment on
whether we should prohibit NDAs that
limit parties to disclosing information
subject to an NDA only in response to
a request by the Commission (in a notice
of proposed rulemaking, a public notice
or otherwise). Such a prohibition would
allow parties to disclose information to
the Commission on a voluntary basis at
their own initiative and apart from any
express request by the Commission. We
note that the Commission has
previously imposed rules effectively
requiring a prior request from the
Commission before parties could
disclose information subject to an NDA.
Section 51.301(c)(1) of the
Commission’s rules states that ‘‘a
nondisclosure agreement that precludes
[a] party from providing information
requested by the Commission’’ is a
violation of the section 251 duty to
negotiate in good faith. Should the
Commission adopt similar restrictions
on NDAs in business data services
commercial agreements? Would such an
approach to NDAs impact parties’
advocacy before the Commission?
Would it still constrain the
Commission’s access to important
information from commercial
agreements? As with NDAs that require
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legal compulsion prior to disclosure,
how would the Commission know to
request disclosure of information in
commercial agreements that it may have
no way of knowing existed?
121. Eliminating the requirement of a
prior request for information would
effectively enable parties to disclose
information from a commercial
agreement on a voluntary basis. We seek
comment on whether this is an
appropriate approach for the
Commission to take. TDS Metrocom
notes that NDAs impact parties’ ability
to fully participate in the rulemaking
process. It states that the ‘‘practice of
subjecting the rates, terms, and
conditions of commercial Ethernet
agreements to confidentiality
restrictions impedes TDS CLEC’s ability
to advocate in support of new rules and
detect unreasonable and discriminatory
rates.’’ Would allowing parties to
disclose voluntarily information from a
commercial agreement enable fuller and
freer advocacy by those parties? Would
it also assist the Commission in
identifying issues that it otherwise
would be unaware of? We also seek
comment on how the Commission
would ensure the confidentiality of such
information once disclosed to the
Commission. To the extent the
information was related to an existing
proceeding, the Commission would
presumably either have already adopted
a suitable protective order or would be
able to do so in response to such a
submission. What steps should the
Commission take to ensure the
protection of such information if the
information was not related to an
existing proceeding? Are there any other
steps the Commission should take to
ensure the protection of confidential
information voluntarily submitted by a
party?
122. Additionally, we seek comment
on whether there are other types of
NDAs or confidentiality provisions that
may inhibit the Commission’s discharge
of its core oversight and fact finding
functions. If so, we seek comment on
whether the Commission should also
prohibit these or take some other action
to modify them. We seek comment on
how any rules the Commission adopts
related to NDAs or other confidentiality
provisions should affect existing
contracts? Finally, how would the
Commission implement a prohibition
on NDAs that restrict its access to
information contained in commercial
agreements?
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2. Scope of Application of Terms and
Conditions Requirements Adopted in
the Tariff Investigation Order
123. In this section of the FNPRM, we
seek comment on the scope of
application of the three requirements we
adopt in the accompanying Tariff
Investigation Order to other tariff
pricing plans not subject to the tariff
investigation and to commercial
agreements for IP based business data
services such as Ethernet. We also seek
comment on whether such requirements
should be applied in non-competitive
markets or more generally in all
markets.
124. In the Designation Order, the
Bureau designated for investigation ‘‘allor-nothing’’ provisions in certain
incumbent LEC tariff pricing plans that
required customers that participate in
one of the plans to make all of their
TDM purchases out of that single plan.
In the Tariff Investigation Order, we
determined that all-or-nothing
provisions are unreasonable and anticompetitive because they restrict a
customer’s purchase options from both
incumbent LECs and other providers.
125. We seek comment on whether we
should extend the Tariff Investigation
Order’s prohibition on all-or-nothing
provisions in the plans under
investigation to a general prohibition on
all-or-nothing provisions in all business
data services, including both tariffed
offerings and commercial agreements,
and whether such a prohibition should
be imposed in noncompetitive markets
or in all markets. We seek comment on
whether other pricing plans or other
providers use all-or-nothing provisions
or provisions that have materially
similar effects for purchasers of TDM or
packet business data services. How
common are such provisions in TDM
tariffs or Ethernet commercial
agreements? If all-or-nothing provisions
are used in other tariffs or in
commercial agreements, what is the
business justification for using them?
What impact do all-or-nothing
restrictions have on the transition to IP
business data services? How, if at all,
are such requirements different for
Ethernet than TDM business data
services? Do Ethernet commercial
agreements raise any special
considerations that would merit unique
consideration? Do these provisions help
providers lower costs or create
efficiencies? If so, we seek
quantification of these costs and
whether there is any rational
relationship between these costs and
efficiencies generated by all-or-nothing
provisions? Additionally, we seek
comment on whether we should impose
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such a prohibition on noncompetitive
markets or all markets.
126. We also seek comment on
potential issues regarding the
implementation of a prohibition on allor-nothing requirements. To the extent
there are other tariffed incumbent LEC
pricing plans or contract tariffs that
contain all-or-nothing provisions, how
should the Commission implement this
proposed prohibition? Should such a
prohibition be effective immediately
upon publication in the Federal
Register? Should it consider a transition
period to allow parties to implement
this rule? If so, what would be an
appropriate transition period for
phasing out these provisions? Should
the Commission institute a fresh look
opportunity to enable customers of
existing pricing plans with all-ornothing restrictions to remedy the
effects of these restrictions prior to the
expiration of their current, often long
term, pricing plans.
127. Multiple purchases under a
single plan. We also seek comment on
whether we should find unreasonable
restrictions on customers’ ability to
participate in an incumbent tariff
pricing plan more than one time
concurrently. In other words, should
customers be restricted from splitting
their purchases under one pricing plan
into two or more separate agreements
and managing those separately? Some
incumbent LEC tariff pricing plans
address this issue and expressly restrict
customers to participating in a single
version of a pricing plan at any one
point in time. For example, the RCP in
the CenturyLink Tariff F.C.C. No. 11
states: ‘‘A customer can have only one
RCP in effect at a time.’’ We seek
comment on whether other pricing
plans impose a similar requirement in
this or other ways.
128. We seek comment on whether
these restrictions on customers are
reasonable. Should incumbent LECs
effectively force customers to aggregate
all their purchases into a single
purchase under a pricing plan? Would
eliminating such restrictions and
allowing customers to split their overall
purchases under a pricing plan into
separate purchases under that plan
provide them with greater flexibility in
managing their purchases? Would it
allow competitive LECs to better
manage increasing shortfall penalty
liability in a declining TDM market that
is transitioning to packet business data
services? We also seek comment on the
business rationale for such a
requirement. What additional
management or tracking burdens would
this impose on incumbent LECs and
how significant would they be? Can
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such costs or burdens be quantified?
How would any such administrative
burdens compare with the benefits of
added flexibility for customers in the
business data services market?
129. We also seek comment on
whether such restrictions are used in
Ethernet commercial agreements. If so,
commenters should cite examples and
discuss the impact they have on
customers’ flexibility in managing their
Ethernet purchases. Would allowing
customers to treat their purchases under
one Ethernet commercial agreement as
separate purchases impose any burdens
on providers of business data services?
Would the benefits of increased
flexibility outweigh any such burdens?
Should the Commission prohibit such
restrictions solely in noncompetitive
markets or should it prohibit them in all
markets?
130. Shortfall penalties are fees that
are imposed for violations of
percentage-based commitments, which
competitive LECs assert require them to
maintain a large proportion of their total
spend with an incumbent LEC provider
to obtain discounts and circuit
portability typically necessary for
wholesale providers. In the Tariff
Investigation Order, we found shortfall
penalties that provided compensation
beyond a price cap LEC’s expectation
damages were unreasonable and
directed certain price cap LECs to
remove such provisions from their
tariffs under investigation and directed
them to make tariff revisions consistent
with the terms of the order. We seek
comment in this FNPRM on whether we
should prohibit the assessment of
shortfall penalties that provide
compensation beyond expectation
damages. Should we prohibit such
penalties both in tariff pricing plans and
in commercial agreements and should
any such prohibition be imposed only
on noncompetitive markets or also on
competitive markets?
131. We now seek further comment
on the reasonableness of shortfall
penalties that are contained either in
tariff pricing plans that were not the
subject of the Bureau’s tariff
investigation or are contained in
commercial agreements for the sale of
IP-based business data services. We seek
comment on whether shortfall penalties
should reflect the economic costs of
breaching an agreement or whether they
should be set at some other level. Would
unreasonable and excessive penalties
impair providers’ ability to transition to
IP based business data services? Could
such penalties negatively affect
wholesale competition and end-user
customers in the form of higher prices,
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reduced innovation, and reduced
investment in broadband services?
132. We seek comment on whether
the standard for assessing the
reasonableness of shortfall penalties that
we adopted in the Tariff Investigation
Order should be applied more broadly
to all providers of TDM and packetbased BDS through either tariff pricing
plans or commercial agreements and
either in noncompetitive markets or in
all markets. We propose that any action
we take in this regard should be applied
on a technology neutral manner. Would
such a standard allow providers to
recover from their customers in the
event of a breach sufficient, insufficient
or excessive damages? We seek
comment on the wide variety of
methodologies for calculating shortfall
penalties both in tariff provisions and
commercial agreements. Commenters
advocating for other measures of
reasonableness for shortfall penalties
should explain their concerns with the
proposed standard and identify an
alternative standard and provide
examples.
133. We seek comment on what
approach would best ensure that both
parties to a contract, whether through a
tariff or a commercial agreement,
receive the benefit of their bargain.
Would a higher ceiling on reasonable
penalties distort market incentives and
lead to a windfall for providers? Would
a lower ceiling be sufficient to
compensate providers? We note that
some incumbent LEC plans assess
shortfall penalties that are a fraction of
full expectation damages for DS1 and
DS3 services. Would it be reasonable to
require incumbent LECs to apply these
lower penalty calculation methods to all
plans? If providers currently have
shortfall penalties that are a fraction of
expectation damages in some of their
plans or agreements, should they be
allowed to adopt higher penalties
without first substantiating a reasonable
basis for an increase? What showing
should such providers have to make?
For example, if carriers claim shortfall
penalties are necessary to recover their
risks and costs, should they be required
to make a cost showing or some other
financial demonstration to justify the
level of the shortfall penalty?
134. We also seek comment on the
impact of shortfall provisions in tariff
pricing plans on customers’ Ethernet
purchase and construction decisions.
The record shows that, if these penalties
are not set equitably and reasonably,
they can provide incumbent LECs with
economic leverage that may cause
competitive LEC customers to forgo
purchasing IP-based business data
services and other services from
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potential competitors or selfprovisioning these services over their
own networks. For example,
competitive LECs have provided
evidence that the decline in TDM sales
has exposed wholesale buyers to everincreasing shortfall penalties, which in
concert with high purchase
commitments and the need for circuit
portability, have ‘‘left them no choice
but to commit to purchasing large
volumes of Ethernet from incumbent
LECs in return for relief from the
penalties.’’ Would ensuring the
reasonableness of shortfall penalties
provide relief for competitive LECs that
claim to experience pressure to make
most if not all Ethernet purchases from
price cap LECs where a shortfall
liability is present?
135. Finally, we seek more specific
comment on the framework that should
be applied to ensure the reasonableness
of shortfall penalties in commercial
agreements for the provision of IP-based
business data services both in
noncompetitive and competitive
markets. Competitive LECs have
provided evidence of the use of shortfall
fees in Ethernet commercial agreements.
We seek comment on the use of shortfall
fees in commercial agreements
generally. How common is the use of
shortfall fees in commercial agreements,
overlay agreements, and other
agreements for the provision of Ethernet
service? How are such fees calculated
and by what methodology are they set?
How do they impact the dynamics of the
market for Ethernet services? What are
the economic costs that providers and
purchasers face in the event of a breach?
What is the best way to structure
shortfall penalties in Ethernet
commercial agreements so that they
reasonably compensate providers while
not excessively penalizing purchasers?
136. Early termination fees, as
distinguished from shortfall or other
fees, are charges assessed on a purchaser
under business data services tariff
pricing plans if a purchaser exits the
plan prior to the expiration of the
purchaser’s term commitment. In the
Tariff Investigation Order, we found
early termination fees to be
unreasonable when they allow the
incumbent LEC seller to recover
damages that exceed the lesser of either:
(1) The revenues the incumbent LEC
would have received if the purchaser
had retained the circuit or circuits
through the end of the term
commitment; or (2) the revenues the
incumbent LEC would have received if
the purchaser had paid the lesser
discount corresponding to the shorter
term the purchaser actually used the
circuit or circuits. We also found that
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certain tariffs at issue contained early
termination provisions in excess of this
measure of damage, concluded such
provisions are unjust and unreasonable
practices under section 201(b), and
directed the incumbent LECs to revise
their tariffs accordingly. We now seek
comment on whether and how the
Commission should consider imposing
constraints on early termination fees
beyond the plans subject to the tariff
investigation and what the scope of
such constraints should be.
137. We first seek comment on
imposing limits on early termination
fees in other price cap LEC tariff pricing
plans and contract tariffs for the
provision of TDM based services.
Competitive LECs assert that incumbent
LECs failed to provide cost justification
or other support for the early
termination fees they charge. For
example, in the tariff investigation, the
Joint CLECs argue that incumbent LECs
did not attempt to ‘‘quantify [their] fixed
and incremental costs or the extent to
which both have already been recovered
over many years of charging customers
for DS1 and DS3 services.’’ Sprint also
asserts that incumbent LECs are ‘‘unable
to explain why it is reasonable to
impose penalty amounts that bear no
relationship to the costs of [ ] early
termination, and that frequently exceed
even the amount the customer would
pay if it met its commitment level.’’ On
the other hand, incumbent LECs assert
that early termination provisions are
necessary to enforce term commitments
and that they are calculated reasonably.
For example, AT&T argues that early
termination provisions in its tariffs are
‘‘lower than what the customer would
have paid if they had held the circuit to
term.’’ CenturyLink contends that
‘‘[e]arly termination fees help ensure
that at least a portion of the expected
revenue stream on which CenturyLink’s
investment was premised will continue
over the life of the customer’s
commitment, and to provide some
compensation to CenturyLink if it does
not.’’
138. We seek comment on the use of
early termination fees more generally
and on their potential impact on the
development of competition and the
technology transitions. Are early
termination fees that penalize customers
beyond the full cost of the term plan
they agreed to reasonable? We seek
comment on whether we should extend
and apply the framework we adopted in
the Tariff Investigation Order to other
providers of TDM and Ethernet-based
business data services either solely in
noncompetitive markets or in all
markets. That framework entailed
capping early termination fees at the
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lesser of either: (1) The revenues the
incumbent LEC would have received if
the purchaser had retained the circuit or
circuits through the end of the term
commitment; or (2) the revenues the
incumbent LEC would have received if
the purchaser had paid the lesser
discount corresponding to the shorter
term the purchaser actually used the
circuit or circuits.
139. In commenting on this proposal,
commenters should address the
following questions. Do these two
measures adequately compensate
providers without excessively
penalizing customers? Are there other
ways to calculate a reasonable early
termination penalty? Would a costbased calculation be appropriate? Are
there any circumstances where a
penalty that compensates providers
beyond their opportunity cost is
reasonable? If so, please describe such
circumstances and what evidence a
provider could use to establish that such
a penalty is reasonable? What showing
should the Commission require if a
provider seeks to raise its existing early
termination fees? Commenters are
invited to discuss factors that the
Commission might take into
consideration in calculating reasonable
early termination penalties, such as cost
studies, revenue expectations, avoided
maintenance and administrative costs,
and any alternative means of valuing
parties’ expectations.
140. A number of existing tariff
pricing plans set early termination fees
lower than this proposed standard.
Some assess fees that represent only a
fraction of the incumbent LEC’s revenue
expectations under the plan. These
penalty amounts were filed as part of
the incumbent LECs’ tariffs and
therefore presumably provide
reasonable compensation to the
incumbent LEC in the case of a
customer’s breach of its term
commitment. We therefore seek
comment on whether we should impose
an upper bound on what we would
consider a reasonable early termination
fee that is lower than the incumbent
LEC’s revenue expectations under its
plan. To the extent commenters suggest
lower limits for early termination fees,
they should provide business and cost
justification for their recommendations.
141. Further, we seek comment on
whether, in the case of the retirement of
a copper network, to require providers
to eliminate any early termination fee
liability where the termination is caused
by the provider electing to discontinue
the plan or service that is the subject of
the term commitment. In such cases,
where it is the provider’s decision to
cancel the service, is eliminating early
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termination fees appropriate so as not to
penalize the customer? Are there any
circumstances under which providers
could reasonably assess early
termination fees in this situation?
142. We also seek comment on any
unique issues that would arise in
applying this prohibition on early
termination fees in commercial
agreements for Ethernet-based business
data services, either solely in
noncompetitive markets or in all
markets. Do overlay or other commercial
agreements for the provision of
Ethernet-based service assess early
termination penalties? At what level are
these penalties set? How are early
termination penalties calculated in
these commercial agreements? What are
the economic costs that providers and
purchasers face in the event of a breach?
What is the best way to structure early
termination fees in Ethernet commercial
agreements to ensure that such fees
reasonably compensate providers while
not excessively penalizing purchasers?
F. Rules Applying to Non-Competitive
Markets
143. We next propose requirements
that would apply to the provision of
business data services only in those
markets that are characterized as noncompetitive. These rules are intended to
provide clear guidance as to what
conduct is just and reasonable in a noncompetitive market and thereby
facilitate the resolution of disputes
through commercial negotiations and
we seek comment generally on what
actions should be taken to ensure that
conduct is just and reasonable in a noncompetitive market. Providers with
market power are able to exercise such
market power to the detriment of their
customers. Recognizing that the market
is evolving and competition may
develop in many markets not currently
subject to material competitive effects,
these rules are intended to constrain
potentially anti-competitive conduct
while also providing the flexibility to
allow all providers to respond to
competition. Like the limited rules that
would be applicable in all markets,
these proposed requirements would be
technology neutral in nature and would
form a part of our proposed overarching
framework for the regulation of BDS
generally.
1. Price Cap Regulation
144. We believe that we should
continue to apply price caps to business
data services now subject to price cap
regulation to the extent an application
of our proposed Competitive Market
Test determines that such price
regulation is necessary or such services
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are not otherwise made subject to an
alternative pricing mechanism. The
principal price cap services are TDM
business data services (i.e., DS1 and DS3
services). Elsewhere in this order, we
propose a number of actions that will
impact how and to which services price
caps will continue to apply. As
described above, we propose to adopt a
Competitive Market Test as a basis for
determining which broadband data
services are competitive or noncompetitive. And, as described below,
we propose to remove competitive TDM
services from price cap regulation. We
further propose to subject noncompetitive TDM services to price cap
regulation and allow for providers to
enter into individually negotiated
agreements for such services. Finally,
we propose and seek comment on
maintaining price caps for noncompetitive TDM services consistent
with these proposals on a non-tariffed
basis. While we seek comment on our
view and each of these proposals
individually, we ask commenters to
keep all these proposed actions in mind
and address advantages or concerns
with their collective impact as
appropriate in their comments.
145. We also seek comment on the
scope of the application of rate
regulation in non-competitive markets
to packet-based BDS (and, as well, to
TDM BDS). At some point in the future,
there may be non-competitive BDS
markets in which TDM is no longer
available. In such a case, how would we
regulate the non-competitive business
data services? How do we ensure the
regulation we adopt here is technologyneutral and sufficient to permit it to be
applied to such a non-competitive BDS
market?
146. As discussed above, the record
makes clear that the market for lowerbandwidth TDM business data services
such as those currently subject to price
caps is non-competitive in significant
measure. Firms with market power do
not have incentives to price services at
just and reasonable levels consistent
with section 201 of the Act. We believe
that the price cap system, as modified
by any measures we adopt in this
proceeding, will limit the extent to
which price cap LECs can exercise their
market power over non-competitive
TDM BDS rates. When properly applied,
price cap regulation replicates the
beneficial incentives of competition in
the provision of business data services
while balancing ratepayer and
stockholder interests. The price cap
indices provide benchmarks of price cap
LEC cost changes that encourage them
to become more productive and
innovative by permitting them to retain
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reasonably higher earnings. Those
indices are designed to limit the prices
price cap LECs charge for service to just
and reasonable levels. By establishing
limits on prices carriers can charge for
business data services, and placing
downward pressure on those limits or
‘‘caps,’’ price caps creates a regulatory
environment that incentivizes carriers to
become more productive and forces
them to pass a portion of their cost
savings to ratepayers.
147. We are not aware of any other
presently available alternative to price
cap regulation that more effectively
balances the interests of ratepayers and
carriers. For instance, extending Phase II
pricing flexibility relief to services
presently under price caps would be
inconsistent with our findings that these
services are provided in noncompetitive areas. Applying rate of
return regulation, in contrast, would
entail overcoming daunting
administrative challenges and would
dampen firms’ incentives to become
more productive. And consistent with
our proposal below to apply a
technology-neutral anchor or
benchmark pricing system to all
business data services, we also propose
to use TDM BDS rates as the benchmark
for establishing reasonable packet-based
BDS rates. Accordingly, we believe we
should continue applying price cap
regulation to BDS, including TDM DS1
or DS3 services, to the extent an
application of our proposed Competitive
Market Test determines such services
are non-competitive. We invite
comment on the above analysis and on
these views.
148. We invite comment on extending
price cap regulation to business data
services presently subject to Phase II
pricing flexibility to the extent an
application of our proposed Competitive
Market Test determines such services
are non-competitive consistent with our
proposal below. We believe that we
should not take that step—or indeed
apply any sort of ex ante pricing
regulation—where our analysis shows
that the market is competitive. We
invite comment on this approach.
149. A productivity-based X factor
and a corresponding inflation measure
had been a fundamental feature of the
Commission’s price cap system from the
system’s inception in 1987 until the
adoption of the CALLS plan. This
balance reflected two propositions that
we believe are essential to any effort to
ensure reasonable rates in noncompetitive markets: (a) That the service
provider have an opportunity to recover
its costs of service; and (b) that the
ratepayer benefit from any decrease in
those costs in much the same way as a
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customer in a competitive market
benefits from cost decreases. We believe
we should restore this balance between
ratepayer and price cap carrier interests
by incorporating a productivity-based X
factor into our price caps system for
business data services on a forwardgoing basis. We invite comment on this
view. We also ask whether we should
make any adjustments to current price
caps to reflect any past productivity
gains that were not reflected in our past
regulatory regimes. Below, we propose
corresponding action to regulate the
rates of IP-based BDS in noncompetitive markets.
150. The goal of price cap regulation
is to have rates and output levels
roughly mirror rates and output levels
in a competitive market, at least on
average over an extended period of time.
If inflation outpaces productivity
growth, price cap rates may become
unreasonably low. Conversely, if
productivity growth outpaces inflation,
companies with market power will be
able to charge unreasonably high rates.
Our current system, in which the Xfactor equals its inflation measure,
implicitly assumes that changes in
business data services productivity
perfectly offset inflation in the general
economy. We think such a perfect offset
likely did not occur in the business data
services industry during the period
since the expiration of the CALLS plan.
Given the rapid growth in business data
services output, and the ever-increasing
economies of scale with respect to
providing business data services, per
unit costs likely have decreased
significantly since that time. We seek
comment on whether this analysis is
correct and, if so, whether this
productivity trend will continue.
151. Over the period since the
expiration of the CALLS plan, as
technology has evolved and for other
business reasons, price cap LECs, like
other LECs, have been consolidating
TDM switches, placing soft-switches,
increasing fiber deployments, and
decreasing maintenance costs. We
believe that, as a consequence, business
data services productivity growth has
significantly outpaced inflation and
therefore that the price cap LECs are
likely charging unreasonably high rates.
In a regulatory environment where
prices fail to reflect productivity gains
and, consequently, carriers set prices
too high, end users will purchase less of
the services produced, and the quantity
of output will be lower than if prices
were set at a competitive level. The
productivity of which the plant is
capable will not be realized.
152. We note that some price cap
LECs assert that their costs have risen
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and the fact that the X factor has been
set equal to the GDP–PI has forced them
to charge below-cost prices. We are
skeptical of this claim: These price cap
LECs have not provided any evidence to
support their claim that business data
services productivity increases have
departed from historical patterns and
now lag behind productivity increases
in the economy as a whole.
Additionally, we note that no price cap
LEC has filed any request that we
examine the frozen productivity factor
in light of their claimed increased costs.
But even if we were to accept the price
cap LECs’ claim, that would only prove
that we need to restore the fundamental
balance between carriers and ratepayers
inherent in the Commission’s price cap
system.
153. Competitive LECs, in contrast,
maintain that price cap LECs have been
reaping the benefits of cost-saving
productivity gains and have not passed
these cost savings to customers. If the
competitive LECs are correct—as our
analysis strongly suggests, prices are
higher than an appropriate X-factor
would have produced. We therefore
believe we should incorporate a
productivity-based X factor into our
price caps system for business data
services. We invite comment on the
above analysis and this approach.
154. We agree with Sprint that we
should explore all available
methodologies for determining a
productivity-based X-factor for business
data services. Accordingly, we seek
comment on several methodologies and
ask the parties to suggest additional
alternatives that they believe will lead
to reasonable rates for those business
data services regulated under price caps.
155. We believe that we should
balance potential precision with
administrative feasibility in deciding
how to set a productivity-based X-factor.
Measuring past productivity and
predicting its future trajectory are
inexact sciences; we are not required ‘‘to
enter precise predictive judgments on
all questions as to which neither [our]
staff nor interested commenters [are]
able to supply certainty.’’ On the
contrary, we believe that we may
properly rely on available data to
estimate productivity growth in the
provision of business data services and
use that estimate to calculate a
reasonable productivity-based X factor.
We invite comment on this analysis and
on how we should balance potential
precision with administrative feasibility
in setting a productivity-based X-factor.
156. We invite comment below on
three methodologies for calculating a
productivity-based X-factor and
corresponding price cap indices
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adjustments. We think these
methodologies capture cost-reduction
incentives while mimicking
competitive-market outcomes by using
projections of productivity gains, rather
than actual values, based on historical
trends. They calculate possible
productivity-based X-factors by taking
the difference between an economywide rate of inflation and the growth
rate of industry input prices and the
projected growth rate of a firm’s
productivity level.
157. Our calculations rely on three
data sources: (a) The U.S. Bureau of
Labor Statistics’ (BLS’s) Capital, Labor,
Energy, Materials, and Services
(KLEMS) data; (b) data from the peer
review process in connection with the
deployment of the Commission’s
Connect America Cost Model (CACM);
and (c) those data in combination with
cost data that TDS submitted in this
proceeding. We seek comment on
whether data from these sources provide
a reasonable basis for calculating a
productivity-based X factor. Do they
properly balance potential precision
with administrative feasibility? Are
there alternative sources of data that
would more precisely calculate
productivity increases in the provision
of business data services? If so, would
the additional precision associated with
obtaining those data and using them to
calculate a productivity-based X-factor
outweigh the associated burdens?
158. The KLEMS data used in our
calculations are publicly available,
annual industry-level data on industrylevel measures of input prices and total
factor productivity (TFP) for the
telecommunications and broadcasting
industries. We seek comment on any
adjustments to the KLEMS data that we
should make to improve its utility as a
measure of business data services
productivity. We seek comment on the
relevant years for which we should use
KLEMS data.
159. In response to a peer review of
the CACM, the CACM was used to
generate cost share data for ten cost
categories. Are there other cost
categories that we should include or
should we exclude some of these cost
categories from our calculations? Does
combining CACM peer review data with
company-specific data, such as the TDS
data used in calculating the proposed X
factor and corresponding adjustments to
price cap indices, provide a more
precise estimate of business data
services productivity growth? Are there
other sources of available companyspecific cost data that would increase
that precision?
160. We invite comment on whether
we should require price cap LECs to
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submit their expense matrix data from
2005 to 2015? If so, should we require
that these data be reported using the
categories previously required under the
Commission’s rules and, if not, what
categories should we specify? Would
the benefits from these data outweigh
the burdens?
161. We ask whether we should
require the price cap LECs to submit
cost studies, as Sprint suggests, to help
us determine business data services
productivity growth. If so, what
methodology should we specify for
those costs studies? Would the benefits
from relying on company-specific data
from these cost studies, as opposed to
economy-wide or industry-wide KLEMS
and CAPM data, outweigh the burdens?
162. We invite comment on whether
and, if so, how we may use the pricing
data collected in this proceeding to
supplement our other calculations.
Would regressions comparing prices for
DS1 and DS3 services in competitive
and non-competitive areas provide
proxies for the minimum amount that
prices should have fallen in noncompetitive areas and, if so, how we
should use those proxies in setting an Xfactor and price cap indices
adjustments? We seek comment on the
pros and cons of using regressions to
supplement other X-factor calculations.
We ask the parties to submit their own
regressions.
163. We seek comment on whether we
should incorporate a consumer
productivity dividend into our price cap
system. If so, how should we calculate
that dividend? Should we incorporate a
dividend component into any X-factor
that we set? Should we include such a
dividend in a price cap indices
adjustment if we decide to take that
approach?
164. GDP–PI (i.e., the gross domestic
product price index) is a measure of
inflation incorporated into the
Commission’s price cap index formula
as one of three basic components in
addition to the X-factor and exogenous
cost adjustments.
165. The Commission currently uses
the BEA chain-weighted GDP–PI to
measure inflation. We find that this
measure accurately reflects cost changes
that carriers face without being
susceptible to carrier influence or
manipulation. We propose that we
should continue to use GDP–PI as the
inflation measure in the price cap index
formula consistent with BEA’s measure
for purposes of setting the X Factor. We
seek comment on this proposal.
166. In the 2005 Special Access
NPRM, the Commission invited
comment on a series of additional issues
relating to price caps. These issues
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included: (a) Whether the price cap
index formula for business data services
should include a growth or ‘‘g’’ factor to
account for any demand growth effects
that are not reflected in an X factor; (b)
whether the Commission should require
price cap LECs to share a portion of
their business data services earnings
with ratepayers through adjustments to
the price cap indices; (c) whether the
Commission should retain a low-end
adjustment mechanism for price cap
LECs that have not implemented pricing
flexibility; and (d) whether the
Commission should subdivide its
special access price cap basket into
additional or different categories and
subcategories.
167. We ask the parties to update the
record on each of these issues. We also
ask whether there are any additional
issues we should resolve to help ensure
that our price cap system produces
reasonable rates for business data
services in non-competitive markets.
168. A growth or ‘‘g’’ factor would
allow ratepayers to benefit from at least
of portion of any business data services
demand growth effects that are not
reflected in a productivity-based Xfactor. We invite comment on whether
we should adopt a ‘‘g’’ factor and, if so,
how we should calculate it. We also ask
how we should how we should measure
demand growth and how we can ensure
that any ‘‘g’’ factor does not double
count growth already reflected in a
productivity-based X-factor. We ask, in
particular, whether demand growth
benefits not reflected in an X factor
should be shared between business data
services providers and their customers.
Should any ‘‘g’’ factor we adopt be
applied only on a going-forward basis,
or should we also adjust the price caps
indices to account for prior demand
growth?
169. Earnings sharing allows
ratepayers to benefit from business data
services profitability and was a feature
of the Commission price cap regime
until 1997. In abolishing sharing, the
Commission found that it blunted price
cap LECs’ efficiency incentives and that
eliminating it would remove vestiges of
rate of return regulation from the price
cap system. We find these reasons
persuasive and therefore believe that we
should not reinstate sharing. We invite
comment on this approach.
170. The low-end adjustment permits
price cap LECs that earn a rate of return
100 basis points or more below the
prescribed rate of return for rate-ofreturn carriers to increase their price
cap indices in the next year to a level
that would allow them to earn 100 basis
points below that rate of return. This
mechanism is available to all price cap
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LECS that have not implemented
pricing flexibility. In the 2005 Special
Access NPRM, the Commission
tentatively concluded that, if it were to
continue to apply price caps to business
data services, it should retain a low-end
adjustment mechanism for price cap
LECs that have not implemented pricing
flexibility.
171. In this FNPRM, we propose
below to replace the current pricing
flexibility framework with a new
technology-neutral framework. Under
the proposed framework, price cap
LECs’ TDM BDS in non-competitive
markets will be subject to price caps and
can be offered through individually
negotiated agreements, a regime that
parallels in most practical respects the
Phase I pricing rules. And price cap
LECs’ TDM BDS in competitive markets
will be removed from price cap
regulation and offered pursuant to
commercial agreements. We invite
comment on how our action on this
proposed paradigm should affect our
consideration of whether we should
retain a low-end adjustment as part of
our price cap system. In particular,
should we allow business data services
providers that provide their TDM
services under these varying regimes to
seek low-end adjustments? If so, how
can we assure that the providers’
claimed earnings on services provided
under price caps accurately reflect their
costs of providing those services?
172. In March 2016, the Commission
reduced the prescribed rate of return for
rate-of-return carriers from 11.25
percent to 9.75 percent, subject to a
transition. Effective July 1, 2016, this
transition will reduce the 11.25 percent
rate of return by 25 basis points per year
until it reaches the represcribed 9.75
percent on July 1, 2021. We ask that the
parties address whether we should use
this reduced rate of return to measure
eligibility for a low-end adjustment in
the event we retain that mechanism. If
so, how, if at all, should we adjust the
percentage that determines eligibility for
a low-end adjustment and the level to
which price cap indices are retargeted
as this transition proceeds? Specifically,
should we use the 9.75 percent
prescribed rate of return in considering
low-end adjustments when it is effective
or should the applicable rate of return
track the rate of return transition?
173. A price cap basket is a broad
grouping of services, such as TDM
services. Prices for services in a given
basket are capped by its price cap index.
Placing services together in the same
basket limits the LEC’s pricing
flexibility and incentives to shift costs.
Within the special access service basket,
services currently are grouped into
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service categories and subcategories.
Similar services are grouped together
into service categories within a single
basket to act as a substantial bar on the
LEC’s ability to engage in
anticompetitive behavior.
174. In the 2005 Special Access
NPRM, the Commission sought
comment on the categories and
subcategories the Commission should
establish in a special access basket if we
continued to apply price cap regulation
to business data services. In response,
commenters proposed a number of
changes to the categories and
subcategories for the special access
basket. We ask interested parties to
update their comments with respect to
the special access basket categories and
subcategories in light of technological
and operational changes that have
occurred in the business data services
marketplace since 2005.
175. We seek comment on whether
the special access basket should be
subdivided into more than one basket,
and whether the baskets should be
further subdivided into categories and
subcategories. We ask whether should
use a single basket or multiple baskets
and the advantages and disadvantages of
each approach. What categories and
subcategories should we establish in a
BDS basket if we adopt a price cap
method to regulate BDS prices? Should
we retain without modification for BDS
the existing special access category and
subcategories? If not, parties should
identify the specific categories and
subcategories of BDS that they contend
we should adopt.
176. We ask parties to discuss the
advantages and disadvantages of having
a BDS basket with relatively few
categories or subcategories compared to
one with many. We also seek comment
on what criteria and data we should
examine to determine which services to
place in which categories or
subcategories. We ask parties proposing
categories or subcategories, to explain in
detail the bases for their proposed
categories or subcategories, and to
support their proposals with data and
studies.
177. Should we establish separate
categories or subcategories based on
BDS line densities? For example,
channel termination services extending
between a LEC end office and a
customer premise in areas where there
are more than 10,000 special access
lines per square mile could be placed in
a particular subcategory.
178. For the same reasons that the
Commission eliminated the lower
pricing bands, we believe that there
should be no lower band for service
categories or subcategories to restrict the
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price cap LECs’ downward pricing
flexibility. We seek comment on this
approach. We likewise seek comment
on the upper band value to limit the
price cap LECs’ upward pricing
flexibility for the categories or
subcategories. Should we retain five
percent as the value? Should we use
different values for different categories
or subcategories? What criteria and data
should we use to determine these
values?
179. We invite comment on whether
business data services productivity
gains have outpaced inflation during the
period since June 30, 2005, the date the
CALLS plan expired. We ask that the
parties support their position on this
issue with detailed data and economic
analysis. We seek comment on whether
in the event we conclude that business
data services productivity gains
outpaced inflation during that period,
we should adjust the baseline price cap
levels to capture those gains for
ratepayers. As noted above, we propose
that a new forward-looking productivity
factor should be applied to TDM
services in non-competitive markets
(with corresponding rate regulation for
IP-based BDS in non-competitive
markets).
180. As indicated above, our X-factor
and price cap indices adjustment
calculations rely on BLS’s KLEMS data;
the Commission’s CACM peer review
data; and CACM peer review data in
combination with TDS cost data. We
think our X-factor calculations capture
cost-reduction incentives while
mimicking competitive-market
outcomes by using projections of
productivity gains, rather than actual
values, based on historical trends. We
use a proxy for the growth rate of input
prices, a measure of economy-wide rate
of inflation based on a national price
index (i.e., GDP–PI) adjusted to account
for systematic difference between the
growth rates of national prices and
telecommunications industry-specific
input prices. To adjust the price cap
index to account for the historic
productivity X-factor, this estimation of
X is subtracted from the annual change
in the GDP–PI to determine the annual
change in the price cap index.
181. We calculate the X-factor by
subtracting from the change in GDP–PI,
the change in industry prices and add
the change in industry total factor
productivity (TFP). The change in
industry TFP is the difference between
the change in TFP for price cap LECs
and the change in TFP for the overall
U.S. economy. We calculate an input
price differential reflecting the historical
difference in the average annual rate of
change in price cap LEC input prices as
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compared with the historical average
annual rate of change in the economy as
a whole. These two factors are then
added together for each year and
subtracted from the measure of the
change in the rate of inflation (i.e. the
change in GDP–PI).
182. Applying this basic calculation,
we apply various data sources and
models for estimating the inputs in the
X-factor equation. From these
calculations, we develop a forwardlooking X-factor adjustment to the price
cap index applied annually.
183. Method One—KLEMS Model.
Our first set of calculations rely on
KLEMS from BEA and the U.S.
Department of Labor’s Bureau of Labor
Statistics (BLS). The BLS maintains
yearly KLEMS statistics on Broadcasting
and Telecommunications. These
industry-level measures of input prices
and total factor productivity (TFP) are
publically available. This is the most
granular level of industry detail for
which KLEMS data is available on a
regular and consistent basis. Input price
indexes are available for each of the five
components of KLEMS—capital (K),
labor (L), energy (E), non-energy
materials (M), and services purchased
from other businesses (S).
184. Commission staff computed three
X-factor estimates using KLEMS data:
(1) The first estimate uses growth rates
that are averaged over all years for
which we have data, 1997 through 2013;
(2) the second considers only the years
for which data would have been
available in 2005, 1997 through 2003;
and (3) the third considers data from
2005 (the year in which the CALLS plan
ended) through 2013. The year 1997
provides a helpful starting point as the
last year in which the Commission
prescribed a productivity-based X-factor
and 2013 represents the year for which
the business data services data was
collected. The results are as follows:
185. Method Two—Connect America
Cost Model. Our second set of
calculations uses data from the CACM
peer review process. In the 2011 USF/
ICC Transformation Order, the
Commission adopted CACM to provide
a forward-looking estimate by census
block of the costs of providing a voice
and broadband-capable network for use
in determining Connect America Fund
support for broadband necessary to
serve price cap areas. The Commission’s
response to a peer review of the CACM
set forth data, including shares and
estimates of changing prices, for ten cost
categories. Relying on cost models and
industry financial accounts, the
Commission staff determined the key
cost components of business data
services supply, estimated their shares,
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and estimated changes in the input
prices of each key component. These
calculations relied on the following
input categories and estimates of the
cost shares of each of these categories:
Labor, fiber, poles, conduit, drop,
optical net terminal, fiber pedestals,
splitters, electronics, and land/
buildings.
186. The CACM methodology
provides base information about the key
costs of supplying business data
services. The CACM was developed to
estimate the costs of a mass market
residential broadband fiber-to-thepremise network that also is used to
provide telephone service, and was built
to also provide business data services.
Consequently, it is essentially a model
of the costs of an incumbent LEC
supply, but with a focus on residential
rather than business data services.
Despite this, there are no reasons to
think that either (1) the underlying cost
categories of the CACM or (2) the rates
of change in input prices of these cost
categories would be significantly
different for business data services than
for residential data services. The CACM
peer review response provides at least a
very rough indication of shares even
though its modeling is not limited to
business data services.
187. For each category, Commission
staff calculated low and high estimates
for changes in input prices. Two
measures, one high and one low, were
used for changes in total factor
productivity. The low estimate for net
impact on costs applies the low estimate
for input prices and the high estimate
for productivity. The high estimate for
net impact on costs applies the high
estimate for input price and the low
estimate for productivity. Weighted
averages were computed for both low
and high estimate, where the weights
were the cost category shares.
Commission staff calculated the net
impact on costs which equals the
change in industry input prices plus the
change in industry TFP. The results are
as follows:
188. Method Three—TDS and
Connect America Cost Model. Our third
set of calculations is a modification of
method two, relying on CACM
calculation supplemented with data
provided by TDS Telecom (TDS). The
TDS data consist of booked financial
data on TDS’s incumbent LEC
operations. Commission staff used these
data as an alternative set of input
categories. However, the TDS categories,
other than those for labor and real
estate, were not at the same level of
detail as in the same CACM
calculations. This required that the TDS
categories for switching and
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transmission be mapped to the
remaining eight CACM categories. The
results are as follows:
189. We invite comment on whether
these methodologies provide a
reasonable basis for assessing industry
productivity for use in X-factor and
price cap indices adjustment and
whether we should use them for such
purpose. How precise are they? Are
there alternative methodologies that
would provide comparable or greater
precision at comparable, or lower, cost?
If so, we ask the parties to describe
those methodologies in detail and to
explain how we should apply them.
190. Are the data used in our
calculations reliable? Are other, more
detailed data available that would more
accurately portray productivity trends?
Do data that provide broad measures of
large economic sectors, like the KLEMS
data, provide the most reliable data for
measuring BDS productivity trends in
relation to production trends in the
overall economy? Or are
telecommunications-specific data, like
the CAPM data, or company-specific
data, like the TDS data, preferable? We
ask the commenters to address the
relative merits of each of these
categories of data and to suggest
additional sources of reliable data
within each category.
191. The calculations present three
different time periods that we could use
to determine a productivity-based Xfactor and, if we decide to take that
course, price cap indices adjustments.
We ask whether these time periods
accurately capture BDS productivity
trends for such purposes and, if not,
which other time periods would provide
increased accuracy and why.
192. Finally, we ask the parties to
recommend, based on our analysis or
their proposed alternative, whether we
should make adjustments to the X factor
and price cap indices. We also seek
comment on capping existing price cap
indices and ask whether this should be
done in all areas or just certain areas
with pricing flexibility. We ask
commenters to explain the basis for
their recommendation and explain how
such approaches would impact
competition and the technology
transitions.
193. We seek comment below in this
FNPRM on applying the substance of
the current Phase I pricing flexibility
requirements to TDM BDS offered in
non-competitive areas. To implement
such proposal, we also seek comment
above on extending price cap regulation
to TDM BDS offered in non-competitive
areas that presently are subject to Phase
II pricing flexibility. We now seek
comment on how we would move such
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services back into price caps. Because
the services we now consider currently
are subject to Phase II pricing flexibility,
their rates have been moved out of price
cap constrained tariffs and are, in some
cases, higher than they would have been
had they been consistently constrained
by the price caps. What, if any, changes
to the currently applicable rates should
be made as part of a transition back into
price caps and why? If so, how should
such changes be implemented? Does
this transition raise any special
considerations? We seek comment on
these questions.
194. We propose that if the
Commission adopts a new X-factor or
otherwise requires adjustments to the
price cap indices, price cap carriers
would implement the associated rate
decreases by submitting TRPs (i.e.,
Tariff Review Plans) and special access
tariff revisions for all rate elements
associated with special access. Such
TRPs would set forth the calculations
underlying the API, and demonstrate
that the revised API for the special
access basket does not exceed the
revised price cap index. We seek
comment on this proposal.
195. How shall we adjust the price
cap indices if the Commission adopts a
new X-factor or otherwise requires
adjustments to the price cap indices?
Should the rate decreases that result
from these actions apply to all rate
elements associated with special access
services, or should carriers be permitted
to choose the manner in which the
decreases are made as long as the
revised API for the special access basket
does not exceed the revised price cap
index? What process should the
Commission employ for purposes of
implementing a new X-factor or any
required adjustments to the price cap
indices? In this regard, we invite
comment on implementation issues
such as the timing for complying with
the required rate reductions, what
should be included in related TRP
submissions and tariff filings, and
carrier certification requirements.
2. Anchor or Benchmarking Pricing
196. In non-competitive markets,
absent guidance as to the range of rates
that would be considered reasonable, a
provider could exercise market power
through the charging of
supracompetitive rates. As discussed
above, TDM BDS rates currently are
constrained to some extent by price
caps. In this section, we propose and
seek comment on a methodology to
ensure that, in non-competitive markets,
rates for Ethernet business data services
not subject to price cap regulation are
just and reasonable. We emphasize that
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the proposed mechanism described
below would be used in those markets
where the Commission determines,
based on an application of the
Competitive Market Test, the market is
non-competitive such that it is likely
competition is not constraining rates to
just and reasonable levels. That said, the
proposed methodology is not
prescriptive, and is intended to facilitate
providers and customers negotiating
reasonable commercial agreements.
197. We first took action to protect
against concerns regarding Ethernet
pricing during the transition to IP in the
Emerging Wireline Order by adopting an
interim rule to ensure that incumbent
LEC BDS providers that are
discontinuing legacy TDM services offer
Ethernet services, used as wholesale
inputs by competitive carriers, at
reasonably comparable rates, terms, and
conditions. This interim rule applies to
two categories of services: (1) BDS
services at DS1 speed and above; and (2)
commercial wholesale platform services
such as AT&T’s Local Service Complete
and Verizon’s Wholesale Advantage.
The interim reasonably comparable
wholesale access requirement is a
condition to a grant of an incumbent
LEC’s discontinuance application
imposed under our authority pursuant
to section 214(c) of the Act, and helps
‘‘bridg[e] the gap’’ between the current
competitive situation and the
completion of the BDS rulemaking. The
condition that the rule imposes expires
when ‘‘all of the following have
occurred: (1) The Commission identifies
a set of rules and/or policies that will
ensure rates, terms, and conditions for
special access services are just and
reasonable; (2) the Commission provides
notice such rules are effective in the
Federal Register; and (3) such rules
and/or policies become effective.’’ The
rules and policies that we propose
establishing from this FNPRM are
intended to meet the first prong of the
Emerging Wireline Order’s standards
governing expiration of the condition.
Once we adopt permanent rules
subsequent to this FNPRM, we will
provide the Federal Register notice
called for in the second prong, which
will announce the effective date called
for in the third prong. We anticipate that
the condition the interim rule imposes
will expire as of the effective date of our
permanent pricing rules for BDS, absent
action staying or overturning our rules
and policies. We further discuss our
various methods for considering a
permanent pricing methodology below.
198. In this FNPRM, we propose an
anchor pricing or benchmarking
approach to replace, as it applies to
BDS, the interim rule currently in effect.
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We consider three options below. The
first option is to rely on regulated TDM
service prices to anchor the prices of
similar packet services. This option
would be effective only where TDM
prices could be expected to reasonably
constrain the rates for higher speed
packet-based services. In that case, we
could decline to otherwise regulate
packet-based BDS rates. If, however, we
were unable to determine that regulated
TDM prices would provide a reasonable
constraint on packet-based BDS, a
second option would be to establish one
regulated price for packet-based BDS,
for example, establish a regulated rate
for a 10 Mbps Ethernet service, which
could serve as an anchor for nearbybandwidth packet-based BDS, and could
arguably constrain those rates. Our third
option is to initially use reasonably
comparable prices for regulated TDM
services as a benchmark to help the
Commission determine whether rates
for various packet-based BDS are just
and reasonable, but over time using, as
a benchmark, the packet-based BDS
prices established under this approach.
Price cap TDM rates do not have a
single rate for a particular TDM service
but a series of rates that, when
combined, create a rate. How should we
account for differences in rate structures
between price-capped TDM rates and
packet-based BDS?
199. We seek comment on which
option we should use and how such a
pricing regime should operate. We
believe we should adopt the third
option—using regulated TDM prices,
but over time using the packet-based
BDS prices established under this
approach as a benchmarking tool in
determining whether packet-based BDS
rates are just and reasonable, similar to
the interim rule adopted in the
Emerging Wireline Order. We believe
this option would be most effective in
constraining rates and most consistent
with the Commission’s goals of
promoting facilities-based competition
and facilitating technology transitions.
We question whether, under the first
option, TDM services could effectively
constrain the prices for higher speed
packet-based services in the current
environment of increasing demand for
high-bandwidth services. In addition,
such reliance may create incentives at
odds with our goal of facilitating the
technology transitions. We also question
the desirability of the second option,
establishing rates for one tier of packetbased BDS, for two reasons. First,
because it is doubtful that such an
approach could reasonably constrain a
relatively wide range of bandwidths (for
example, it is unlikely that a 25 Mbps
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anchor price would effectively constrain
prices for 2 Mbps and 50 Mbps
services). Second, for reasons similar to
our hesitation to bring such services
under price cap regulation, any price
regulation where the Commission
would be establishing rates for carriers
to charge (even for just one service)
would still add reporting and
monitoring burdens on carriers, which
could inhibit innovation. In contrast, we
believe the third option would be the
least burdensome and most effective in
encouraging competition through
commercial negotiation. We seek
comment on these various options and
our views.
200. Certain parties have suggested
we could use a cost model to establish
benchmarks for packet-based BDS
Ethernet services. For instance, as noted
above, the CACM was used to provide
a forward-looking estimate by census
block of the costs of providing a voice
and broadband-capable network for use
in determining Connect America Fund
support for broadband necessary to
serve price cap areas. We seek comment
on whether we could either establish a
new cost model or modify an existing
cost model to provide a basis for
establishing Ethernet rate benchmarks
within price cap incumbent LEC service
areas to the extent that price regulation
might otherwise apply? What would be
the benefits of a model-based approach
in contrast to the anchor or
benchmarking approaches described
above? Is there a particular model that
we should consider? What would be the
benefits of establishing a new model
instead of modifying an existing model?
201. Although packet-based BDS have
largely been provided outside of price
cap regulation, we expect adoption of an
anchor or benchmarking pricing
mechanism would provide many of the
advantages of price caps and other
forms of pricing regulation without
some of the disadvantages. Through the
adoption of price cap regulation, the
Commission attempted to encourage
incumbent LECs to innovate and
increase efficiencies in providing
service. However, bringing more
services under our price caps would
entail reporting and monitoring costs
which we can avoid under our proposed
anchor or benchmarking approach
(since such an approach, in part by its
expression, and in part through setting
of precedents in adjudications, will
encourage parties to negotiate
reasonable terms and conditions). We
seek comment on this approach. Would
our proposed approach work effectively
to constrain prices and increase
innovation? Would one of the
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alternative forms be more effective than
our proposed approach?
202. We note that the Verizon/
INCOMPAS Joint Letter suggests that the
Commission should rely on ex ante rate
regulation in relevant markets with
insufficient competition. We seek
comment on the principles in the
Verizon/INCOMPAS Joint Letter. How
would we implement ex ante pricing
regulation that would further the goals
of constraining prices and ensuring just
and reasonable rates and be imposed on
a technology neutral basis? How would
such regulation be implemented on an
operational basis?
203. As described above, we propose
to use as a benchmark for reasonable
packet-based BDS rates the price of the
most comparable legacy TDM
technology and base the reasonableness
of the price on that service level, even
if the services are provided using a new
or different technology. Over time, as
TDM benchmarks are discontinued,
packet-based BDS rates established as
being fair and reasonable under this
approach would serve as a continuing
benchmark. We seek comment on this
proposal. How would this methodology
be implemented? Should this price be a
ceiling for the rates of various packetbased services or should it merely be
used as a tool to determine whether
rates are reasonable? Would this method
be a workable solution to ensure that
packet-based BDS rates are just and
reasonable? If not, what alternative
solutions should the Commission
consider?
204. We believe we should impose
anchor or benchmarking pricing only in
non-competitive markets. Is that the
correct determination? Why or why not?
Would there be reasons to impose
anchor or benchmarking pricing in
competitive markets? We believe that in
effectively competitive markets, anchor
or benchmarking pricing would not be
necessary because competition would
be sufficient to constrain prices to just
and reasonable levels. We also believe
that anchor or benchmarking pricing
would not be appropriate where we find
sufficient material competitive effects
under the Competitive Market Test,
even where that means competition is
not necessarily driving prices to
effectively competitive levels. This is
because we must account for limitations
on our ability to establish what a
competitive price is, the harms of
unintended consequences from
regulatory action (for example, to the
extent regulatory action encourages
waste through rent-seeking), as well as
its administrative costs. Is that a
reasonable approach? If not, what
impact would anchor or benchmarking
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pricing have on areas that already have
material competitive effects?
205. We seek comment on the scope
of the application of rate regulation in
non-competitive markets to packetbased BDS (and, as well, to TDM BDS).
In non-competitive areas, should all
providers be subject to rate regulation or
should only some providers be so
impacted? If the latter, how should we
determine which providers? So, for
example, should rate regulation apply
only to the largest providers (and how
would such an outcome be
implemented as market shares change
over time)? Conversely, should we
consider adopting a rule that providers
with less than a certain percentage of
market share would not be subject to
rate regulation on the ground that
smaller providers likely represent new
entrants? Or should we use another
factor than market share were we to
adopt this approach, such as the
ubiquity of infrastructure capable of
delivering BDS service in a relevant
geographic market, or the effective
ability of a provider to reach some
percentage of potential BDS customers?
We seek general comment on the scope
of rate regulation in non-competitive
markets.
206. We propose above to evaluate the
reasonableness of rates for packet-based
BDS by benchmarking them against the
incumbent LEC’s TDM price for the
most comparable level of service
available, and over time, as TDM
services are discontinued,
benchmarking them against packetbased BDS rates established as being
just and reasonable under this approach.
For example, the anchor price for a
particular market for a 5 Mbps Ethernet
service would be the cost of the closest
TDM equivalent offered by the
incumbent LEC, which, for example,
might be a DS1. This would not imply
that the price of the Ethernet service
should be the same as that of the nearest
equivalent service, but only that the
Commission would judge whether the 5
Mbps service price was just and
reasonable in the light of the DS1 price.
In this example, the Commission could
determine that the 5 Mbps service price
should not exceed the price of the DS1
multiplied by 3.3 (= 5 / 1.5), given the
prices of higher bandwidth services
usually fall more than proportionately
with bandwidth, and that Ethernet
services are considered to have a lower
cost in supply than legacy TDM
services. Would this anchor price
approach be workable? If not—what
method should the Commission utilize?
If it is workable, would the proposed
upper bound, that the ratio of the price
of a packet-based BDS with a bandwidth
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in excess of a regulated TDM service to
the price of the TDM service should not
exceed the ratio the packet-based BDS
bandwidth to the TDM service
bandwidth, be reasonable? What about
for packet-based BDS for which the
nearest comparable TDM service has a
higher bandwidth?
207. We seek comment on this
proposal. Does it adequately cover
situations in which an obvious
comparable TDM service does not exist
in a given market? We welcome
comment on any alternative or
additional ways for providers to address
the situation where it is difficult to find
a comparable TDM service offering on
which to base the anchor price.
208. In addition to the bandwidth of
the service offering, should the rates
differ based on the technology, service
tier, geographic location, quality of
service, or any other factors? How
should these differences be accounted
for in determining the ultimate rate
ceilings that providers are permitted to
charge at or below for their packet-based
BDS? How would any discounts
commonly provided for TDM services
influence the benchmark rates? Are
there any other issues that should be
accounted for that may affect the
ultimate rates (either higher or lower)
than the benchmark set by our anchor
price? If so, what are they, and why
should BDS providers be entitled to
adjust their rates accordingly? How do
we ensure that carriers are not permitted
to increase prices above the benchmark
by imposing unreasonable charges on
related services, such as special
construction?
209. Our anchor or benchmark prices
must adjust to changes in economic
conditions and advancements in
technology and productivity that impact
the costs of providing services.
Specifically, how would anchor prices
be established once incumbent LECs
have fully transitioned from TDM to
packet-based services? To address this
challenge, at least over the medium
term, we propose to make permanent,
after the interim rule expires, the
current network transition requirement
adopted in the Emerging Wireline Order
which requires an ILEC discontinuing
TDM service to offer a comparable
packet service at comparable prices. We
seek comment on that approach, and
also on how best to establish an anchor
or benchmark price for the potential
situation where, due to increased
bandwidth demands, sales of low
bandwidth Ethernet services decline
and have been replaced by broad
demand for higher bandwidth BDS. Is
this situation too speculative to consider
regulatory approaches at this point? In
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particular, would our proposal to use as
a benchmark any packet-based BDS
with prices that were established under
this approach work? Is this approach
sufficiently technology-neutral, and if
not, is there a more appropriate
technology-neutral alternative? Would
this approach over time be likely to
become unmoored as TDM services are
discontinued and as the minimum
bandwidth of service offerings rise?
What other factors would cause the
Commission to reset anchor or
benchmark pricing? Should anchor or
benchmark pricing be revisited on a
regular, recurring basis? In any case, is
it likely there will be any need for
regulation of such higher bandwidth
services or are there reasons to believe
that, as this transition takes place, such
services will take on the characteristics
of low bandwidth services, including a
lack of competitive supply for such
services?
210. In the Enterprise Broadband
Forbearance Orders, the Commission
granted forbearance from the
application of dominant carrier
regulation, including tariffing, to certain
of the petitioning incumbent LECs’
broadband telecommunications
services. The forbearance grants did not
include all price cap incumbent LECs
and only included certain IP services
being offered at the time of the grants,
resulting in some inconsistency
regarding the tariffing of IP-services.
Upon implementation of an anchor or
benchmarking pricing methodology, we
believe we should continue the
forbearance from tariffing for all packetbased services currently subject to
forbearance. In addition, we believe we
should expand the forbearance to
include all price cap incumbent LECs
and all packet-based services. We
believe that forbearance from tariffing
will allow for greater use of commercial
negotiations, which will facilitate
innovative integrated service offerings
designed to meet changing market
conditions and will increase customers’
ability to obtain service arrangements
that are specifically tailored to their
individualized needs. We seek comment
on these views. Would this approach be
consistent with the three-part test in
section 10(a) of the Act? What impact
would a more comprehensive
forbearance from tariffing have on the
development of packet-based BDS?
Would greater flexibility lead to more
competitive pricing and offerings? How
should the increased use of forbearance
from tariffing requirements be
implemented? Should the detariffing be
mandatory or should carriers be
permitted to file permissive tariffs?
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Should there be any grandfathering for
services that are currently offered
pursuant to tariff?
211. The success of the proposed
anchor or benchmarking pricing
framework will rest in part on parties
having access to generally available
rates that comply with the anchor or
benchmarking pricing requirements.
Our primary goal under anchor or
benchmarking pricing would be to
create a framework of technologyneutral regulation that will facilitate the
emergence of competition. We want to
minimize burdens on market
participants and not increase barriers to
market entry. Tariffing has the potential
to impose burdensome obligations and
may prevent more competitive offerings
from being introduced by limiting
flexibility and the ability to individually
tailor product offerings. The disclosure
tariffs require, however, is a positive
aspect in non-competitive areas because
it can help combat unjust and
unreasonable rates, terms, and
conditions. Requiring BDS providers to
disclose their rates, terms, and
conditions publically would provide a
clear check as to whether they are
compliant with our anchor pricing
requirements. Do these potential
transparency benefits outweigh
potential benefits to competition that
would arise from forbearance from
tariffing requirements? Are there other
potential benefits to tariffs that we
should consider? We now turn to a
proposed public disclosure requirement
that would offset any negative impact of
forbearance from tariffing requirements.
212. We believe we should require
providers affected by our proposed
anchor or benchmarking pricing regime
to publicly disclose their generally
available rates, terms, and conditions.
The rates in these public disclosures
should be consistent with the anchor or
benchmarking pricing rules we adopt
and should be available to customers on
the carrier’s Web site. We seek comment
on these proposals. How should
disclosure of rates be implemented? Is
posting on a carrier’s Web site
sufficient?
213. Currently, the Emerging Wireline
Order’s reasonably comparable standard
helps ensure that providers are offering
just and reasonable rates when they seek
to discontinue certain legacy TDM
services. Accordingly, we have
temporary policies in place that should
help ease any unjust and unreasonable
rates in the Ethernet BDS market where
legacy TDM services are discontinued.
With this in mind, what is a reasonable
timeline for implementing the new
anchor or benchmarking pricing
methodology? Should the timeline be
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linked to the determinations under the
Competitive Market Test? What types of
changes and preparations would
providers need to undertake to switch to
the anchor or benchmark prices that
would justify time for a transition? If a
transition is needed, how long should it
last to ensure that providers are ready
and customers are provided relief in as
timely a manner as possible?
214. Some BDS providers and
purchasers enter into contracts with
terms that last for several years,
especially in the context of receiving
term discounts. We do not intend to
intervene where sufficient material
competitive effects keep rates at just and
reasonable levels. However, should the
Commission need to take additional
action after adoption of our proposed
anchor or benchmarking pricing regime,
it is well-established that ‘‘[u]nder the
Sierra-Mobile doctrine, the Commission
has the power to prescribe a change in
contract rates when it finds them to be
unlawful, and to modify other
provisions of private contracts when
necessary to serve the public interest.’’
Such a need may arise, for example,
when contract terms last long after
adoption of our regime, which would
prevent the rates from falling to just and
reasonable level under our anchored
prices. We note that an agency may
modify or abrogate a valid contract
‘‘only if it harms the public interest.’’
Under what circumstances should we
exercise our authority under the SierraMobile doctrine to abrogate such
contracts that remain inconsistent with
the benchmarked rates under our anchor
pricing system? In the context of the
prices for BDS, under what, if any,
circumstances would rates above the
anchor or benchmark price justify
contract abrogation?
215. We do not envision that our
anchor or benchmarking pricing
methodology will impose any additional
reporting requirements on carriers that
offer the Ethernet services falling under
these new anchor or benchmark rates.
We have, however, proposed to require
public disclosure of generally available
terms and conditions. We invite
commenters to explain whether any
reporting requirements should be
imposed to ensure that providers
comply with our rules and that those
rules serve the purposes for which they
were designed. If reporting requirements
should be implemented, what form
should they take? Should we require
certification that providers are in
compliance? Are there any other
requirements we should consider, and
what are the costs and benefits of
adopting additional requirements?
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216. We expect the Commission’s
enforcement process and declaratory
ruling process will be critical
components of our proposed anchor or
benchmarking pricing methodology that
will help ensure our new rules prevent
providers from offering packet-based
BDS at rates, terms, and conditions that
are unjust and unreasonable. For
example, interested parties may file
complaints alleging that particular BDS
providers’ rates, terms, and conditions
are unjust, unreasonable, or unjustly or
unreasonably discriminatory. Based on
these complaints, we would then
evaluate the rates providers’ charge to
determine whether they are just and
reasonable. This determination would
be made based on the facts before us in
each individual circumstance. In
response to complaints, providers of
Ethernet BDS could make arguments
about why the services at issue cost
more to provide than the TDM services
to which we would look to benchmark
prices. BDS providers, in addition, may
seek declaratory rulings that the rates
they charge for services subject to our
anchor pricing system are just and
reasonable. Such declaratory rulings
will provide BDS providers certainty
that they are in compliance with our
new anchor or benchmarking pricing
regime. We seek comment on whether
the complaint and declaratory ruling
processes would be reasonable
processes to utilize in enforcing the
proposed pricing methodology. Should
we adopt a timeframe for resolving these
complaints or declaratory rulings?
Where the Commission concludes that
the rates for BDS services were unjust
and unreasonable, should providers be
found liable for refunds? Are there
better approaches to meeting these
goals?
3. Wholesale Pricing
217. Certain competitive LECs argue
that business data services providers are
charging them wholesale rates higher
than the retail rates those same
providers charge end user customers,
and that such wholesale rates are
unreasonable. These competitive LECs
argue that when business data services
providers price their wholesale services
higher than their retail services, this can
result ‘‘in a price squeeze, preventing
[competitors] from competing with the
RBOCs for the sale of Ethernet service
to end users.’’ As evidence of this price
squeeze, Windstream cites the fact that
the ‘‘ILECs’ wholesale Guidebook rates
bear little relationship to real retail
prices. [REDACTED] which is below its
wholesale Guidebook rate for an
Ethernet at the same capacity level and
term ($1,225) as well as its DS3 three-
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year rate ($1,232.50).’’ TDS also argues
that the ‘‘RBOCs were offering Ethernet
service to wholesale customers such as
TDS CLEC at a price higher than they
sold the same service at retail, even
though they avoided some significant
costs when selling at wholesale.’’
Windstream adds that, [REDACTED].
218. These allegations raise concerns
that are not novel. The Commission
previously has recognized that
incumbent LECs can ‘‘strategically
manipulate the price of their direct
competitors’ wholesale inputs to
prevent competition in the downstream
retail market.’’ While our proposed
framework would move away from
regulating providers based on their
historical categorizations, we find it
likely that providers in non-competitive
markets have similar abilities and
incentives to engage in such price
manipulation. We believe that existing
rules may apply to these concerns
regarding wholesale pricing, and that
addressing such concerns in our
proposed framework may provide
helpful guidance. We also note that the
Verizon/INCOMPAS Joint Letter states
that ‘‘[t]here should be a relationship
between wholesale and retail pricing’’
for business data services.
219. We seek proposals for and
comment on adopting rules, under
sections 201 and 202(a), ensuring just
and reasonable wholesale rates that
would be applicable to provider(s) in
non-competitive markets. Are there
other sources of authority that we
should consider? How do we best
ensure that we employ sources of
authority that operate in a technologyneutral manner?
220. We ask commenters to explain
how frequently business data services
providers charge wholesale customers
rates that exceed the corresponding
retail rate. Does the practice vary
depending on bandwidth levels or other
product features? Are there other
examples of this practice, and if so
where is such pricing taking place?
Windstream argues that such practices
violate ‘‘Section 251(b)(1) as an
‘unreasonable or discriminatory
condition[] or limitation[]’ that results
in a failure to provide carrier customers
and end users services ‘subject to the
same conditions,’ and violates
prohibitions of sections 201 and 202
against unjust and unreasonable as well
as unreasonably discriminatory
practices and charges.’’ We invite
commenters to explain whether
charging higher rates for wholesale
business data services than for
comparable retail services would violate
the Act and our rules. We also seek
comment on the view that, because of
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avoided costs or other factors,
reasonable wholesale rates should be
lower than retail. Do the services
wholesale customers tend to purchase
use different portions of the incumbent
LECs’ networks than the services retail
customers purchase? Are there
differences in the incumbent LECs’
expenses for sales, marketing, customer
service, technical support, and
uncollectibles between wholesale and
retail customers? If there are differences
justifying a discount, how would we
determine the just and reasonable
discount that would apply to wholesale
rates?
221. We seek comment on what if any
steps should be taken to ensure that
customers have a basis for determining
whether wholesale rates are just and
reasonable under existing or proposed
rules. For example, what steps are
incumbent LECs currently taking to
disclose the lowest retail price to
potential customers under existing
rules? Are such processes effective, or
should we take additional measures to
ensure that potential customers are
aware of the lowest retail price? For
example, should we require some form
of public disclosure, such as on a
carrier’s Web site? Would such a
disclosure put purchasers in a better
position to know whether the rates they
are charged are just and reasonable? Are
there other requirements we should
adopt regarding wholesale rates?
222. Finally, we seek comment on the
relationship between any requirement
concerning wholesale rates and the rate
regulation we have proposed for TDM
and packet-based services in noncompetitive markets. Should both
approaches be used? One or the other?
Or are there certain markets (by service,
geography, customers or some
combination of factors) for which the
relationship between wholesale and
retail rates is most salient?
4. Terms and Conditions
223. As part of the technology neutral
framework for regulating business data
services, we propose prohibiting tariff
and other contractual arrangements that
condition the sale of business data
services in a non-competitive market on
the sale of such services in a
competitive market. Such rules would
be applied on a technology neutral
basis. We seek comment on both the
harms such agreements may impose and
on implementation of any prohibition in
light of the ongoing purchase
agreements for such services that may
contain tying arrangements. How do we
balance current business expectations of
customers and providers against the
long term harms such arrangements may
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impose on the evolution of the
competitive market for business data
services? We address specifically three
types of tying arrangements that have
been identified in the record: IP
migration provisions, typically found in
incumbent LEC tariff pricing plans,
provisions that leverage incumbent LEC
tariff pricing plan penalty liability to
induce sales of Ethernet and other
services, and geographic tying. To what
extent, if at all, would a prohibition on
tying obviate the need to identify multilocation customers, or any other class of
customers, for purposes of the
application of the Competitive Markets
Test or alternative regulatory approach?
Are there any other actions that the
Commission should consider to address
issues arising from customers who are
purchasing a service that spans
competitive and non-competitive
markets?
224. IP migration provisions are
common among incumbent LEC pricing
plans. These provisions allow customers
to count Ethernet purchases toward
fulfillment of their TDM commitments.
We seek comment on whether we
should prohibit such provisions as
unreasonable tying arrangements. To
what extent do such provisions
encourage and facilitate incumbent
LECs’ leveraging of their dominance in
the provision of TDM business data
services to increase sales of their
Ethernet services? How do the price cap
incumbent LECs’ market positions differ
between the TDM and Ethernet business
data services markets that are usually
covered by the tariff containing such
provisions? We seek comment on
whether and, if so, to what extent
incumbent LEC IP migration provisions
advantage incumbent LECs competing
for Ethernet sales. If IP migration
provisions were eliminated from
incumbent LEC tariff pricing plans,
what would be the impact on customers
of those plans? To what extent have
customers relied on IP migration
provisions to meet their commitments
under TDM pricing plans? What volume
of Ethernet purchases would be
affected? If customers were unable to
count such purchases toward fulfillment
of their TDM commitments, what
potential penalties would they incur?
How would a prohibition, if adopted,
best be implemented? Should customers
be allowed a ‘‘fresh look’’ period to reevaluate their tariff commitments or
other transition period to allow
customers to adapt their purchasing
arrangements? Would this unreasonably
deprive price cap incumbent LECs of
the benefit of their bargain? How could
such a prohibition best be applied in a
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technology-neutral manner? What
implementation questions are raised by
our proposal to eliminate tariffing?
What additional factors should the
Commission consider?
225. As explained above, competitive
LECs have more recently alleged
incumbent LECs use tariff pricing plan
penalty liability as leverage to induce
competitive LECs to agree to large
Ethernet purchases from the incumbent
LECs. They claim that these practices
represent unreasonable tying
arrangements and could extend
incumbent LECs’ dominance of TDM
business data services to IP services. We
seek comment on prohibiting the use of
provisions that offset penalty liability
from tariff pricing plans in Ethernet
commercial agreements. We note that
such provisions appear in multiple
commercial agreements submitted by
the four large incumbent LECs in
response to the Bureau’s tariff
investigation. How pervasive are these
practices? What is their impact on
competition for Ethernet services? What
would be the impact of eliminating such
provisions on buyers, sellers and the
market generally? To what extent do
such agreements contain change of law
provisions in anticipation of changes
such as this? We also seek comment on
the use of other provisions in
commercial agreements that tie the sale
of Ethernet services to the sale of
services by providers in noncompetitive markets. Finally, if the
Commission were to bar the use of such
provisions in Ethernet commercial
agreements, how should the
Commission implement such a
requirement? Should the Commission,
as some competitive LECs have
advocated, require commercial
agreements that link purchases to
tariffed penalties or other tariff
provisions be filed with the Commission
as a contract tariff? What should the
parameters be of such a requirement?
Would any other type of linkage require
such agreement to be filed as a tariff?
How could such a prohibition best be
applied in a technology-neutral manner?
226. First, we recognize that in the
competition analysis above we find that
the competitive triggers adopted in the
Pricing Flexibility Order were poor
measures of competition. In this
FNPRM, however, we propose a new
framework that includes a Competitive
Market Test to determine areas that are
competitive and non-competitive. The
assertions and arguments concerning
tying across markets subject to different
levels of market concentration remain
relevant in the new regulatory
framework. We seek additional
comment on whether and to what extent
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we should be concerned geographic
tying could take place under the
proposed technology-neutral framework
and, if so, what remedial action we
should take.
227. While prohibiting such tying
arrangements would minimize potential
harm, it would also eliminate the ability
of providers and purchasers to link
TDM purchases and Ethernet purchases
in any way, including the use of IP
migration provisions in TDM tariffed
services and the use of credits to offset
penalty liability conditioned on the
purchase of Ethernet service from the
provider. It is clear from the record that
linking DSn purchases and Ethernet
purchases involves material short term
benefits for purchasers as they attempt
to manage the effects of the decline in
TDM services and the transition to IP
services. Some competitive LECs
advocate in favor of such arrangements
and incumbent LECs generally defend
their reasonableness. Considering the
benefits of these arrangements may be
particularly relevant given the current
decline in TDM sales and the
consequent penalty liabilities that
decline involves.
228. The Commission has established
as one of its priorities facilitating
technology transitions. While we share
the concerns of commenters that
incumbent LECs may have the incentive
and ability to leverage their market
position in TDM services to increase
their Ethernet sales, we also recognize
that addressing the harms of tying TDM
BDS to Ethernet services may require a
more nuanced approach to reflect the
implications of such a prohibition on
the technology transition. AT&T states
that such restrictions would ‘‘artificially
discourage the replacement of TDM
services with Ethernet services.’’ We
seek comment on approaches that
would encourage the transition to
Ethernet while limiting an incumbent
LEC’s ability to leverage its market
position in the provision of TDM BDS
to gain a similar position in the
provision of Ethernet offerings. Are
there other ways to provide both parties
with the benefits from these
arrangements while limiting the harms
to competition in the market for
business data services? We also seek
comment on ways to allow the benefits
of such arrangements during a defined
period of time to facilitate the industry’s
transition to IP services.
229. Finally, we seek comment on
how we should implement any
prohibition on tying arrangements the
Commission may adopt. What effect
would adopting such a prohibition have
on existing tariff and contractual
arrangements in tariffs and commercial
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agreements? Should the Commission
consider either grandfathering existing
agreements or providing a transition
period to allow parties to adapt their
agreements to reflect such a prohibition?
Should there be a ‘‘fresh’’ look period to
allow customers to reallocate their
purchases in light of the modifications
or prohibitions we propose to tying
arrangements?
230. Percentage commitments are
requirements included in some
incumbent LEC tariff pricing plans that
require customers to commit to buy,
over the term of the plan, a high
percentage of the amount of services
they elect to purchase when initiating or
renewing purchases through a tariff
pricing plan. Given the framework we
adopted in the Tariff Investigation Order
that addresses the special access
marketplace by focusing on penalties,
we declined to take action on
percentage commitments in that Order.
We seek comment on whether this
approach is sufficient to ensure that
percentage commitments will not harm
competition, impede investment and
deployment of facilities-based
competitive networks, or hinder the
transition to IP-based business data
services.
231. We also seek to broaden our
inquiry into minimum percentage
commitments in this FNPRM and seek
comment on the impact percentage
commitments have on the provision of
TDM based business data services. With
regard to the TDM based market, how
prevalent is the use of such
commitments in tariff pricing plans and
contract tariffs beyond those
investigated in the Bureau’s tariff
investigation? What impact do such
commitments have systemically on the
market for TDM based business data
services? How do they vary?
Competitive LECs claim that such
commitments tend to ‘‘lock up’’ or
foreclose significant portions of the
market for TDM based business data
services, impairing competition and
inhibiting technology transition. Is that
still the case? Incumbent LECs assert in
the tariff investigation that the decline
in TDM based business data services
market effectively rendered the
competitive LECs’ lock up arguments
moot. We seek comment on whether
that is in fact the case or whether
percentage commitments operate
differently in a declining market. What
is their effect in a declining TDM
market? What remedies would be
appropriate to ensure that percentage
commitments are reasonable and allow
incumbent LECs the flexibility to
manage their businesses while also
minimizing the potential harms
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associated with ‘‘locking in’’
competitive LEC customers? Should the
Commission consider prohibiting the
use of percentage commitments,
limiting the level at which the
commitment is set, or taking some other
remedial step to ensure they do not
negatively impact the market?
232. We also seek comment on the use
of percentage commitments in
commercial agreements for the sale of
packet based business data services
such as Ethernet. Competitive LECs cite
the incumbent LECs’ use of such
requirements in Ethernet commercial
agreements and claim incumbent LECs
are attempting to lock up or control
their Ethernet purchases. Competitive
LECs cite in particular the fact that their
Ethernet commercial agreements with
incumbent LECs typically involve large
scale purchases and involve the sale of
other telecommunications services such
as mobile wireless and long distance
service. How commonly are percentage
commitments used in Ethernet
commercial agreements and at what
percentage levels are they set? How do
they impact the market for Ethernet
business data services? Should the fact
that commercial agreements can involve
such large scale purchases impact our
analysis? If the Commission found
percentage commitments were
impacting the Ethernet market, what
remedies should the Commission
consider adopting? To the extent
commenters suggest the adoption of
remedies, they should also address how
such remedies should be implemented.
233. Term commitments require
customers that participate in a term
pricing plan to commit to continue to
make those purchases for a set term of
months or years. Term commitments in
tariff pricing plans vary considerably
from one year to as long as ten years. We
declined to address term commitments
in the Tariff Investigation Order, instead
addressing competitive LECs’ concerns
by prohibiting penalties that exceed the
incumbent LECs’ expectation damages.
We seek comment on whether action on
term commitments is necessary to
ensure that they will not harm
competition, impede investment and
deployment of facilities-based
competitive networks, or hinder the
transition to IP-based business data
services. We also seek to broaden our
inquiry into term commitments in this
FNPRM and seek comment on the
impact term commitments have on the
provision of TDM based business data
services generally. How prevalent is the
use of such commitments in tariff
pricing plans and contract tariffs beyond
those investigated in the Bureau’s tariff
investigation? What impact do such
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commitments have systemically on the
market for TDM based business data
services? In the tariff investigation, the
incumbent LECs submitted data that
showed that the average term lengths for
agreements under the plans at issue was
considerably longer than the term
lengths typically reported by
competitive LECs. It also showed that a
very high percentage of all sales in the
plans at issue—over 97 percent—occur
in plans longer than three years. Are
longer term agreements in any way
evidence of a seller’s market power? Do
incumbent LEC term plans that are
longer than most competitive LEC plans
tend to inhibit the technology transition
or otherwise impact competition in the
TDM based market? What remedies
would be appropriate to ensure that
term commitments are reasonable and
allow incumbent LECs the flexibility to
manage their businesses while also
minimizing the potential harms
associated with the alleged ‘‘locking in’’
competitive providers?
234. We also seek comment on the use
of term commitments in commercial
agreements for the sale of IP based
business data services such as Ethernet.
How do term commitments in Ethernet
commercial agreements compare with
those in TDM tariff pricing plans and
contract tariffs? To what extent do term
commitments impact the Ethernet
market? How does the length of term
commitments offered by competitive
providers in Ethernet commercial
agreements compare with the length of
term commitments offered by
incumbent LECs? What remedies, if any,
should the Commission consider
adopting either to limit or condition
term commitments in Ethernet
commercial agreements? To the extent
commenters suggest the adoption of
remedies, they should also address how
such remedies should be implemented.
To the extent that the Commission
should consider restrictions on term
commitments, should such restrictions
apply solely to non-competitive markets
or more broadly to all markets?
235. Under upper percentage
thresholds, if a buyer’s purchases
increase more than a set percentage
above their initial volume commitment
during the term of the plan, the buyer
is required either to commit to an
increased purchase volume or to pay an
overage penalty. We did not address
upper percentage thresholds in the
Tariff Investigation Order, but instead
seek comment on whether we should
adopt a broad prohibition on such
requirements in non-competitive areas.
236. We seek comment on whether
the use of upper percentage thresholds
in tariffs and contract tariffs generally is
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an unreasonable practice. As discussed
above, in both the Tariff Investigation
Order and earlier in this FNPRM, the
price cap LECs’ all-or-nothing
requirements often served to restrict
customer options and inhibit the ability
of competitive LEC customers to plan
for their network evolution. Such
unreasonable restrictions also may have
contributed to the asserted lock in effect
of upper percentage thresholds. We seek
comment on whether the price cap
LECs’ arguments about their potential
risk exposure when customers add large
amounts of circuits to their plans with
portability are more persuasive if the
customer has the choice to place its
demand in a term plan without
portability when adding new circuits to
its agreements with the price cap LEC.
We seek comment on whether upper
percentage thresholds are unreasonable
and should be prohibited for providers
of TDM business data services in noncompetitive markets. Under what
circumstances might upper percentage
provisions be found reasonable? In the
record, incumbents LECs argued they
incurred risks and costs when an
increase in purchases reached a certain
point; however, they failed to provide
any financial information on what these
costs are or how they are related to
actual upper percentages or overage
penalties that are used. We seek
comment on what showing a carrier
should be required to make if it
supports such a provision. Will
removing the all-or-nothing
requirements from the providers’ tariffs
provide the flexibility customers need to
make different choices if they do not
want to increase their spend under an
upper percentage threshold? If we were
to adopt a prohibition on upper
percentage thresholds, what is an
appropriate transition period for
phasing out these provisions?
237. We seek comment on the extent
to which commercial agreements for the
provision of Ethernet-based service
assess upper percentage thresholds. We
also seek comment on whether these
provisions are found elsewhere in the
telecommunications industry or offered
by other carriers other than in
incumbent LEC tariffs. Are upper
percentage thresholds in Ethernet
commercial agreements unreasonable
and, if so, should the Commission
prohibit them in this context as well?
Should such a prohibition apply solely
to non-competitive markets or more
broadly to all markets?
238. Overage penalties effectively
function as the enforcement mechanism
for the upper volume thresholds
addressed in the previous section of this
FNPRM. We did not address overage
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penalties in the Tariff Investigation
Order, but instead seek further comment
here. We seek comment on the use of
overage penalties to enforce upper
percentage thresholds in TDM based
tariffs and contract tariffs. If the
Commission does not eliminate upper
percentage thresholds, we seek
comment on the circumstances under
which the Commission should find
overage penalties to be unreasonable.
For example, in the Tariff Investigation
Order, we determined that shortfall
penalties that exceeded the seller’s
revenue expectations were
unreasonable. We seek comment on
whether this is an appropriate approach
to assessing overage penalties as well.
How would such a measure work in the
case of an overage? How should the
Commission determine a seller’s
revenue expectations in an overage
situation? Are there alternative
approaches to determining the outer
bound of reasonableness for overage
penalties? Commenters advocating for
the use of a different measure of
reasonable overage penalties should
explain their reasons for not applying
the standard used to assess shortfall
penalties and identify an alternative
standard using examples. What is the
best way to structure overage penalties
to ensure that the fees reasonably
compensate providers while not
excessively penalizing purchasers?
239. We also seek comment on
whether and to what extent overage
penalties are contained in commercial
agreements for the provision of Ethernet
business data services. Is it reasonable
to include such penalties in agreements
for Ethernet business data services in
non-competitive areas? If so, how do
these contracts calculate these
penalties? If the Commission decides to
eliminate overage penalties or impose
limitations on them, how should it
implement those decisions? Would
there be any need for the Commission
to consider adopting any transitional
rules to facilitate implementation?
Should such a prohibition apply solely
to non-competitive markets or more
broadly to all markets?
240. Competitive LECs have asserted
certain provisions in incumbent LEC
tariff pricing plans that apply upon
expiration of a purchaser’s agreement to
buy services tend to lock purchasers
into re-committing to purchase under
those plans under essentially the same
prices, terms and conditions of their
previous agreements. These provisions
include requirements for automatic
renewal of subscription agreements
under the same terms and conditions as
a previous agreement and requirements
that force buyers to pay higher,
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undiscounted month-to-month rates
immediately upon expiration of an
agreement. Competitive LECs claim
these provisions impair competition and
inhibit technology transitions. We seek
comment on the reasonableness of such
provisions in tariffs and commercial
agreements in areas where competition
is not present. We also seek comment on
existing so-called ‘‘evergreen’’
provisions in some tariff pricing plans
that allow customers to extend service
under the same prices, terms and
conditions for certain periods of time
following the expiration of an
agreement, including whether we
should require such provisions in tariffs
and commercial agreements in noncompetitive markets.
241. Incumbent LEC tariff pricing
plans commonly contain provisions
related to the expiration of a purchaser’s
agreement. It is inherent in the
relatively long-term nature of the need
for and provision of business data
services that parties generally must
renegotiate their agreements at the
expiration of an agreement in order to
continue the service arrangement.
Parties typically negotiate the terms and
conditions of a subsequent agreement as
they approach the end of the term of an
existing agreement. The provisions we
seek comment on—automatic renewals
and requirements to revert to
undiscounted, month to month rates—
may impose unreasonable constraints
on purchasers whose agreements have
expired in light of the long term nature
of broadband data services agreements
and the substantial logistics required to
move purchases to other providers or
construct facilities to self-provision.
242. Provisions requiring automatic
renewal of agreements are included in
certain incumbent LEC tariff pricing
plans. For example, the Commitment
Discount Plan (CDP) in Verizon Tariff
No. 1 states ‘‘[i]f the CDP Customer does
not notify the Telephone Company of its
choice during the two (2) month
extension, a new CDP will begin based
on the previously effective commitment
period.’’ We propose to prohibit
automatic renewal provisions in tariff
pricing plans and contract tariffs for the
provision of TDM based broadband data
services in non-competitive areas as an
unreasonable constraint on purchasers’
ability to modify their commitments or
seek alternative providers to supply
their needs. We seek comment on
whether automatic renewal provisions
are unreasonable. We also seek
comment on how common they are and
how frequently they are invoked in
practice. What is the practical impact of
such provisions on purchasers’ options
at the expiration of an agreement? How
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do they impact the dynamics between
the parties as they renegotiate their
arrangements? How do they impact the
flexibility and the timeframe customers
have to negotiate or to develop
alternative sources of supply? Do
competitive LECs also impose automatic
renewal provisions in their business
data service sales agreements? We also
seek comment on whether such
provisions are used in commercial
agreements for Ethernet business data
services? Additionally, are such
provision included in agreements for
managed services sold to retail end
users? Finally, we seek comment on
whether such a prohibition should
apply solely to non-competitive markets
or more broadly to all markets?
243. Given the comments in the
record, we are particularly concerned
that incumbent providers have the
incentive and ability to use the
expiration of a contract as an
opportunity to increase charges for
ongoing service and use that as leverage
to induce customers to recommit to
their pricing plans. In areas without
sufficient competition, these provisions
have the potential to put increased
pressure on customers to renew
contracts with incumbent providers,
even if the terms are unfavorable, to
avoid paying higher rates for an
extended period of time. We therefore
believe that any provision that enables
a provider to increase its rates upon the
expiration of either a tariff or
commercial agreement for TDM or
Ethernet-based service in areas without
sufficient competition is unreasonable
under section 201 of the Act.
244. We seek comment on our view
and on the following additional
questions. How do such provisions
constrain purchasers’ options at the end
of an agreement? Could the reversion to
month to month rates be understood as,
in effect, a penalty enforcing the resubscription to a subsequent agreement?
How reasonable is it to assess month to
month rates, after a purchaser has
already fulfilled its commitments under
a previous agreement which presumably
compensated the incumbent LEC for the
circuits involved? Do competitive LECs
also impose such a requirement at the
expiration of their sales agreements? If
we were to require the modification of
such provisions, should the
Commission determine that evergreen
provisions are a more reasonable
alternative?
245. We note that incumbent LECs
argue that one of the benefits to a
provider of offering term discount plans
is that the plans allow it ‘‘to recover its
costs over the life of the plan.’’ If the life
of the plan has ended, and the
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incumbent LEC has presumably
recovered its costs apart from on-going
maintenance costs, is there any
justification for allowing the incumbent
LEC to increase the price and charge
higher rates upon termination? How do
these higher rates compare to the
shortfall penalties that customers pay if
they terminate their plans early? We
also seek comment on whether an
automatic reversion to undiscounted
rates is a feature common to IP based
Ethernet commercial agreements. To the
extent such provisions appear in
Ethernet commercial agreements,
should the Commission consider
prohibiting or otherwise restricting
them? Finally, should such any such
prohibition or restriction apply solely to
non-competitive markets or more
broadly to all markets?
246. We also seek comment on socalled ‘‘evergreen’’ provisions that allow
a purchaser to continue to purchase
services under the same terms and
conditions following the expiration of
an agreement as it had under the
expired agreement. We seek comment
on whether the Commission should
require the inclusion of evergreen
provisions in tariff pricing plans and
commercial agreements for business
data services in non-competitive
markets. Would requiring carriers to
provide evergreen status on a monthly
basis following the expiration of an
agreement provide purchasers flexibility
in assessing their options or
transitioning their purchases to IP based
services? Would it be reasonable to
impose such a requirement on providers
in markets without sufficient
competition, which would be assured
additional purchases of their services
under terms they have already agreed
to?
247. We also seek comment on
whether Ethernet commercial
agreements commonly include
evergreen provisions to ensure
continued service at the same rates,
terms and conditions following the
expiration of an agreement. Are such
provisions more common in Ethernet
agreements than in TDM pricing plans?
With regard to applying this framework
to the provision of Ethernet-based
business data service, do parties face the
same constraints when negotiating
agreements for TDM services and
Ethernet-based services after a contract’s
expiration? Are there special terms and
conditions that only apply when parties
are negotiating a move from a provider’s
TDM services to a provider’s Ethernetbased services and, if so, what impact
do those terms and conditions have on
the provision of Ethernet services? We
also seek comment on whether a
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mandate for evergreen provisions
should apply solely to non-competitive
markets or more broadly to all markets.
248. We seek comment on whether
required evergreen status should be time
limited. If so, what would be a
reasonable period of time that would
provide flexibility to purchasers but also
not unreasonably extend uncertainty for
providers in non-competitive areas?
Should customers be allowed to pay
monthly rates equal to those under the
original agreement for up to one year
past the contract’s expiration? Would
this provide sufficient time to account
for the average length of contract
negotiations and to protect the interests
of both parties? Do contract renewal
negotiations typically extend beyond
one year, and if they do, are there
examples of providers that are willing to
continue offering rates at the same level
as those in the expired deal? We seek
comment on this time period and
whether a shorter or longer term would
be more appropriate.
G. Alternative Approaches To
Reforming BDS That Fulfill Core Goals
249. In addition to seeking comment
on the new regulatory framework
outlined above, we invite commenters
to suggest alternative frameworks to
apply to BDS. Are there other regulatory
frameworks that would minimize
regulation where competition is
sufficient to constrain BDS rates, terms,
and conditions and focus regulatory
action on circumstances in which
sufficient competition is lacking? All
proposals should address the
commercial practicalities and
administrative feasibility of applying
the alternative framework and explain
how it furthers the Commission’s core
goals of promoting investment,
innovation, competition, and protecting
customers in the BDS marketplace.
250. In Part V.D.2 above, we invite
comment a Competitive Market Test
that focuses on product markets,
customer classes, business density, and
the number of facilities-based providers
in a given geographic area, such as the
census block. In this section, we seek
comment on alternative approaches and
criteria for determining whether or not
a market is competitive. Commenters
proposing such an alternative should
explain how it will further the
Commission’s core goals in application
and address administrative feasibility.
251. In Part V.D.5 we ask for comment
as to which provider(s) specific rules in
a non-competitive market should apply
and how the Commission should
determine whether to apply specific
regulation to a particular provider,
including the use of market shares, in
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non-competitive markets. In this
section, we seek alternative proposals
that would ensure that the Commission
limits regulation to that which is
necessary to ensure just and reasonable
rates, terms and conditions within a
non-competitive market while still
encouraging new market entrants.
Should we use a test of market power
and, if so, how should market power be
defined and how would such a marketpower test be applied in a way that
minimizes burdens on providers and the
Commission? As to the scope of
regulation, should we focus on the
conditions in non-competitive markets
and consider regulations that would
apply generally or should we apply
specific rules only to certain entrants,
and if so, which ones? And how can we
maintain and/or create incentives for
new entry? How should we consider the
potential presence of barriers to entry
and policies that might serve to lower
artificial barriers to entry? In general,
what is the best form of regulation of a
non-competitive market? As in Part
V.D.5, we ask commenters to consider
the impact of alternative new regulatory
frameworks on investment and
innovation.
252. For any proposed frameworks
submitted in response to this section,
commenters should explain how any
triggers would be applied, which
provider(s) would be subject to
regulation and how such regulation
would be implemented and enforced.
For example, would there be tariffs or
another mechanism? How would any
alternative market test be applied, and
would there be a process for challenges?
Commenters submitting proposals they
believe are simpler than the framework
proposed above should explain why and
how the administration would differ
from the alternative proposals in this
FNPRM.
253. While we have focused in the
immediately preceding paragraphs on
alternative tests of market
competitiveness, we also encourage
commenters to consider and suggest
higher-level alternative regulatory
regimes that would further the
Commission’s core goals.
H. Deregulation of the Pricing Process
254. In this section, we consider
modifications to existing pricing
mechanisms to implement the
technology neutral regulatory
framework for business data services
proposed above. The proposed actions
are intended to remove significant
regulatory burdens, maintain price cap
constraints where necessary to ensure
just and reasonable rates, and create
incentives to facilitate the technology
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transitions. First, we propose to replace
the current pricing flexibility regime
with rules based on the results of the
Competitive Market Test. Under such
rules, we would move competitive
services out of price caps and move
non-competitive services into a
structure that provides the protections
of price caps while allowing providers
to negotiate individual contracts.
Second, we propose a path to detariff
TDM business data services while
maintaining price caps on a detariffed
basis. Finally, we seek comment on a
voluntary mechanism that would
provide carriers with the flexibility to
adjust price cap rates for TDM BDS
when replacement packet-based
business data services are available.
255. We recognize that in this FNPRM
we propose a number of changes to our
interrelated regulatory rules.
Specifically, in addition to the
proposals in this section, we propose
adopting a price cap productivity factor
and relying on price cap TDM rates as
benchmarks for non-competitive IP
rates. We seek comment on any impacts
that various proposals may have on each
other.
1. Replacement of Pricing Flexibility
Rules
256. In this section, we seek comment
on the rules that will apply to TDM
services currently subject to regulation
under price caps as well as the pricing
flexibility rules under the new
regulatory framework. Here, we propose
and seek comment on changes to the
existing pricing flexibility rules.
257. We propose to treat competitive
TDM and packet-based BDS on a
technology neutral basis and propose
further to remove TDM BDS determined
to be competitive under the Competitive
Market Test from price cap regulation
and apply the competitive regulatory
framework proposed above to these
services. We seek comment on these
proposals. Are there any reasons to treat
competitive TDM differently from other
competitive business data services? Are
there implementation concerns with
regulating these competitive services in
this manner? Why or why not? If so, we
seek proposals for addressing such
concerns. If we adopt these proposals,
should we require mandatory
detariffing?
258. The Competitive Market Test
will likely find some business data
services are non-competitive and draw
boundaries for such findings on a level
more granular than an MSA, the current
pricing flexibility boundary.
Accordingly, it is possible that such
non-competitive business data services
may currently be regulated under price
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caps, Phase I pricing flexibility or Phase
II pricing flexibility rules. Regardless of
their current status, a non-competitive
finding is a determination that we
cannot rely on competition to constrain
rates, terms and conditions to just and
reasonable levels. We thus would need
to have rules in place to constrain rates
to just and reasonable levels. Our
analysis of the application of the pricing
flexibility rules indicates that customers
have often benefited from individually
negotiated contracts, and we believe
that allowing such contracts will
facilitate the development of a
competitive market where possible. In
order to constrain rates to just and
reasonable levels and preserve the
benefit of negotiated contracts where
available, we propose to subject noncompetitive TDM business data
services, regardless of the currently
applicable price cap and pricing
flexibility rules, to a single, lighthanded price cap regime that protects
customers while providing flexibility to
facilitate competition as it evolves.
Specifically, we propose to apply the
substance of the current Phase I pricing
flexibility requirements to TDM
business data services offered in noncompetitive areas and seek comment on
this proposal. Do parties support this
proposal, why or why not? What
concerns, administrative or otherwise,
are raised by this proposal? Commenters
asserting such services should be treated
differently based on their current
regulatory status should explain why
that is consistent with the overall
framework we propose in this order.
259. We seek comment on what
changes to our current Phase I pricing
flexibility rules are necessary to apply
their substance to non-competitive TDM
business data services. We propose to
base our application of those rules and
any necessary rule modifications on our
authority under sections 201 and 202 of
the Act. We seek comment on this
proposal.
I. Additional Regulatory Incentives for
Price Cap Carriers
260. We seek comment on potential
regulatory forbearance and flexibility
that will permit price cap incumbent
LECs to continue to facilitate the
technology transition, and to have
increased incentives to develop
innovative products and services.
261. We believe that implementation
of our proposal for broadband data
services offered in competitive markets
would require that we forbear from the
tariffing requirements in section 203 of
the Act to the extent a BDS provider is
currently subject to those requirements.
We seek comment on this view and on
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the benefits of detariffing to customers
and carriers in a competitive area. We
also seek comment on whether the
Commission should forbear from
sections 204 and 205 of the Act. We
propose forbearing to the extent
necessary to implement our proposed
framework and to condition the
forbearance on the continuing existence
of a competitive market under the
Competitive Market Test. We expressly
contemplate that should a market
become non-competitive, then all of the
regulation of non-competitive markets
would apply, including price cap
regulation. We invite comment on these
proposals and on whether such
conditional forbearance would meet the
statutory forbearance criteria.
262. We propose the Commission
make a similar finding for BDS in noncompetitive areas, including TDM
services under the section 10(a)
standard, allowing forbearance from the
tariffing requirements of section 203 of
the Act, but continuing to require price
cap regulation. We seek comment on
this proposal, including the costs and
benefits of tariffing in a non-competitive
market or a market in which
competition may be evolving over time.
How would such a regulatory approach
work to meet the goals of our proposed
framework? How should the
Commission consider the effect of any
such forbearance on competition as set
forth in section 10(b)? If the
Commission decides to forbear from
section 203, should it require mandatory
detariffing as it did with interstate
interexchange services or should it
allow permissive tariffing? What would
be the benefits of either approach?
Should the Commission consider
forbearing from sections 204 and 205 for
these services? Would relief from
tariffing and other provisions meet the
statutory forbearance criteria? Would
such relief provide additional incentives
for innovation and development of new
services? How would such relief benefit
consumers and businesses? If providers
continue to file similar information with
the Commission as a tariff, we ask
whether this impacts commenters’
views on the benefits and burdens of
such approach.
263. While we find above that TDM
and packet-based BDS are in the same
product market, these services are not
identical and we also recognize
significant switching costs in the
market. We believe our regulatory
framework can and should take account
of legitimate differences in the provision
of these services. We seek comment on
how to do so and how to harmonize our
goal of technological neutrality with the
application of price cap regulation? Are
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there other methods of regulation that
we should consider applying to these
services or packet-based BDS to achieve
our goals?
264. We note that without tariff
filings, carriers would not receive the
protection pursuant to section 204(a) of
the Act of deemed lawful status for
filing tariffs on a streamlined basis. This
status immunizes carriers from damages
liability for the periods in which the
streamlined tariffs are in effect. We seek
comment on how removing this
protection would impact carriers and
customers and the remedies available
for rate challenges, including potential
retroactive refunds. Should we provide
carriers the option of permissive
tariffing that would allow incumbent
LECs to retain the ‘‘deemed lawful’’
protections of section 204(a) if the
carrier should choose that option?
265. How, if at all, should the
Commission modify its price cap filing
rules in light of any forbearance from
tariffing requirements? Under current
rules, price cap incumbent LECs are
required to submit a yearly filing to
demonstrate that the carrier’s API does
not exceed its PCI. Would any
additional rules be necessary to provide
for adding new services? We seek
comment on how any such filing should
occur. Should the Commission maintain
the yearly annual access charge filing
requirement for this showing? Are there
other alternatives that would ensure
compliance with the price cap rules?
Without tariff filings, how should the
Commission best ensure that price cap
incumbent LECs are offering rates
consistent with their price cap filings?
How should the Commission address a
violation? Absent tariff filings, how
would the Commission examine the
newly filed rates or require the price cap
incumbent LEC to modify its rates, to
the extent appropriate, in the event of a
violation? Would the Commission need
to take formal action against the carrier
and, if so, what form would that take?
Are there other means for the
Commission to review changes to a
carrier’s rates without the tariff filing
requirement? Would the public
disclosure requirement discussed below
be sufficient?
266. What additional rules or
procedures would be necessary to
address rate or discount plan changes
that would have resulted in a tariff filing
absent forbearance? For example, under
our current rules, a price cap LEC that
grandfathers or otherwise discontinues a
rate discount plan would be reducing
the rate options for that service, which
would constitute a rate restructure
pursuant to section 61.49(e) of our rules,
requiring the carrier to file supporting
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materials sufficient to make the
adjustments to each affected API and
SBI. Such a change may or may not
impact the price cap, depending on the
impact such a change will have on
customer choices going forward. For
example, if the price cap LEC
grandfathers a service that has no
customers, it potentially will have no
impact on the carrier’s API or SBI. The
same is not true when a carrier
grandfathers a pricing plan with
substantial customers. We seek
comment on what, if any, new
requirements are necessary to ensure
effective operation of the price cap as
carriers begin to discontinue various
discount plans.
267. Even if the Commission decides
to forbear from tariffing requirements,
we understand the importance of
transparency for the price cap
incumbent LEC’s TDM rates.
Accordingly, we propose to require
price cap incumbent LECs to publicly
disclose the rates, terms, and conditions
for services currently subject to tariffing
requirements. We seek comment on this
proposal. How should disclosure of
rates be implemented? Is posting on a
carrier’s Web site sufficient? Should the
public disclosure requirement be
limited to non-competitive markets?
268. As the technology transition
continues to progress, one option for
promoting an efficient move from TDM
services to packet-based business data
services is to allow BDS providers, on
an entirely voluntary basis, the option to
place some or all of their packet-based
services under price cap regulation by
including them in the special access
basket. Moving these services into the
basket would create flexibility for the
provider to make rate adjustments to
services within the confines of the cap.
This would allow carriers flexibility to
set prices for both packet-based services
and TDM services based on the relative
cost of and demand for these services,
as would be the case in a competitive
market. At the same time, the price cap
would minimize the carriers’ ability to
charge non-competitive prices. We seek
comment on this voluntary option. If the
Commission were to permit this option,
how should it be implemented? Would
it incentivize technology transitions?
Should packet-based services be placed
in a separate service category and/or
subcategories within the special access
basket? If so, should pricing flexibility
within the packet-based service category
and/or subcategories be limited to an
annual increase of five percent, relative
to the percentage change in the PCI, the
same percentage that applies to existing
special access service categories and
subcategories? Should providers be able
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to utilize this option at any time, or
should there be a window or multiple
windows of opportunity for when it
would be available?
J. Forbearance Grants and Deemed
Grants
1. Verizon Deemed Grant
269. As discussed above, in 2006
Verizon’s Enterprise Broadband
Forbearance Petition was deemed
granted by operation of law after the
Commission did not act on that petition
within the statutory time limit.
Consistent with Enterprise Broadband
Forbearance Orders and with the
Commission’s unanimous commitment
to apply the AT&T Forbearance Order to
Verizon, we propose to reverse the
Verizon deemed grant to the extent it
encompasses forbearance relief not
granted other carriers. We additionally
propose that this decision would extend
to Hawaiian Tel and to the legacy
Verizon portions of FairPoint and
Frontier, which were ‘‘Verizon
telephone companies’’ at the time of the
deemed grant. We invite comment on
these proposals and ask whether such
action would be consistent with the
statutory forbearance criteria.
2. Other Forbearance Actions
270. In this FNPRM, we propose a
number of interrelated changes to our
regulation of business data services,
many of which would allow or require
carriers to detariff business data services
that are presently provided subject to
the tariffing requirements in section
203. Implementing those proposed
changes would require that we expand
the prior forbearance from section 203
to additional business data services
providers and additional business data
services. We believe we should expand
that forbearance to the extent necessary
to implement any regulatory changes we
adopt in this proceeding. We invite
comment on this view and on whether
such forbearance would be consistent
with the statutory forbearance criteria.
3. Legal Standard and Procedure
271. We believe that we have
statutory authority to reverse a
forbearance grant and a forbearance
‘‘deemed grant’’ by the failure of the
Commission to act within the deadline
of section 10(c). As the D.C. Circuit has
observed, the Commission’s forbearance
actions—and the forbearance relief
‘‘deemed granted’’ to Verizon—are ‘‘not
chiseled in marble.’’ Instead, the
Commission may ‘‘reassess’’ that
forbearance as it ‘‘reasonably see[s] fit
based on changes in market conditions,
technical, capabilities, or policy
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approaches to regulation’’ of business
data services. We invite comment on the
legal standard we would need to meet
to reverse forbearance that has been
deemed granted. Where, as here,
Verizon does not oppose reversal of its
deemed granted forbearance to place it
on the same footing with other carriers
as part of our proposed new framework,
we believe that this standard is met. We
invite comment on this analysis.
272. While we choose to address
potential forbearance reversal in this
rulemaking proceeding, we do not here
consider whether rulemaking
procedures are required for a reversal of
forbearance. Nor are we, in taking this
procedural approach here, classifying
forbearance proceedings as necessarily
requiring rulemaking procedures. The
Commission has previously declined to
classify forbearance as either
adjudication or rulemaking. Rather, we
find only that it is appropriate to
address the proposed reversal here
through a rulemaking proceeding.
K. Monitoring the Marketplace Going
Forward
273. To update the analysis of the
BDS industry going forward, we propose
to conduct a periodic collection of data
every three years, starting with the
collection of year-end 2017 data. We
seek comment on this proposal and
alternative mechanisms that would
assure our market definitions and
competition analysis are updated on a
regular basis.
1. Mandatory Periodic Collection
274. We propose to require BDS
providers to submit information similar
to what was collected previously for
2013, starting in 2018 and submitting
2017 data. In light of our experience
with the data collection and analysis
conducted, significantly paring down
the number of providers required to
report and the amount of reported
information to those data categories
most relevant to our analysis is
appropriate. As with the earlier
collection, we plan to focus on
obtaining data on market structure,
pricing, demand, and responses to
competitive pressures. We propose,
however, to eliminate many of the
questions directed at providers related
to terms and conditions, coverage
footprints for ‘‘best efforts’’ services,
marketing materials, disconnection
policies, and short term and long-range
promotional and advertising strategies.
Our prior experience shows that the
burden on filers of collecting such
information going forward is not
justified by the corresponding benefits
of having this information for our core
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market analysis. We do not
underestimate the importance of best
efforts service, however, but can
account for this service by using the
information already collected by the
Commission annually pursuant to the
FCC Form 477 (Local Telephone
Competition and Broadband Reporting).
We also propose to not collect data from
BDS purchasers on a mandatory basis
and to instead use voluntary survey
sampling of purchasers as discussed
below. These changes would
substantially decrease the burden on
filers while providing the Commission
with the data necessary to periodically
update its analysis.
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2. Providers Covered by the Periodic
Collection Requirement
275. We propose to narrow the scope
of our collection to minimize burdens
on smaller providers where possible
without compromising our analysis.
While we would require all price cap
incumbent LECs to provide data, we are
considering excluding from the periodic
collection those competitive providers
below a set threshold based on either
location with connection, number of
BDS customers, or BDS revenues.
276. We continue to analyze whether
the exclusion of providers below
various thresholds will significantly
impact the results of our price
regressions and other methods of
analysis. We seek comment on this
proposal generally and ask for
commenters to suggest appropriate
thresholds and to quantify the potential
impact of any exclusion on our analysis
of the BDS industry.
3. Required Data and Information
277. Based on what we have learned,
the most valuable data to our analysis is
on the providers’ locations with
connections and billing information.
Accordingly, we propose to require
incumbent LECs to report locations
where they have connections and
provided BDS over the applicable
period consistent with the information
collected for questions II.B.2–3 in the
2015 Collection. Competitive providers
would report locations where they have
in-service or idle connections consistent
with the reporting requirements for
questions II.A.3–4 in the 2015
Collection. The reported locations
would include all locations to which the
competitive provider has a fiber
connection (whether idle or in-service).
Providers would also submit monthly
billing information for the applicable
period to the billed circuit element and
linked to the served location consistent
with the reporting requirements for
questions II.A.12–14 for competitive
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providers and II.B.4–6 for incumbent
LECs in the 2015 Collection.
278. Other categories of information
required from providers as taken from
the 2015 Collection would include the
reporting of:
• BDS revenues for applicable period
separated by customer and technology
as required by questions II.A.15–16 for
competitive providers and questions
II.B.8–9 for incumbent LECs;
• Wire centers subject to price cap
regulation by incumbent LECs for the
applicable period as required by
question II.B.7;
• Fiber network maps and
information on fiber nodes by
competitive providers as required by
question II.A.5; and
• Information on recent RFPs from
competitive providers as required by
question II.A.11.
279. During the course of the Bureau’s
review of the collected 2013 data and ex
parte discussions with stakeholders, we
have also identified additional
categories of questions or variations of
previous categories of questions for
which we propose to collect from all
covered providers to assist with
updating the Commission’s analysis.
These categories are as follows:
• A report on the different categories
of BDS offered, including the different
bandwidth speeds offered and the
performance level guarantees offered
with each type of service;
• Descriptions of how the provider
structures its market operations to focus
on particular classes of customers and
the package of services marketed to each
customer class;
• Information on BDS customer churn
data, wins and losses over the
applicable period, and the provider type
to whom they are winning or losing
customers to the extent known;
• Internal business documents
assessing competitive pressures in the
marketplace and changes to business
operations in response to competitive
pressures;
• Information to better track customer
purchases across providers;
• Data on managed services
purchased, which include a BDS
component; and
• Information specific to the sale of
leased lines to, and use by, carrier
customers.
280. We believe this additional
information would help the
Commission further assess BDS demand
by different classes of customers, the
needs of those customer classes, and the
level of competition in the marketplace.
These changes would also address
recommendations for improvements by
our outside economic consultant. We
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seek comment on the proposed data
points discussed above. In addition,
depending on the ultimate criteria
adopted for a Competitive Market Test,
we seek comment on alternative data
points for collection so the Commission
can better measure the effectiveness of
the Competitive Market Test criteria and
revaluate and update its market
definitions.
4. Voluntary Survey of Purchasers
281. We propose to not require BDS
purchasers to submit data on a
mandatory basis as with the previous
collection given the burdens associated
with such reporting compared to the
value of the data for our analysis. The
Commission instead proposes to
conduct, with the assistance of a thirdparty, a voluntary survey of BDS
purchasers, starting in 2017. The survey
would include a sampling of wholesale
and retail customers, a sampling of
businesses of different sizes: small,
medium, and large, and a sampling of
mobile wireless providers.
282. The survey would collect
information on, but not limited to, the
BDS needs of the customer (e.g.,
establishing virtual or private networks,
accessing data centers or cloud-based
services, accessing the Internet, and
processing credit card transactions,
among other information), the number
of business locations requiring service,
the performance levels required by the
customer (e.g., the service guarantees
required on reliability, latency, packet
loss, jitter, and mean time to repair), the
purchaser’s bandwidth requirements
(symmetrical and/or asymmetrical), the
BDS provider(s) they purchase from, the
purchase and substitutability of ‘‘best
efforts’’ services to meet their BDS
needs, the extent to which they
purchase BDS using fixed wireless,
other potential BDS substitutes, number
of available providers to fulfill BDS
needs in a given area, types of BDS
typically purchased by the customer
(e.g., Ethernet at certain speeds or DS1s
and DS3s), prices typically paid for each
type of BDS, any problems encountered
with obtaining BDS (availability, timing,
problematic terms and conditions, and
the like), total BDS expenditures over
the prior calendar year, the extent to
which purchaser buys TDM products
and plans to purchase such legacy
services over the next three years. We
seek comment on this proposal and on
other potential categories of information
to include in the survey.
5. Timing of the Collection
283. We believe that a periodic
collection every three years is
reasonable for our oversight needs. We
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seek comment on this view. This
collection period would minimize the
burden on filers while still allowing the
Commission to timely gather data to
update its analysis and monitor
competition. The BDS industry is
changing and significant developments
can occur from year-to-year. By
collecting data every three years, the
Commission can effectively take stock of
these changing trends. That said, we
propose to conduct the first periodic
collection in 2018, for year-end 2017
data. This would mean more than a
three-year gap from the 2013 data but is
reasonable to give covered providers
time to update their systems to better
track the information requested.
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III. Procedural Matters
A. Ex Parte Requirements
284. This proceeding shall be treated
as a ‘‘permit-but-disclose’’ proceeding in
accordance with the Commission’s ex
parte rules. Persons making ex parte
presentations must file a copy of any
written presentation or a memorandum
summarizing any oral presentation
within two business days after the
presentation (unless a different deadline
applicable to the Sunshine period
applies). Persons making oral ex parte
presentations are reminded that
memoranda summarizing the
presentation must (1) List all persons
attending or otherwise participating in
the meeting at which the ex parte
presentation was made, and (2)
summarize all data presented and
arguments made during the
presentation. Memoranda must contain
a summary of the substance of the ex
parte presentation ad not merely a list
of the subjects discussed. More than a
one or two sentence description of the
views and arguments presented is
generally required. If the oral
presentation consisted in whole or in
part of the presentation of data or
arguments already reflected in the
presenter’s written comments,
memoranda or other filings in the
proceeding, the presenter may provide
citations to such data or arguments in
his or her prior comments, memoranda,
or other filings (specifying the relevant
page and/or paragraph numbers where
such data or arguments can be found) in
lieu of summarizing them in the
memorandum. Documents shown or
given to Commission staff during ex
parte meetings are deemed to be written
ex parte presentations and must be filed
consistent with rule 1.1206(b). In
proceedings governed by rule 1.49(f) or
for which the Commission has made
available a method of electronic filing,
written ex parte presentations and
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memoranda summarizing oral ex parte
presentations, and all attachments
thereto, must be filed through the
electronic comment filing system
available for that proceeding, and must
be filed in their native format (e.g., .doc,
.xml, .ppt, searchable .pdf). Participants
in this proceeding should familiarize
themselves with the Commission’s ex
parte rules.
B. Paperwork Reduction Act Analysis
285. This FNPRM contains proposed
new information collection
requirements. The Commission, as part
of its continuing effort to reduce
paperwork burdens, invites the general
public and the OMB and other Federal
agencies to comment on the information
collection requirements contained in
this document, as required by the PRA,
Public Law 104–13. In addition,
pursuant to the Small Business
Paperwork Relief Act of 2002, Public
Law 107–198, see 44 U.S.C. 3506(c)(4),
we seek specific comment on how we
might further reduce the information
collection burden for small business
concerns with fewer than 25 employees.
C. Initial Regulatory Flexibility Analysis
286. As required by the Regulatory
Flexibility Act of 1980 (RFA), the
Commission has prepared an Initial
Regulatory Flexibility Analysis (IRFA)
for this FNPRM, of the possible
significant economic impact on small
entities of the policies and rules
addressed in this document. The IRFA
is set forth as Appendix D. Written
public comments are requested on this
IRFA. Comments must be identified as
responses to the IRFA and must be filed
by the deadlines for comments on the
FNPRM provided on or before the dates
indicated on the first page of this
document. The Commission’s Consumer
and Governmental Affairs Bureau,
Reference Information Center, will send
a copy of this FNPRM, including the
IRFA, to the Chief Counsel for Advocacy
of the Small Business Administration
(SBA).
IV. Ordering Clauses
287. Accordingly, it is ordered that,
pursuant to sections 1, 2, 4(i)–(j), 10,
201(b), 202(a), 203, 204(a), 205, 303(r),
and 403 of the Communications Act of
1934, as amended, 47 U.S.C. 151, 152,
154(i)–(j), 160, 201(b), 202(a), 203,
204(a), 205, 303(r), and 403 this Tariff
Investigation Order and FNPRM is
adopted.
288. It is further ordered that,
pursuant to the applicable procedures
set forth in sections 1.415 and 1.419 of
the Commission’s Rules, 47 CFR 1.415,
1.419, interested parties may file
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comments on the FNPRM and the
application of the prohibition on all-ornothing provisions in the tariff pricing
plans subject to the tariff investigation
to existing agreements on or before June
28, 2016, and reply comments on or
before July 26, 2016.
289. It is further ordered that the
Commission’s Consumer &
Governmental Affairs Bureau, Reference
Information Center, shall send a copy of
this FNPRM, including the Initial
Regulatory Flexibility Analyses to the
Chief Counsel for Advocacy of the Small
Business Administration.
Initial Regulatory Flexibility Act
Analysis
1. As required by the Regulatory
Flexibility Act of 1980, as amended
(RFA), the Commission has prepared
this Initial Regulatory Flexibility
Analysis (IRFA) of the possible
significant economic impact on a
substantial number of small entities
from the policies and rules proposed in
this FNPRM. The Commission requests
written public comment on this IRFA.
Comments must be identified as
responses to the IRFA and must be filed
by the deadlines for comments on the
FNPRM provided in the item. The
Commission will send a copy of the
FNPRM, including this IRFA, to the
Chief Counsel for Advocacy of the Small
Business Administration (SBA). In
addition, the FNPRM and IRFA (or
summaries thereof) will be published in
the Federal Register.
A. Need for, and Objectives of, the
Proposed Rules
2. Technology-Neutral Framework. In
the FNPRM the Commission proposes to
replace the existing, fragmented
regulatory regime applicable to business
data services (BDS) (i.e., special access
services) with a new technology-neutral
framework—the Competitive Market
Test—which subjects non-competitive
markets to tailored regulation, and
competitive markets to minimal
oversight. The pricing flexibility
framework adopted in 1999 based
regulatory relief from dominant carrier
regulations on the presence of thirdparty collocations in the incumbent
local exchange carrier’s (LEC’s) wire
centers, which were considered proxies
for competition in the marketplace. The
Commission’s review of the 2015
Collection data supports the
Commission’s earlier findings that
collocations are a poor proxy for
predicting the entry of facilities-based
competition and the 1999 regime
retained unnecessary regulation in areas
that were likely competitive and
deregulated over large areas where
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competition was unlikely to occur. The
Commission therefore proposes to
abandon the collocation-based
competition showings for determining
regulatory relief for incumbent LECs
and, instead, proposes to apply a new
Competitive Market Test and seeks
comment on a regulatory framework
going forward.
3. Competitive Analysis. The
Commission sets forth its analysis of the
extent of competition in the supply of
BDS, based on its analysis of the 2015
Collection, and stakeholders’ comments,
and seeks comment on these findings.
As far as the BDS product market, the
Commission finds that ‘‘best efforts’’
BIAS do not appear to be a substitute for
BDS whereas packet-based BDS,
including HFC, is a substitute for TDMbased BDS, and product markets are
subdivided by customer requirements
and BDS performance characteristics.
As far as the BDS geographic market,
geographic concentration on any
measure is high. The Commission found
that supply of BDS with a bandwidth in
excess of 50 Mbps tends to be more
competitive than supply of BDS with
lower bandwidths and allowing ILECs
to offer contract tariffs benefits BDS
purchasers and suppliers. The
Commission seeks comment on how
many competitive choices are necessary
to ensure a competitive market, how
important is potential competition,
whether facility-based supply beyond
half a mile has a material effect on
prices and whether prices vary by the
type of supply. Finally, the Commission
seeks comment on a white paper
prepared by an outside econometrician
engaged by the Commission, Dr. Marc
Rysman, conducting an independent
competition analysis of the BDS market.
4. Competitive Market Test. As a
replacement to the pricing flexibility
rules, the Commission proposes a
Competitive Market Test to determine
the extent to which particular
geographic areas and customer classes
are subject to sufficient competition. In
the FNPRM, the Commission proposes
to define ‘‘business data services’’ (BDS)
as a telecommunications service that
transports data between two or more
designated points at a rate of at least 1.5
Mbps in both directions (upstream/
downstream) with prescribed
performance requirements that include
bandwidth, reliability, latency, jitter,
and packet loss. The Commission,
however, proposes excluding ‘‘best
effort’’ services, e.g., mass market
broadband Internet access service
(BIAS) such as DSL and cable modem
broadband access. The Commission is
considering a test, which focuses on
bandwidth, different customer classes,
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business density, and the number of
providers in areas consisting of census
blocks where each block in the relevant
market meets the specified criteria. The
Commission asks about applying the
Competitive Market Test across all areas
served by price cap carriers every three
years to account for changes in business
density and the presence of facilitiesbased providers in geographic areas.
The Commission asks to what extent
and how the Commission should give
providers and purchasers an
opportunity to challenge the
determinations rendered.
5. Rules Applicable to All Markets.
The Commission proposes limited
requirements applicable to all
competitive and non-competitive BDS
markets. First, the Commission seeks
comment on prohibiting the use of
nondisclosure agreements (NDAs) in
BDS commercial agreements that restrict
parties ability to provide information to
the Commission, effectively require
legal compulsion to produce
information, and limit parties disclosure
to a response to a request by the
Commission (e.g. Notice of Proposed
Rulemaking). Second, the Commission
asks for comment on the appropriate
treatment of the three types of tariff
terms identified as unreasonable in the
accompanying Tariff Investigation
Order– ‘‘all-or-nothing’’ provisions,
shortfall penalties, and early
termination fees—as well as other
contractual terms and conditions that
have been subject to public comment.
The Commission seeks comment on
whether these provisions should be
applied in non-competitive markets or
more generally in all markets.
6. Non-Competitive Markets. The
Commission proposes a tailored set of
rules to safeguard customers in noncompetitive markets, including the use
of price regulation. In the FNPRM, the
Commission proposes to continue to
apply price cap regulation to timedivision multiplexing (TDM)-based BDS
in non-competitive markets, including
non-competitive areas subject to pricing
flexibility. The Commission also seeks
comment on the application of rate
regulation in non-competitive markets
to packet-based BDS. The Commission
proposes to incorporate into its price
cap system a productivity-based ‘‘Xfactor’’—an adjustment to the price
ceiling carriers can change reflecting the
extent to which carriers overall
outperform economy-wide productivity
to ensure they are passing these gains to
ratepayers while recovering their costs
of service. We seek comment on the
methodologies and data sources we
should use to calculate the X-factor,
including a staff-produced productivity
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study, and the corresponding price cap
adjustments as well as the components
of the price cap system.
7. Anchor Pricing and Benchmarking.
In the FNPRM, the Commission
proposes to adopt an anchor pricing or
benchmarking approach for BDS in noncompetitive markets to replace the
interim rule adopted in the Emerging
Wireline Order. We likewise believe
that that anchor or benchmark pricing
would not be appropriate in competitive
markets. The Commission considers
three options: (1) Relying on regulated
TDM-based services pricing to anchor
prices for similar packet-based services,
(2) establishing a price for packet-based
BDS which could serve as an anchor for
similar packet-based services, and (3)
initially using reasonably comparable
prices for TDM-based services as a
benchmark for packet-based services to
determine whether those rates are just
and reasonable. The Commission
proposes to adopt the third option but
seeks comment on this proposal and any
associated implementation issues. Upon
implementation of anchor pricing or
benchmarking, we propose to continue
forbearing from tariffing all packetbased services and to expand
forbearance to include all price cap
carriers and all packet-based services
because this will allow for greater
commercial negotiation and innovation.
For carriers subject to these
requirements, we propose to require
them to publically disclose their
generally available rates, terms and
conditions and seek comment on this
proposal. The Commission seeks
comment on whether any reporting
requirements should be imposed and
whether the complaint and declaratory
ruling process is reasonable to ensure
compliance with the proposed
framework. The Commission also seeks
proposals for ensuring just and
reasonable wholesale rates applicable in
non-competitive markets such as
whether providers are charging higher
rates for wholesale than retail BDS,
whether we should require public
disclosure of these rates.
8. Terms and Conditions. The
Commission proposes generally
prohibiting tariff and other contractual
‘‘tying’’ arrangements that condition the
sale of BDS in a non-competitive market
on the sale of such services in a
competitive market. The Commission
also proposes prohibiting automatic
renewal provisions in tariff pricing
plans and contract tariffs for the
provision of TDM-based broadband data
services in non-competitive areas. The
Commission proposes to find
unreasonable any provision that enables
a provider to increase its rates upon the
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expiration of either a tariff or
commercial agreement for TDM-based
or Ethernet-based service in noncompetitive areas. Finally, the
Commission seeks comment on tariff or
commercial agreements containing
percentage commitments to increase
commitments if they reach a percentage
threshold, overage penalties for going
over volume commitments, automatic
renewal provisions, undiscounted
month-to-month pricing, and
‘‘evergreen’’ provisions that allow a
purchaser to continue under same terms
and conditions as under an expired
agreement. In addition to seeking
comment on the new regulatory
framework, the Commission invites
comment on alternative frameworks to
apply to BDS.
9. Pricing Deregulation. The
Commission proposes a set of
deregulatory rules to govern competitive
markets, using the Act’s statutory
authority to ensure that the provision of
telecommunications services is just and
reasonable. The Commission proposes
that tariffs should not be used as part of
the regulation of any BDS. The
Commission proposes removing TDMbased BDS determined to be competitive
from price cap regulation and apply a
competitive regulatory framework,
proposing a path to detariff timedivision multiplexing (TDM)-based
services while maintaining price caps.
The Commission proposes forbearing
from tariffing requirements to the extent
necessary to implement our proposed
framework, conditioned on the
continuing presence of competition. The
Commission proposes a similar finding
for BDS in non-competitive areas,
including TDM-based services but
continue to require price cap regulation.
The Commission seeks comment on
how the Commission should modify its
filing rules if it forbears from tariffing
requirements. The Commission
proposes to apply Phase I pricing
flexibility requirements to TDM-based
BDS in non-competitive areas and seeks
comment on this proposal and any
necessary changes to this approach.
10. Forbearance Grants and Deemed
Grants. In order for the new regulatory
framework be applied in a technologyneutral manner, the Commission
proposes to eliminate the current
exemption for certain Verizon services
from the basic provisions of the Act
governing just and reasonable offerings
of telecommunications services. The
Commission invites comment on the
legal standard we would need to meet
to reverse Verizon’s forbearance that has
been deemed granted, stating its belief
that this standard is met in a rulemaking
proceeding. Additionally, the
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Commission proposes extending this
decision to reverse forbearance to
Hawaiian Telecom and to the legacy
Verizon portions of FairPoint and
Frontier and invites comment on these
proposals. At the same time, the
Commission proposes to expand
forbearance to the extent necessary to
implement any regulatory changes
adopted in this proceeding, many of
which would allow or require carriers to
detariff BDS, and invites comment on
this proposal.
B. Legal Basis
11. The legal basis for any action that
may be taken pursuant to the FNPRM is
contained in sections 1, 2, 4(i)–(j), 10,
201, 202(a), 203, 204(a), 205, 208, 251,
303(r), and 403 of the Communications
Act of 1934, as amended, 47 U.S.C. 151,
152, 154(i)–(j), 160, 201(b), 202(a), 203,
204(a), 205, 208, 251, 303(r), and 403.
C. Description and Estimate of the
Number of Small Entities To Which the
Rules Would Apply
12. The RFA directs agencies to
provide a description of, and where
feasible, an estimate of the number of
small entities that may be affected by
the proposed rules, if adopted. The RFA
generally defines the term ‘‘small
entity’’ as having the same meaning as
the terms ‘‘small business,’’ ‘‘small
organization,’’ and ‘‘small governmental
jurisdiction.’’ In addition, the term
‘‘small business’’ has the same meaning
as the term ‘‘small-business concern’’
under the Small Business Act. A smallbusiness concern’’ is one which: (1) Is
independently owned and operated; (2)
is not dominant in its field of operation;
and (3) satisfies any additional criteria
established by the Small Business
Administration (SBA).
1. Total Small Entities
13. Our proposed action, if
implemented, may, over time, affect
small entities that are not easily
categorized at present. We therefore
describe here, at the outset, three
comprehensive, statutory small entity
size standards. First, nationwide, there
are a total of approximately 28.2 million
small businesses, according to the SBA,
which represents 99.7% of all
businesses in the United States. In
addition, a ‘‘small organization’’ is
generally ‘‘any not-for-profit enterprise
which is independently owned and
operated and is not dominant in its
field.’’ Nationwide, as of 2007, there
were approximately 1,621,215 small
organizations. Finally, the term ‘‘small
governmental jurisdiction’’ is defined
generally as ‘‘governments of cities,
towns, townships, villages, school
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districts, or special districts, with a
population of less than fifty thousand.’’
Census Bureau data for 2011 indicate
that there were 90,056 local
governmental jurisdictions in the
United States. We estimate that, of this
total, as many as 89,327 entities may
qualify as ‘‘small governmental
jurisdictions.’’ Thus, we estimate that
most governmental jurisdictions are
small.
2. Broadband Internet Access Service
Providers
14. The rules adopted in the Order
apply to broadband Internet access
service providers. The Economic Census
places these firms, whose services might
include Voice over Internet Protocol
(VoIP), in either of two categories,
depending on whether the service is
provided over the provider’s own
telecommunications facilities (e.g., cable
and DSL ISPs), or over client-supplied
telecommunications connections (e.g.,
dial-up ISPs). The former are within the
category of Wired Telecommunications
Carriers, which has an SBA small
business size standard of 1,500 or fewer
employees. These are also labeled
‘‘broadband.’’ The latter are within the
category of All Other
Telecommunications, which has a size
standard of annual receipts of $32.5
million or less. These are labeled nonbroadband. According to Census Bureau
data for 2007, there were 3,188 firms in
the first category, total, that operated for
the entire year. Of this total, 3144 firms
had employment of 999 or fewer
employees, and 44 firms had
employment of 1,000 employees or
more. For the second category, the data
show that 2,383 firms operated for the
entire year. Of those, 2,346 had annual
receipts below $32.5 million per year.
Consequently, we estimate that the
majority of broadband Internet access
service provider firms are small entities.
15. The broadband Internet access
service provider industry has changed
since this definition was introduced in
2007. The data cited above may
therefore include entities that no longer
provide broadband Internet access
service, and may exclude entities that
now provide such service. To ensure
that this FRFA describes the universe of
small entities that our action might
affect, we discuss in turn several
different types of entities that might be
providing broadband Internet access
service. We note that, although we have
no specific information on the number
of small entities that provide broadband
Internet access service over unlicensed
spectrum, we include these entities in
our Final Regulatory Flexibility
Analysis.
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3. Wireline Providers
16. Incumbent Local Exchange
Carriers (Incumbent LECs). Neither the
Commission nor the SBA has developed
a small business size standard
specifically for incumbent LEC services.
The closest applicable size standard
under SBA rules is for the category
Wired Telecommunications Carriers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. According to Commission
data, 1,307 carriers reported that they
were incumbent LEC providers. Of these
1,307 carriers, an estimated 1,006 have
1,500 or fewer employees and 301 have
more than 1,500 employees.
Consequently, the Commission
estimates that most providers of
incumbent LEC service are small
businesses that may be affected by rules
adopted pursuant to the Order.
17. Competitive Local Exchange
Carriers (Competitive LECs),
Competitive Access Providers (CAPs),
Shared-Tenant Service Providers, and
Other Local Service Providers. Neither
the Commission nor the SBA has
developed a small business size
standard specifically for these service
providers. The appropriate size standard
under SBA rules is for the category
Wired Telecommunications Carriers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. According to Commission
data, 1,442 carriers reported that they
were engaged in the provision of either
competitive local exchange services or
competitive access provider services. Of
these 1,442 carriers, an estimated 1,256
have 1,500 or fewer employees and 186
have more than 1,500 employees. In
addition, 17 carriers have reported that
they are Shared-Tenant Service
Providers, and all 17 are estimated to
have 1,500 or fewer employees. In
addition, 72 carriers have reported that
they are Other Local Service Providers.
Of the 72, seventy have 1,500 or fewer
employees and two have more than
1,500 employees. Consequently, the
Commission estimates that most
providers of competitive local exchange
service, competitive access providers,
Shared-Tenant Service Providers, and
other local service providers are small
entities that may be affected by rules
adopted pursuant to the Order.
18. We have included small
incumbent LECs in this present RFA
analysis. As noted above, a ‘‘small
business’’ under the RFA is one that,
inter alia, meets the pertinent small
business size standard (e.g., a telephone
communications business having 1,500
or fewer employees), and ‘‘is not
dominant in its field of operation.’’ The
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SBA’s Office of Advocacy contends that,
for RFA purposes, small incumbent
LECs are not dominant in their field of
operation because any such dominance
is not ‘‘national’’ in scope. We have
therefore included small incumbent
LECs in this RFA analysis, although we
emphasize that this RFA action has no
effect on Commission analyses and
determinations in other, non-RFA
contexts.
19. Interexchange Carriers. Neither
the Commission nor the SBA has
developed a small business size
standard specifically for providers of
interexchange services. The appropriate
size standard under SBA rules is for the
category Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 359 carriers have
reported that they are engaged in the
provision of interexchange service. Of
these, an estimated 317 have 1,500 or
fewer employees and 42 have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of interexchange carriers are small
entities that may be affected by rules
adopted pursuant to the Order.
20. Operator Service Providers (OSPs).
Neither the Commission nor the SBA
has developed a small business size
standard specifically for operator
service providers. The appropriate size
standard under SBA rules is for the
category Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 33 carriers have
reported that they are engaged in the
provision of operator services. Of these,
an estimated 31 have 1,500 or fewer
employees and two have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of OSPs are small entities that may be
affected by rules adopted pursuant to
the Order.
21. Prepaid Calling Card Providers.
Neither the Commission nor the SBA
has developed a small business size
standard specifically for prepaid calling
card providers. The appropriate size
standard under SBA rules is for the
category Telecommunications Resellers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. According to Commission
data, 193 carriers have reported that
they are engaged in the provision of
prepaid calling cards. Of these, an
estimated all 193 have 1,500 or fewer
employees and none have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of prepaid calling card providers are
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small entities that may be affected by
rules adopted pursuant to the Order.
22. Local Resellers. The SBA has
developed a small business size
standard for the category of
Telecommunications Resellers. Under
that size standard, such a business is
small if it has 1,500 or fewer employees.
According to Commission data, 213
carriers have reported that they are
engaged in the provision of local resale
services. Of these, an estimated 211
have 1,500 or fewer employees and two
have more than 1,500 employees.
Consequently, the Commission
estimates that the majority of local
resellers are small entities that may be
affected by rules adopted pursuant to
the Order.
23. Toll Resellers. The SBA has
developed a small business size
standard for the category of
Telecommunications Resellers. Under
that size standard, such a business is
small if it has 1,500 or fewer employees.
According to Commission data, 881
carriers have reported that they are
engaged in the provision of toll resale
services. Of these, an estimated 857
have 1,500 or fewer employees and 24
have more than 1,500 employees.
Consequently, the Commission
estimates that the majority of toll
resellers are small entities that may be
affected by rules adopted pursuant to
the Order.
24. Other Toll Carriers. Neither the
Commission nor the SBA has developed
a size standard for small businesses
specifically applicable to Other Toll
Carriers. This category includes toll
carriers that do not fall within the
categories of interexchange carriers,
operator service providers, prepaid
calling card providers, satellite service
carriers, or toll resellers. The closest
applicable size standard under SBA
rules is for Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 284 companies
reported that their primary
telecommunications service activity was
the provision of other toll carriage. Of
these, an estimated 279 have 1,500 or
fewer employees and five have more
than 1,500 employees. Consequently,
the Commission estimates that most
Other Toll Carriers are small entities
that may be affected by the rules and
policies adopted pursuant to the Order.
25. 800 and 800-Like Service
Subscribers. Neither the Commission
nor the SBA has developed a small
business size standard specifically for
800 and 800-like service (toll free)
subscribers. The appropriate size
standard under SBA rules is for the
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category Telecommunications Resellers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. The most reliable source of
information regarding the number of
these service subscribers appears to be
data the Commission collects on the
800, 888, 877, and 866 numbers in use.
According to our data, as of September
2009, the number of 800 numbers
assigned was 7,860,000; the number of
888 numbers assigned was 5,588,687;
the number of 877 numbers assigned
was 4,721,866; and the number of 866
numbers assigned was 7,867,736. We do
not have data specifying the number of
these subscribers that are not
independently owned and operated or
have more than 1,500 employees, and
thus are unable at this time to estimate
with greater precision the number of toll
free subscribers that would qualify as
small businesses under the SBA size
standard. Consequently, we estimate
that there are 7,860,000 or fewer small
entity 800 subscribers; 5,588,687 or
fewer small entity 888 subscribers;
4,721,866 or fewer small entity 877
subscribers; and 7,867,736 or fewer
small entity 866 subscribers.
4. Wireless Providers—Fixed and
Mobile
26. The broadband Internet access
service provider category covered by
this Order may cover multiple wireless
firms and categories of regulated
wireless services. Thus, to the extent the
wireless services listed below are used
by wireless firms for broadband Internet
access service, the proposed actions
may have an impact on those small
businesses as set forth above and further
below. In addition, for those services
subject to auctions, we note that, as a
general matter, the number of winning
bidders that claim to qualify as small
businesses at the close of an auction
does not necessarily represent the
number of small businesses currently in
service. Also, the Commission does not
generally track subsequent business size
unless, in the context of assignments
and transfers or reportable eligibility
events, unjust enrichment issues are
implicated.
27. Wireless Telecommunications
Carriers (except Satellite). Since 2007,
the Census Bureau has placed wireless
firms within this new, broad, economic
census category. Under the present and
prior categories, the SBA has deemed a
wireless business to be small if it has
1,500 or fewer employees. For the
category of Wireless
Telecommunications Carriers (except
Satellite), census data for 2007 show
that there were 1,383 firms that operated
for the entire year. Of this total, 1,368
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firms had employment of 999 or fewer
employees and 15 had employment of
1,000 employees or more. Since all
firms with fewer than 1,500 employees
are considered small, given the total
employment in the sector, we estimate
that the vast majority of wireless firms
are small. Wireless Communications
Services. This service can be used for
fixed, mobile, radiolocation, and digital
audio broadcasting satellite uses. The
Commission defined ‘‘small business’’
for the wireless communications
services (WCS) auction as an entity with
average gross revenues of $40 million
for each of the three preceding years,
and a ‘‘very small business’’ as an entity
with average gross revenues of $15
million for each of the three preceding
years. The SBA has approved these
definitions. 218–219 MHz Service. The
first auction of 218–219 MHz spectrum
resulted in 170 entities winning licenses
for 594 Metropolitan Statistical Area
(MSA) licenses. Of the 594 licenses, 557
were won by entities qualifying as a
small business. For that auction, the
small business size standard was an
entity that, together with its affiliates,
has no more than a $6 million net worth
and, after federal income taxes
(excluding any carry over losses), has no
more than $2 million in annual profits
each year for the previous two years. In
the 218–219 MHz Report and Order and
Memorandum Opinion and Order, we
established a small business size
standard for a ‘‘small business’’ as an
entity that, together with its affiliates
and persons or entities that hold
interests in such an entity and their
affiliates, has average annual gross
revenues not to exceed $15 million for
the preceding three years. A ‘‘very small
business’’ is defined as an entity that,
together with its affiliates and persons
or entities that hold interests in such an
entity and its affiliates, has average
annual gross revenues not to exceed $3
million for the preceding three years.
These size standards will be used in
future auctions of 218–219 MHz
spectrum.
28. 2.3 GHz Wireless Communications
Services. This service can be used for
fixed, mobile, radiolocation, and digital
audio broadcasting satellite uses. The
Commission defined ‘‘small business’’
for the wireless communications
services (‘‘WCS’’) auction as an entity
with average gross revenues of $40
million for each of the three preceding
years, and a ‘‘very small business’’ as an
entity with average gross revenues of
$15 million for each of the three
preceding years. The SBA has approved
these definitions. The Commission
auctioned geographic area licenses in
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the WCS service. In the auction, which
was conducted in 1997, there were
seven bidders that won 31 licenses that
qualified as very small business entities,
and one bidder that won one license
that qualified as a small business entity.
29. 1670–1675 MHz Services. This
service can be used for fixed and mobile
uses, except aeronautical mobile. An
auction for one license in the 1670–1675
MHz band was conducted in 2003. One
license was awarded. The winning
bidder was not a small entity.
30. Wireless Telephony. Wireless
telephony includes cellular, personal
communications services, and
specialized mobile radio telephony
carriers. As noted, the SBA has
developed a small business size
standard for Wireless
Telecommunications Carriers (except
Satellite). Under the SBA small business
size standard, a business is small if it
has 1,500 or fewer employees.
According to Commission data, 413
carriers reported that they were engaged
in wireless telephony. Of these, an
estimated 261 have 1,500 or fewer
employees and 152 have more than
1,500 employees. Therefore, a little less
than one third of these entities can be
considered small.
31. Broadband Personal
Communications Service. The
broadband personal communications
services (PCS) spectrum is divided into
six frequency blocks designated A
through F, and the Commission has held
auctions for each block. The
Commission initially defined a ‘‘small
business’’ for C– and F-Block licenses as
an entity that has average gross revenues
of $40 million or less in the three
previous calendar years. For F-Block
licenses, an additional small business
size standard for ‘‘very small business’’
was added and is defined as an entity
that, together with its affiliates, has
average gross revenues of not more than
$15 million for the preceding three
calendar years. These small business
size standards, in the context of
broadband PCS auctions, have been
approved by the SBA. No small
businesses within the SBA-approved
small business size standards bid
successfully for licenses in Blocks A
and B. There were 90 winning bidders
that claimed small business status in the
first two C-Block auctions. A total of 93
bidders that claimed small business
status won approximately 40 percent of
the 1,479 licenses in the first auction for
the D, E, and F Blocks. On April 15,
1999, the Commission completed the
reauction of 347 C–, D–, E–, and F-Block
licenses in Auction No. 22. Of the 57
winning bidders in that auction, 48
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claimed small business status and won
277 licenses.
32. On January 26, 2001, the
Commission completed the auction of
422 C and F Block Broadband PCS
licenses in Auction No. 35. Of the 35
winning bidders in that auction, 29
claimed small business status.
Subsequent events concerning Auction
35, including judicial and agency
determinations, resulted in a total of 163
C and F Block licenses being available
for grant. On February 15, 2005, the
Commission completed an auction of
242 C–, D–, E–, and F-Block licenses in
Auction No. 58. Of the 24 winning
bidders in that auction, 16 claimed
small business status and won 156
licenses. On May 21, 2007, the
Commission completed an auction of 33
licenses in the A, C, and F Blocks in
Auction No. 71. Of the 12 winning
bidders in that auction, five claimed
small business status and won 18
licenses. On August 20, 2008, the
Commission completed the auction of
20 C–, D–, E–, and F-Block Broadband
PCS licenses in Auction No. 78. Of the
eight winning bidders for Broadband
PCS licenses in that auction, six claimed
small business status and won 14
licenses.
33. Specialized Mobile Radio
Licenses. The Commission awards
‘‘small entity’’ bidding credits in
auctions for Specialized Mobile Radio
(SMR) geographic area licenses in the
800 MHz and 900 MHz bands to firms
that had revenues of no more than $15
million in each of the three previous
calendar years. The Commission awards
‘‘very small entity’’ bidding credits to
firms that had revenues of no more than
$3 million in each of the three previous
calendar years. The SBA has approved
these small business size standards for
the 900 MHz Service. The Commission
has held auctions for geographic area
licenses in the 800 MHz and 900 MHz
bands. The 900 MHz SMR auction began
on December 5, 1995, and closed on
April 15, 1996. Sixty bidders claiming
that they qualified as small businesses
under the $15 million size standard won
263 geographic area licenses in the 900
MHz SMR band. The 800 MHz SMR
auction for the upper 200 channels
began on October 28, 1997, and was
completed on December 8, 1997. Ten
bidders claiming that they qualified as
small businesses under the $15 million
size standard won 38 geographic area
licenses for the upper 200 channels in
the 800 MHz SMR band. A second
auction for the 800 MHz band was held
on January 10, 2002 and closed on
January 17, 2002 and included 23 BEA
licenses. One bidder claiming small
business status won five licenses.
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34. The auction of the 1,053 800 MHz
SMR geographic area licenses for the
General Category channels began on
August 16, 2000, and was completed on
September 1, 2000. Eleven bidders won
108 geographic area licenses for the
General Category channels in the 800
MHz SMR band and qualified as small
businesses under the $15 million size
standard. In an auction completed on
December 5, 2000, a total of 2,800
Economic Area licenses in the lower 80
channels of the 800 MHz SMR service
were awarded. Of the 22 winning
bidders, 19 claimed small business
status and won 129 licenses. Thus,
combining all four auctions, 41 winning
bidders for geographic licenses in the
800 MHz SMR band claimed status as
small businesses.
35. In addition, there are numerous
incumbent site-by-site SMR licenses and
licensees with extended implementation
authorizations in the 800 and 900 MHz
bands. We do not know how many firms
provide 800 MHz or 900 MHz
geographic area SMR service pursuant
to extended implementation
authorizations, nor how many of these
providers have annual revenues of no
more than $15 million. One firm has
over $15 million in revenues. In
addition, we do not know how many of
these firms have 1,500 or fewer
employees, which is the SBAdetermined size standard. We assume,
for purposes of this analysis, that all of
the remaining extended implementation
authorizations are held by small
entities, as defined by the SBA.
36. Lower 700 MHz Band Licenses.
The Commission previously adopted
criteria for defining three groups of
small businesses for purposes of
determining their eligibility for special
provisions such as bidding credits. The
Commission defined a ‘‘small business’’
as an entity that, together with its
affiliates and controlling principals, has
average gross revenues not exceeding
$40 million for the preceding three
years. A ‘‘very small business’’ is
defined as an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $15 million for the preceding
three years. Additionally, the lower 700
MHz Service had a third category of
small business status for Metropolitan/
Rural Service Area (MSA/RSA)
licenses—‘‘entrepreneur’’—which is
defined as an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $3 million for the preceding
three years. The SBA approved these
small size standards. An auction of 740
licenses (one license in each of the 734
MSAs/RSAs and one license in each of
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the six Economic Area Groupings
(EAGs)) commenced on August 27,
2002, and closed on September 18,
2002. Of the 740 licenses available for
auction, 484 licenses were won by 102
winning bidders. Seventy-two of the
winning bidders claimed small
business, very small business or
entrepreneur status and won a total of
329 licenses. A second auction
commenced on May 28, 2003, closed on
June 13, 2003, and included 256
licenses: 5 EAG licenses and 476
Cellular Market Area licenses.
Seventeen winning bidders claimed
small or very small business status and
won 60 licenses, and nine winning
bidders claimed entrepreneur status and
won 154 licenses. On July 26, 2005, the
Commission completed an auction of 5
licenses in the Lower 700 MHz band
(Auction No. 60). There were three
winning bidders for five licenses. All
three winning bidders claimed small
business status.
37. In 2007, the Commission
reexamined its rules governing the 700
MHz band in the 700 MHz Second
Report and Order. An auction of 700
MHz licenses commenced January 24,
2008 and closed on March 18, 2008,
which included, 176 Economic Area
licenses in the A Block, 734 Cellular
Market Area licenses in the B Block, and
176 EA licenses in the E Block. Twenty
winning bidders, claiming small
business status (those with attributable
average annual gross revenues that
exceed $15 million and do not exceed
$40 million for the preceding three
years) won 49 licenses. Thirty three
winning bidders claiming very small
business status (those with attributable
average annual gross revenues that do
not exceed $15 million for the preceding
three years) won 325 licenses.
38. Upper 700 MHz Band Licenses. In
the 700 MHz Second Report and Order,
the Commission revised its rules
regarding Upper 700 MHz licenses. On
January 24, 2008, the Commission
commenced Auction 73 in which
several licenses in the Upper 700 MHz
band were available for licensing: 12
Regional Economic Area Grouping
licenses in the C Block, and one
nationwide license in the D Block. The
auction concluded on March 18, 2008,
with 3 winning bidders claiming very
small business status (those with
attributable average annual gross
revenues that do not exceed $15 million
for the preceding three years) and
winning five licenses.
39. 700 MHz Guard Band Licensees.
In 2000, in the 700 MHz Guard Band
Order, the Commission adopted size
standards for ‘‘small businesses’’ and
‘‘very small businesses’’ for purposes of
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determining their eligibility for special
provisions such as bidding credits and
installment payments. A small business
in this service is an entity that, together
with its affiliates and controlling
principals, has average gross revenues
not exceeding $40 million for the
preceding three years. Additionally, a
very small business is an entity that,
together with its affiliates and
controlling principals, has average gross
revenues that are not more than $15
million for the preceding three years.
SBA approval of these definitions is not
required. An auction of 52 Major
Economic Area licenses commenced on
September 6, 2000, and closed on
September 21, 2000. Of the 104 licenses
auctioned, 96 licenses were sold to nine
bidders. Five of these bidders were
small businesses that won a total of 26
licenses. A second auction of 700 MHz
Guard Band licenses commenced on
February 13, 2001, and closed on
February 21, 2001. All eight of the
licenses auctioned were sold to three
bidders. One of these bidders was a
small business that won a total of two
licenses.
40. Cellular Radiotelephone Service.
Auction 77 was held to resolve one
group of mutually exclusive
applications for Cellular Radiotelephone
Service licenses for unserved areas in
New Mexico. Bidding credits for
designated entities were not available in
Auction 77. In 2008, the Commission
completed the closed auction of one
unserved service area in the Cellular
Radiotelephone Service, designated as
Auction 77. Auction 77 concluded with
one provisionally winning bid for the
unserved area totaling $25,002.
41. Private Land Mobile Radio
(‘‘PLMR’’). PLMR systems serve an
essential role in a range of industrial,
business, land transportation, and
public safety activities. These radios are
used by companies of all sizes operating
in all U.S. business categories, and are
often used in support of the licensee’s
primary (non-telecommunications)
business operations. For the purpose of
determining whether a licensee of a
PLMR system is a small business as
defined by the SBA, we use the broad
census category, Wireless
Telecommunications Carriers (except
Satellite). This definition provides that
a small entity is any such entity
employing no more than 1,500 persons.
The Commission does not require PLMR
licensees to disclose information about
number of employees, so the
Commission does not have information
that could be used to determine how
many PLMR licensees constitute small
entities under this definition. We note
that PLMR licensees generally use the
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licensed facilities in support of other
business activities, and therefore, it
would also be helpful to assess PLMR
licensees under the standards applied to
the particular industry subsector to
which the licensee belongs.
42. As of March 2010, there were
424,162 PLMR licensees operating
921,909 transmitters in the PLMR bands
below 512 MHz. We note that any entity
engaged in a commercial activity is
eligible to hold a PLMR license, and that
any revised rules in this context could
therefore potentially impact small
entities covering a great variety of
industries.
43. Rural Radiotelephone Service. The
Commission has not adopted a size
standard for small businesses specific to
the Rural Radiotelephone Service. A
significant subset of the Rural
Radiotelephone Service is the Basic
Exchange Telephone Radio System
(BETRS). In the present context, we will
use the SBA’s small business size
standard applicable to Wireless
Telecommunications Carriers (except
Satellite), i.e., an entity employing no
more than 1,500 persons. There are
approximately 1,000 licensees in the
Rural Radiotelephone Service, and the
Commission estimates that there are
1,000 or fewer small entity licensees in
the Rural Radiotelephone Service that
may be affected by the rules and
policies proposed herein.
44. Air-Ground Radiotelephone
Service. The Commission has previously
used the SBA’s small business size
standard applicable to Wireless
Telecommunications Carriers (except
Satellite), i.e., an entity employing no
more than 1,500 persons. There are
approximately 100 licensees in the AirGround Radiotelephone Service, and
under that definition, we estimate that
almost all of them qualify as small
entities under the SBA definition. For
purposes of assigning Air-Ground
Radiotelephone Service licenses
through competitive bidding, the
Commission has defined ‘‘small
business’’ as an entity that, together
with controlling interests and affiliates,
has average annual gross revenues for
the preceding three years not exceeding
$40 million. A ‘‘very small business’’ is
defined as an entity that, together with
controlling interests and affiliates, has
average annual gross revenues for the
preceding three years not exceeding $15
million. These definitions were
approved by the SBA. In May 2006, the
Commission completed an auction of
nationwide commercial Air-Ground
Radiotelephone Service licenses in the
800 MHz band (Auction No. 65). On
June 2, 2006, the auction closed with
two winning bidders winning two Air-
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Ground Radiotelephone Services
licenses. Neither of the winning bidders
claimed small business status.
45. Aviation and Marine Radio
Services. Small businesses in the
aviation and marine radio services use
a very high frequency (VHF) marine or
aircraft radio and, as appropriate, an
emergency position-indicating radio
beacon (and/or radar) or an emergency
locator transmitter. The Commission has
not developed a small business size
standard specifically applicable to these
small businesses. For purposes of this
analysis, the Commission uses the SBA
small business size standard for the
category Wireless Telecommunications
Carriers (except Satellite), which is
1,500 or fewer employees. Census data
for 2007, which supersede data
contained in the 2002 Census, show that
there were 1,383 firms that operated that
year. Of those 1,383, 1,368 had fewer
than 100 employees, and 15 firms had
more than 100 employees. Most
applicants for recreational licenses are
individuals. Approximately 581,000
ship station licensees and 131,000
aircraft station licensees operate
domestically and are not subject to the
radio carriage requirements of any
statute or treaty. For purposes of our
evaluations in this analysis, we estimate
that there are up to approximately
712,000 licensees that are small
businesses (or individuals) under the
SBA standard. In addition, between
December 3, 1998 and December 14,
1998, the Commission held an auction
of 42 VHF Public Coast licenses in the
157.1875–157.4500 MHz (ship transmit)
and 161.775–162.0125 MHz (coast
transmit) bands. For purposes of the
auction, the Commission defined a
‘‘small’’ business as an entity that,
together with controlling interests and
affiliates, has average gross revenues for
the preceding three years not to exceed
$15 million dollars. In addition, a ‘‘very
small’’ business is one that, together
with controlling interests and affiliates,
has average gross revenues for the
preceding three years not to exceed $3
million dollars. There are approximately
10,672 licensees in the Marine Coast
Service, and the Commission estimates
that almost all of them qualify as
‘‘small’’ businesses under the above
special small business size standards
and may be affected by rules adopted
pursuant to the Order.
46. Advanced Wireless Services
(AWS) (1710–1755 MHz and 2110–2155
MHz bands (AWS–1); 1915–1920 MHz,
1995–2000 MHz, 2020–2025 MHz and
2175–2180 MHz bands (AWS–2); 2155–
2175 MHz band (AWS–3)). For the
AWS–1 bands, the Commission has
defined a ‘‘small business’’ as an entity
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with average annual gross revenues for
the preceding three years not exceeding
$40 million, and a ‘‘very small
business’’ as an entity with average
annual gross revenues for the preceding
three years not exceeding $15 million.
For AWS–2 and AWS–3, although we
do not know for certain which entities
are likely to apply for these frequencies,
we note that the AWS–1 bands are
comparable to those used for cellular
service and personal communications
service. The Commission has not yet
adopted size standards for the AWS–2
or AWS–3 bands but proposes to treat
both AWS–2 and AWS–3 similarly to
broadband PCS service and AWS–1
service due to the comparable capital
requirements and other factors, such as
issues involved in relocating
incumbents and developing markets,
technologies, and services.
47. 3650–3700 MHz band. In March
2005, the Commission released a Report
and Order and Memorandum Opinion
and Order that provides for nationwide,
non-exclusive licensing of terrestrial
operations, utilizing contention-based
technologies, in the 3650 MHz band
(i.e., 3650–3700 MHz). As of April 2010,
more than 1270 licenses have been
granted and more than 7433 sites have
been registered. The Commission has
not developed a definition of small
entities applicable to 3650–3700 MHz
band nationwide, non-exclusive
licensees. However, we estimate that the
majority of these licensees are Internet
Access Service Providers (ISPs) and that
most of those licensees are small
businesses.
48. Fixed Microwave Services.
Microwave services include common
carrier, private-operational fixed, and
broadcast auxiliary radio services. They
also include the Local Multipoint
Distribution Service (LMDS), the Digital
Electronic Message Service (DEMS), and
the 24 GHz Service, where licensees can
choose between common carrier and
non-common carrier status. At present,
there are approximately 36,708 common
carrier fixed licensees and 59,291
private operational-fixed licensees and
broadcast auxiliary radio licensees in
the microwave services. There are
approximately 135 LMDS licensees,
three DEMS licensees, and three 24 GHz
licensees. The Commission has not yet
defined a small business with respect to
microwave services. For purposes of the
FRFA, we will use the SBA’s definition
applicable to Wireless
Telecommunications Carriers (except
satellite)—i.e., an entity with no more
than 1,500 persons. Under the present
and prior categories, the SBA has
deemed a wireless business to be small
if it has 1,500 or fewer employees. The
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Commission does not have data
specifying the number of these licensees
that have more than 1,500 employees,
and thus is unable at this time to
estimate with greater precision the
number of fixed microwave service
licensees that would qualify as small
business concerns under the SBA’s
small business size standard.
Consequently, the Commission
estimates that there are up to 36,708
common carrier fixed licensees and up
to 59,291 private operational-fixed
licensees and broadcast auxiliary radio
licensees in the microwave services that
may be small and may be affected by the
rules and policies adopted herein. We
note, however, that the common carrier
microwave fixed licensee category
includes some large entities.
49. Offshore Radiotelephone Service.
This service operates on several UHF
television broadcast channels that are
not used for television broadcasting in
the coastal areas of states bordering the
Gulf of Mexico. There are presently
approximately 55 licensees in this
service. The Commission is unable to
estimate at this time the number of
licensees that would qualify as small
under the SBA’s small business size
standard for the category of Wireless
Telecommunications Carriers (except
Satellite). Under that SBA small
business size standard, a business is
small if it has 1,500 or fewer employees.
Census data for 2007, which supersede
data contained in the 2002 Census,
show that there were 1,383 firms that
operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15
firms had more than 100 employees.
Thus, under this category and the
associated small business size standard,
the majority of firms can be considered
small.
50. 39 GHz Service. The Commission
created a special small business size
standard for 39 GHz licenses—an entity
that has average gross revenues of $40
million or less in the three previous
calendar years. An additional size
standard for ‘‘very small business’’ is:
An entity that, together with affiliates,
has average gross revenues of not more
than $15 million for the preceding three
calendar years. The SBA has approved
these small business size standards. The
auction of the 2,173 39 GHz licenses
began on April 12, 2000 and closed on
May 8, 2000. The 18 bidders who
claimed small business status won 849
licenses. Consequently, the Commission
estimates that 18 or fewer 39 GHz
licensees are small entities that may be
affected by rules adopted pursuant to
the Order.
51. Broadband Radio Service and
Educational Broadband Service.
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Broadband Radio Service systems,
previously referred to as Multipoint
Distribution Service (MDS) and
Multichannel Multipoint Distribution
Service (MMDS) systems, and ‘‘wireless
cable,’’ transmit video programming to
subscribers and provide two-way high
speed data operations using the
microwave frequencies of the
Broadband Radio Service (BRS) and
Educational Broadband Service (EBS)
(previously referred to as the
Instructional Television Fixed Service
(ITFS)). In connection with the 1996
BRS auction, the Commission
established a small business size
standard as an entity that had annual
average gross revenues of no more than
$40 million in the previous three
calendar years. The BRS auctions
resulted in 67 successful bidders
obtaining licensing opportunities for
493 Basic Trading Areas (BTAs). Of the
67 auction winners, 61 met the
definition of a small business. BRS also
includes licensees of stations authorized
prior to the auction. At this time, we
estimate that of the 61 small business
BRS auction winners, 48 remain small
business licensees. In addition to the 48
small businesses that hold BTA
authorizations, there are approximately
392 incumbent BRS licensees that are
considered small entities. After adding
the number of small business auction
licensees to the number of incumbent
licensees not already counted, we find
that there are currently approximately
440 BRS licensees that are defined as
small businesses under either the SBA
or the Commission’s rules.
52. In 2009, the Commission
conducted Auction 86, the sale of 78
licenses in the BRS areas. The
Commission offered three levels of
bidding credits: (i) A bidder with
attributed average annual gross revenues
that exceed $15 million and do not
exceed $40 million for the preceding
three years (small business) received a
15 percent discount on its winning bid;
(ii) a bidder with attributed average
annual gross revenues that exceed $3
million and do not exceed $15 million
for the preceding three years (very small
business) received a 25 percent discount
on its winning bid; and (iii) a bidder
with attributed average annual gross
revenues that do not exceed $3 million
for the preceding three years
(entrepreneur) received a 35 percent
discount on its winning bid. Auction 86
concluded in 2009 with the sale of 61
licenses. Of the ten winning bidders,
two bidders that claimed small business
status won 4 licenses; one bidder that
claimed very small business status won
three licenses; and two bidders that
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claimed entrepreneur status won six
licenses.
53. In addition, the SBA’s Cable
Television Distribution Services small
business size standard is applicable to
EBS. There are presently 2,436 EBS
licensees. All but 100 of these licenses
are held by educational institutions.
Educational institutions are included in
this analysis as small entities. Thus, we
estimate that at least 2,336 licensees are
small businesses. Since 2007, Cable
Television Distribution Services have
been defined within the broad economic
census category of Wired
Telecommunications Carriers; that
category is defined as follows: ‘‘This
industry comprises establishments
primarily engaged in operating and/or
providing access to transmission
facilities and infrastructure that they
own and/or lease for the transmission of
voice, data, text, sound, and video using
wired telecommunications networks.
Transmission facilities may be based on
a single technology or a combination of
technologies.’’ The SBA has developed
a small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees. To
gauge small business prevalence for
these cable services we must, however,
use the most current census data that
are based on the previous category of
Cable and Other Program Distribution
and its associated size standard; that
size standard was: All such firms having
$13.5 million or less in annual receipts.
According to Census Bureau data for
2007, there were a total of 996 firms in
this category that operated for the entire
year. Of this total, 948 firms had annual
receipts of under $10 million, and 48
firms had receipts of $10 million or
more but less than $25 million. Thus,
the majority of these firms can be
considered small.
54. Narrowband Personal
Communications Services. In 1994, the
Commission conducted an auction for
Narrowband PCS licenses. A second
auction was also conducted later in
1994. For purposes of the first two
Narrowband PCS auctions, ‘‘small
businesses’’ were entities with average
gross revenues for the prior three
calendar years of $40 million or less.
Through these auctions, the
Commission awarded a total of 41
licenses, 11 of which were obtained by
four small businesses. To ensure
meaningful participation by small
business entities in future auctions, the
Commission adopted a two-tiered small
business size standard in the
Narrowband PCS Second Report and
Order. A ‘‘small business’’ is an entity
that, together with affiliates and
controlling interests, has average gross
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revenues for the three preceding years of
not more than $40 million. A ‘‘very
small business’’ is an entity that,
together with affiliates and controlling
interests, has average gross revenues for
the three preceding years of not more
than $15 million. The SBA has
approved these small business size
standards. A third auction was
conducted in 2001. Here, five bidders
won 317 (Metropolitan Trading Areas
and nationwide) licenses. Three of these
claimed status as a small or very small
entity and won 311 licenses.
55. Paging (Private and Common
Carrier). In the Paging Third Report and
Order, we developed a small business
size standard for ‘‘small businesses’’ and
‘‘very small businesses’’ for purposes of
determining their eligibility for special
provisions such as bidding credits and
installment payments. A ‘‘small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues not
exceeding $15 million for the preceding
three years. Additionally, a ‘‘very small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $3 million for the preceding
three years. The SBA has approved
these small business size standards.
According to Commission data, 291
carriers have reported that they are
engaged in Paging or Messaging Service.
Of these, an estimated 289 have 1,500 or
fewer employees, and two have more
than 1,500 employees. Consequently,
the Commission estimates that the
majority of paging providers are small
entities that may be affected by our
action. An auction of Metropolitan
Economic Area licenses commenced on
February 24, 2000, and closed on March
2, 2000. Of the 2,499 licenses auctioned,
985 were sold. Fifty-seven companies
claiming small business status won 440
licenses. A subsequent auction of MEA
and Economic Area (‘‘EA’’) licenses was
held in the year 2001. Of the 15,514
licenses auctioned, 5,323 were sold.
One hundred thirty-two companies
claiming small business status
purchased 3,724 licenses. A third
auction, consisting of 8,874 licenses in
each of 175 EAs and 1,328 licenses in
all but three of the 51 MEAs, was held
in 2003. Seventy-seven bidders claiming
small or very small business status won
2,093 licenses. A fourth auction,
consisting of 9,603 lower and upper
paging band licenses was held in the
year 2010. Twenty-nine bidders
claiming small or very small business
status won 3,016 licenses.
56. 220 MHz Radio Service—Phase I
Licensees. The 220 MHz service has
both Phase I and Phase II licenses. Phase
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I licensing was conducted by lotteries in
1992 and 1993. There are approximately
1,515 such non-nationwide licensees
and four nationwide licensees currently
authorized to operate in the 220 MHz
band. The Commission has not
developed a small business size
standard for small entities specifically
applicable to such incumbent 220 MHz
Phase I licensees. To estimate the
number of such licensees that are small
businesses, we apply the small business
size standard under the SBA rules
applicable to Wireless
Telecommunications Carriers (except
Satellite). Under this category, the SBA
deems a wireless business to be small if
it has 1,500 or fewer employees. The
Commission estimates that nearly all
such licensees are small businesses
under the SBA’s small business size
standard that may be affected by rules
adopted pursuant to the Order.
57. 220 MHz Radio Service—Phase II
Licensees. The 220 MHz service has
both Phase I and Phase II licenses. The
Phase II 220 MHz service is subject to
spectrum auctions. In the 220 MHz
Third Report and Order, we adopted a
small business size standard for ‘‘small’’
and ‘‘very small’’ businesses for
purposes of determining their eligibility
for special provisions such as bidding
credits and installment payments. This
small business size standard indicates
that a ‘‘small business’’ is an entity that,
together with its affiliates and
controlling principals, has average gross
revenues not exceeding $15 million for
the preceding three years. A ‘‘very small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues that do not
exceed $3 million for the preceding
three years. The SBA has approved
these small business size standards.
Auctions of Phase II licenses
commenced on September 15, 1998, and
closed on October 22, 1998. In the first
auction, 908 licenses were auctioned in
three different-sized geographic areas:
Three nationwide licenses, 30 Regional
Economic Area Group (EAG) Licenses,
and 875 Economic Area (EA) Licenses.
Of the 908 licenses auctioned, 693 were
sold. Thirty-nine small businesses won
licenses in the first 220 MHz auction.
The second auction included 225
licenses: 216 EA licenses and 9 EAG
licenses. Fourteen companies claiming
small business status won 158 licenses.
5. Satellite Service Providers
58. Satellite Telecommunications
Providers. Two economic census
categories address the satellite industry.
The first category has a small business
size standard of $30 million or less in
average annual receipts, under SBA
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rules. The second has a size standard of
$30 million or less in annual receipts.
59. The category of Satellite
Telecommunications ‘‘comprises
establishments primarily engaged in
providing telecommunications services
to other establishments in the
telecommunications and broadcasting
industries by forwarding and receiving
communications signals via a system of
satellites or reselling satellite
telecommunications.’’ For this category,
Census Bureau data for 2007 show that
there were a total of 570 firms that
operated for the entire year. Of this
total, 530 firms had annual receipts of
under $30 million, and 40 firms had
receipts of over $30 million.
Consequently, we estimate that the
majority of Satellite
Telecommunications firms are small
entities that might be affected by our
action.
60. The second category of Other
Telecommunications comprises, inter
alia, ‘‘establishments primarily engaged
in providing specialized
telecommunications services, such as
satellite tracking, communications
telemetry, and radar station operation.
This industry also includes
establishments primarily engaged in
providing satellite terminal stations and
associated facilities connected with one
or more terrestrial systems and capable
of transmitting telecommunications to,
and receiving telecommunications from,
satellite systems.’’ For this category,
Census Bureau data for 2007 show that
there were a total of 1,274 firms that
operated for the entire year. Of this
total, 1,252 had annual receipts below
$25 million per year. Consequently, we
estimate that the majority of All Other
Telecommunications firms are small
entities that might be affected by our
action.
6. Cable Service Providers
61. Because section 706 requires us to
monitor the deployment of broadband
using any technology, we anticipate that
some broadband service providers may
not provide telephone service.
Accordingly, we describe below other
types of firms that may provide
broadband services, including cable
companies, MDS providers, and
utilities, among others.
62. Cable and Other Program
Distributors. Since 2007, these services
have been defined within the broad
economic census category of Wired
Telecommunications Carriers; that
category is defined as follows: ‘‘This
industry comprises establishments
primarily engaged in operating and/or
providing access to transmission
facilities and infrastructure that they
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own and/or lease for the transmission of
voice, data, text, sound, and video using
wired telecommunications networks.
Transmission facilities may be based on
a single technology or a combination of
technologies.’’ The SBA has developed
a small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees. To
gauge small business prevalence for
these cable services we must, however,
use current census data that are based
on the previous category of Cable and
Other Program Distribution and its
associated size standard; that size
standard was: All such firms having
$13.5 million or less in annual receipts.
According to Census Bureau data for
2007, there were a total of 2,048 firms
in this category that operated for the
entire year. Of this total, 1,393 firms had
annual receipts of under $10 million,
and 655 firms had receipts of $10
million or more. Thus, the majority of
these firms can be considered small.
63. Cable Companies and Systems.
The Commission has also developed its
own small business size standards, for
the purpose of cable rate regulation.
Under the Commission’s rules, a ‘‘small
cable company’’ is one serving 400,000
or fewer subscribers, nationwide.
Industry data that there are currently
4,600 active cable systems in the United
States. Of this total, all but nine cable
operators are small under the 400,000
subscriber size standard. In addition,
under the Commission’s rules, a ‘‘small
system’’ is a cable system serving 15,000
or fewer subscribers. Current
Commission records show 4,945 cable
systems nationwide. Of this total, 4,380
cable systems have less than 20,000
subscribers, and 565 systems have
20,000 or more subscribers, based on the
same records. Thus, under this
standard, we estimate that most cable
systems are small entities.
64. Cable System Operators. The
Communications Act of 1934, as
amended, also contains a size standard
for small cable system operators, which
is ‘‘a cable operator that, directly or
through an affiliate, serves in the
aggregate fewer than 1 percent of all
subscribers in the United States and is
not affiliated with any entity or entities
whose gross annual revenues in the
aggregate exceed $250,000,000.’’ The
Commission has determined that an
operator serving fewer than 677,000
subscribers shall be deemed a small
operator, if its annual revenues, when
combined with the total annual
revenues of all its affiliates, do not
exceed $250 million in the aggregate.
Based on available data, we find that all
but ten incumbent cable operators are
small entities under this size standard.
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We note that the Commission neither
requests nor collects information on
whether cable system operators are
affiliated with entities whose gross
annual revenues exceed $250 million,
and therefore we are unable to estimate
more accurately the number of cable
system operators that would qualify as
small under this size standard.
65. The open video system (OVS)
framework was established in 1996, and
is one of four statutorily recognized
options for the provision of video
programming services by local exchange
carriers. The OVS framework provides
opportunities for the distribution of
video programming other than through
cable systems. Because OVS operators
provide subscription services, OVS falls
within the SBA small business size
standard covering cable services, which
is ‘‘Wired Telecommunications
Carriers.’’ The SBA has developed a
small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees.
According to Census Bureau data for
2007, there were a total of 955 firms in
this previous category that operated for
the entire year. Of this total, 939 firms
had employment of 999 or fewer
employees, and 16 firms had
employment of 1,000 employees or
more. Thus, under this second size
standard, most cable systems are small
and may be affected by rules adopted
pursuant to the Order. In addition, we
note that the Commission has certified
some OVS operators, with some now
providing service. Broadband service
providers (BSPs) are currently the only
significant holders of OVS certifications
or local OVS franchises. The
Commission does not have financial or
employment information regarding the
entities authorized to provide OVS,
some of which may not yet be
operational. Thus, again, at least some
of the OVS operators may qualify as
small entities.
7. Electric Power Generators,
Transmitters, and Distributors
66. Electric Power Generators,
Transmitters, and Distributors. The
Census Bureau defines an industry
group comprised of ‘‘establishments,
primarily engaged in generating,
transmitting, and/or distributing electric
power. Establishments in this industry
group may perform one or more of the
following activities: (1) Operate
generation facilities that produce
electric energy; (2) operate transmission
systems that convey the electricity from
the generation facility to the distribution
system; and (3) operate distribution
systems that convey electric power
received from the generation facility or
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the transmission system to the final
consumer.’’ The SBA has developed a
small business size standard for firms in
this category: ‘‘A firm is small if,
including its affiliates, it is primarily
engaged in the generation, transmission,
and/or distribution of electric energy for
sale and its total electric output for the
preceding fiscal year did not exceed 4
million megawatt hours.’’ Census
Bureau data for 2007 show that there
were 1,174 firms that operated for the
entire year in this category. Of these
firms, 50 had 1,000 employees or more,
and 1,124 had fewer than 1,000
employees. Based on this data, a
majority of these firms can be
considered small.
D. Description of Projected Reporting,
Recordkeeping, and Other Compliance
Requirements for Small Entities
67. The Commission proposes to
prohibit the use of non-disclosure
agreements that restrict parties to a BDS
tariff or commercial agreement from
sharing the terms of such agreements
with the Commission. In the event of
detariffing, the Commission proposes on
requiring price cap incumbent LECs to
publicly disclose the rates, terms and
conditions for services currently subject
to tariffing requirements and seeks
comment on this proposal.
68. In order to calculate a productivity
X-factor, the Commission invites
comment on whether we should require
price cap LECs to submit their expense
matrix data from 2005 to 2015 and, if so,
whether should we require that these
data be reported using the categories
previously required under the
Commission’s rules and, if not, what
categories should we specify, and
whether the benefits from these data
outweigh the burdens. The Commission
asks whether we should require the
price cap LECs to submit cost studies to
help us determine business data
services productivity growth and if so,
what methodology should we specify
for those costs studies. The Commission
asks whether the benefits from relying
on company-specific data from these
cost studies, as opposed to economywide or industry-wide data, outweigh
the burdens. Furthermore, the
Commission proposes that if it adopts a
new X-factor or otherwise requires
adjustments to the price cap indices,
price cap carriers would implement the
associated rate decreases by submitting
Tariff Review Plans (TRPs) and special
access tariff revisions for all rate
elements associated with special access
and seeks comment on this proposal.
69. In the FNPRM, the Commission
proposes to require providers of BDS
subject to anchor pricing or
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benchmarking to publically disclose
generally available terms and
conditions. The Commission seeks
comment on whether any requirements
should be imposed to ensure
compliance with our proposed rules
and, if so, what form they should take.
The Commission seeks comment on
whether we should require compliance
certification from providers as well as
any other requirements we should
consider and the costs and benefits.
70. The Commission also proposes a
future periodic data collection that will
allow the Commission to update
periodically its identification of
competitive and non-competitive
markets. Beginning in 2018 (i.e., yearend 2017 data), the Commission
proposes collecting data every three
years from incumbent LEC providers to
update the Commission’s competitive
analysis and monitor the BDS
marketplace. The Commission proposes
essentially a paired-down version of the
2015 Collection. Specifically, the
Commission proposes collecting data on
locations with connections, fiber routes,
and monthly billing information,
revenues, requests for proposals, and
wire center locations by regulatory type
as well as new categories of information
for collection, e.g., churn data, data on
managed services, internal documents
showing competitive pressure
assessments and operational responses.
Meanwhile, the Commission proposes
omitting purchasers of BDS from the
mandatory collection, instead proposing
to hire a third-party to voluntarily
survey purchaser customer classes.
E. Steps Taken To Minimize the
Significant Economic Impact on Small
Entities and Significant Alternatives
Considered
71. The RFA requires an agency to
describe any significant alternatives that
it has considered in reaching its
proposed approach, which may include
(among others) the following four
alternatives: (1) The establishment of
differing compliance or reporting
requirements or timetables that take into
account the resources available to small
entities; (2) the clarification,
consolidation, or simplification of
compliance or reporting requirements
under the rule for small entities; (3) the
use of performance, rather than design,
standards; and (4) an exemption from
coverage of the rule, or any part thereof,
for small entities. We expect to consider
all of these factors when we have
received substantive comment from the
public and potentially affected entities.
72. The Commission proposes to
apply a Competitive Market Test to
determine whether there is sufficient
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competition to constrain prices for BDS.
The Commission proposes two
alternatives for applying the
Competitive Market Test, favoring one
based on bright-line triggers—business
density and the number of
competitors—which will offer clearer
rules and be administratively less
burdensome for providers to present the
case.
73. The Commission seeks comment
on whether data from various sources
proposed in a staff study provide a
reasonable basis for calculating a
productivity-based X factor but seeks
comment on alternative sources of data
that would more precisely calculate
productivity increases in the provision
of business data services. The
Commission seeks comment on whether
the additional precision associated with
obtaining those data and using them to
calculate a productivity-based X-factor
outweigh the associated burdens. In
particular, the Commission proposes
calculating the X-factor using economywide and industry-wide data as opposed
to company-specific data from cost
studies, but asks whether the added
precision from company-wide data
outweighs the burdens.
74. For competitive areas, the
Commission proposes removing
significant regulatory burdens imposed
on BDS providers. Specifically, the
Commission proposes removing TDMbased BDS determined to be competitive
under the Competitive Market Test from
price cap regulation and apply a
competitive regulatory framework—
proposing a path to detariff TDM-based
services while maintaining price caps
on a detariffed basis. The Commission
also seeks comment on a voluntary
mechanism that would provide carriers
with flexibility to adjust price cap rates
for TDM-based services when
replacement packet-based services are
available.
75. The Commission recognizes that
applying heightened regulation to
services largely unregulated previously
may impose burdens on providers and
purchasers. The Commission, therefore,
asks commenters whether there should
be an implementation period to give
providers sufficient time to bring
markets into compliance with the
applicable regulatory obligations, and
seek comment on the length of any
implementation period.
76. As noted above, in the FNPRM,
the Commission seeks comment on
whether we should extend the Tariff
Investigation Order’s prohibition on allor-nothing provisions a general
prohibition for business data services,
including both tariffed offerings and
commercial agreements and whether
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mstockstill on DSK3G9T082PROD with PROPOSALS2
such a prohibition should be imposed in
noncompetitive markets or in all
markets. The Commission asks what
additional management or tracking
burdens would this impose on
incumbent LECs and how significant
would they be, whether such costs or
burdens can be quantified, and how
such administrative burdens compare
with the benefits of added flexibility for
customers in the business data services
market. The Commission also asks about
whether allowing customers to treat
their purchases under one Ethernet
commercial agreement as separate
purchases impose any burdens on
providers of business data services and
whether the benefits of increase
flexibility outweigh any such burdens.
77. In the FNPRM, the Commission
proposes to periodically collect data
from incumbent LEC providers going
forward to update the Commission’s
analysis and monitor the marketplace
for BDS. The Commission took several
steps to minimize the economic impact
on small providers and proposes
exempting purchasers from the
VerDate Sep<11>2014
21:31 Jun 02, 2016
Jkt 238001
collection requirements. The
Commission proposes narrowing the
scope of the collection to minimize
burdens on smaller providers while
providing the Commission with the data
necessary to periodically update its
analysis. The Commission seeks
comment on whether it is possible to
exclude smaller competitive LECs from
the collection without adversely
affecting the Commission’s analysis of
the BDS market. The Commission is
considering excluding competitive
providers below a set threshold based
on either locations with connections,
number of customers, or revenues and
ask commenters to suggest appropriate
thresholds and to quantify the potential
impact of any exclusion on the
Commission’s analysis. The
Commission proposes a collection that
is significantly less burdensome then
the 2015 Collection, largely omitting
questions on terms and conditions and
narrative responses. The Commission
proposes to omit purchasers, largely
smaller entities, from the mandatory
periodic collection, instead proposing to
PO 00000
Frm 00047
Fmt 4701
Sfmt 9990
36075
hire a third party to conduct a voluntary
survey of customer classes.
Furthermore, the proposed three year
periodic collection period, as opposed
to annual or quarterly, would minimize
the burden on filers.
78. As SBA observed, changes in
special access (BDS) prices may have an
impact on small carriers including small
competitive carriers. In the FNPRM, the
Commission proposes modifying the
existing regulatory regime applicable to
BDS. Any such actions will accrue to
the benefit of all carriers, including
small competitive carriers, as it will
ensure the availability of business data
services at just and reasonable rates.
F. Federal Rules That May Duplicate,
Overlap, or Conflict With the Proposed
Rules
79. None.
Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 2016–12058 Filed 6–2–16; 8:45 am]
BILLING CODE 6712–01–P
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Agencies
[Federal Register Volume 81, Number 107 (Friday, June 3, 2016)]
[Proposed Rules]
[Pages 36029-36075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12058]
[[Page 36029]]
Vol. 81
Friday,
No. 107
June 3, 2016
Part V
Federal Communications Commission
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47 CFR Part 69
Developing a New Regulatory Framework for Business Data Services
(Special Access); Proposed Rule
Federal Register / Vol. 81 , No. 107 / Friday, June 3, 2016 /
Proposed Rules
[[Page 36030]]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 69
[WC Docket Nos. 16-143, 15-247, 05-25 and RM-10593; FCC 16-54]
Developing a New Regulatory Framework for Business Data Services
(Special Access)
AGENCY: Federal Communications Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: In this document, the Federal Communications Commission seeks
comment on replacing the existing, fragmented regulatory regime
applicable to business data services (BDS) (i.e., special access
services) with a new technology-neutral framework, the Competitive
Market Test, which subjects non-competitive markets to tailored
regulation, and competitive markets to minimal oversight.
DATES: Comments are due on or before June 28, 2016; reply comments are
due on or before July 26, 2016. Written comments on the Paperwork
Reduction Act proposed information collection requirements must be
submitted by the public, Office of Management and Budget (OMB), and
other interested parties on or before August 2, 2016.
ADDRESSES: You may submit comments, identified by WC Docket Nos. 16-
143, 15-247, 05-25 and RM-10593, by any of the following methods:
Federal Communications Commission's Web site: https://apps.fcc.gov/ecfs/. Follow the instructions for submitting comments.
People With Disabilities: Contact the FCC to request
reasonable accommodations (accessible format documents, sign language
interpreters, CART, etc.) by email: FCC504@fcc.gov or phone: 202-418-
0530 or TTY: 202-418-0432.
For detailed instructions for submitting comments and additional
information on the rulemaking process, see the SUPPLEMENTARY
INFORMATION section of this document. In addition to filing comments
with the Secretary, a copy of any comments on the Paperwork Reduction
Act information collection requirements contained herein should be
submitted to the Federal Communications Commission via email to
PRA@fcc.gov and to Nicole Ongele, Federal Communications Commission,
via email to Nicole.Ongele@fcc.gov.
FOR FURTHER INFORMATION CONTACT: Christopher Koves, Pricing Policy
Division, Wireline Competition Bureau, 202-418-8209 or
Christopher.Koves@fcc.gov. For additional information concerning the
Paperwork Reduction Act information collection requirements contained
in this document, send an email to PRA@fcc.gov or contact Nicole Ongele
at (202) 418-2991.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's
Further Notice of Proposed Rulemaking (FNPRM), WC Docket Nos. 16-143,
15-247, 05-25 and RM-10593, FCC 16-54, released May 2, 2016. The
summary is based on the public redacted version of the document, the
full text of which is available here: https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-54A1.pdf. To request alternative
formats for persons with disabilities (e.g. accessible format
documents, sign language, interpreters, CARTS, etc.), send an email to
fcc504@fcc.gov or call the Commission's Consumer and Governmental
Affairs Bureau at (202) 418-0530 or (202) 418-0432 (TTY). Pursuant to
Sections 1.415 and 1.419 of the Commission's rules, 47 CFR 1.415,
1.419, interested parties may file comments and reply comments on or
before the dates indicated on the first page of this document. Comments
may be filed using the Commission's Electronic Comment Filing System
(ECFS). See Electronic Filing of Documents in Rulemaking Proceedings,
63 FR 24121 (1998), https://www.fcc.gov/Bureaus/OGC/Orders/1998/fcc98056.pdf.
Electronic Filers: Comments may be filed electronically
using the Internet by accessing the ECFS: https://apps.fcc.gov/ecfs/.
Paper Filers: Parties who choose to file by paper must
file an original and one copy of each filing. If more than one docket
or rulemaking number appears in the caption of this proceeding, filers
must submit two additional copies for each additional docket or
rulemaking number.
Filings can be sent by hand or messenger delivery, by commercial
overnight courier, or by first-class or overnight U.S. Postal Service
mail. All filings must be addressed to the Commission's Secretary,
Office of the Secretary, Federal Communications Commission.
[cir] All hand-delivered or messenger-delivered paper filings for
the Commission's Secretary must be delivered to FCC Headquarters at 445
12th St. SW., Room TW-A325, Washington, DC 20554. The filing hours are
8:00 a.m. to 7:00 p.m. All hand deliveries must be held together with
rubber bands or fasteners. Any envelopes and boxes must be disposed of
before entering the building.
[cir] Commercial overnight mail (other than U.S. Postal Service
Express Mail and Priority Mail) must be sent to 9300 East Hampton
Drive, Capitol Heights, MD 20743.
[cir] U.S. Postal Service first-class, Express, and Priority mail
must be addressed to 445 12th Street SW., Washington, DC 20554.
People with Disabilities: To request materials in accessible
formats for people with disabilities (braille, large print, electronic
files, audio format), send an email to fcc504@fcc.gov or call the
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-
418-0432 (tty).
I. Introduction
1. Business data service (BDS) is critical to the delivery of
innovative broadband services for businesses and government
institutions and is a major contributor to the nation's economy.
Incumbent LECs and competitive providers reported revenues of almost
$45 billion for 2013 for the sale of dedicated services. It is,
however, important to recognize that BDS is an important input
(sometimes self-supplied) in the broader market for enterprise
services, which include voice, Internet, private network, web-security,
cloud connection, and other digital services. Available information
suggests that the annual revenues for the broader enterprise services
industry could exceed $75 billion annually.
2. In this FNPRM, we provide our analysis to date of the 2015
Collection. We then seek comment on a number of proposals to establish
a new regulatory paradigm for BDS to more appropriately address the
technological changes occurring today and to facilitate the continued
evolution of the type of robust competition that will result in ever-
improving services for American businesses and consumers. To that end,
the FNPRM seeks to develop a technology-neutral framework that no
longer classifies BDS through the legacy prism of traditional services
and company classifications. Rather, the Commission seeks to enter a
new era where regulatory determinations are made based on whether a
market is competitive and the concomitant regulatory obligations apply
to all providers, looking to legitimate differences in products,
places, and customers. The goals of this FNPRM are supported by the
joint principles recently announced by INCOMPAS and Verizon urging the
Commission to ``adopt a permanent framework for regulating all
dedicated services in a technology neutral manner.'' That two of the
entities who were once
[[Page 36031]]
diametrically opposed have joined together urging the Commission to
adopt such principles is further evidence of the evolution in the BDS
market today and the need for this new paradigm to harmonize regulation
with the changing technology.
II. Further Notice of Proposed Rulemaking
A. Competition Analysis
1. Our Approach
3. We analyze the data collected and the evidence submitted in this
proceeding to reach preliminary evaluations as to the degree of
competiveness in BDS markets. Our public interest evaluation
necessarily encompasses the ``broad aims of the Communications Act,''
which include, among other things, a deeply rooted preference for
preserving and enhancing competition in relevant markets with increased
private sector deployment of advanced services. In conducting this
analysis, we take a forward-looking view of technological and market
changes.
4. We examine the effectiveness (and likely effectiveness) of
competitive restraints, to identify where market power exists in BDS
markets. We focus our analysis on BDS prices, and terms and conditions,
and consider the effectiveness of current competitive restraints and
whether market power, where it exists, has enabled unreasonable pricing
or other practices or an ability to unlawfully exclude competition.
5. To distinguish product markets, we generally look to include
products in the same market if they are reasonably interchangeable,
with differences in price, quality, and service capability being
relevant. In the case of geographic markets, we look to supply, rather
than demand substitution. For both product and geographic markets, we
do not believe it is necessarily required to engage a formal
hypothetical monopolist test considering likely consumer substitution
if a hypothetical monopolist imposed at least a small but significant
and non-transitory increase in price (SSNIP), taking a more direct
approach to demonstrate the use of market power.
2. Product Markets
6. In our data collection we defined BDS as a dedicated end-to-end
telecommunications service. Leading technologies of this type are DS1s
and DS3s, typically carried over copper pairs, which account for the
majority of the BDS revenue in 2013 according to these data. DS3 lines
carry about 30 times the bandwidth of a DS1 line, which is a symmetric
1.5 Mbps service. It is also possible to achieve higher bandwidth
levels over other circuit-based technologies. An alternative to
circuit-based technology is packet-based service, more commonly
delivered over fiber optic cable or HFC cable using a standard called
DOCSIS. Fiber can deliver higher bandwidth and service levels, and most
new investment is in fiber optic and coaxial cable, and in next
generation DOCSIS 3.1 electronics. Cable companies also provide BDS at
competitive rates over the coaxial-fiber hybrid technology, commonly
referred to as ``Ethernet over DOCSIS,'' that have characteristics of
BDS carried over fiber: It can be used to provide access to the
Internet and point-to-point communications (such as a virtual private
network); it is generally available at symmetric bandwidths up to 10
Mbps; and is often supplied with service reliability guarantees, even
if not at the same level as what is typically offered over fiber. We
agree with several commenters recognizing that since this proceeding
began in 2005, there has been significant innovation, investment and
deployment of IP-based technologies, and DOCSIS relied on by cable
companies, and that increasingly business customers purchase these
technologies instead of TDM services. However, many business customers
continue to rely on TDM services.
7. We described best efforts services above. Several commenters,
including certain competitive LECs, claim that best efforts Ethernet
over DOCSIS provided by cable companies does not provide the requisite
dedicated access needed by certain, notably mid-sized and larger
business customers and carriers, even if it meets other demands. Other
commenters contend the Commission should include best efforts DOCSIS
cable service within a broader product market definition.
8. We believe it is likely that best effort services may not be in
the same product market or markets as BDS. The prices of best efforts
services are considerably lower than the prices of roughly comparable
BDS. Compared with BDS, best effort services are less reliable, notably
in terms of guaranteed uptime, and other service level guarantees; in
some cases do not offer higher bandwidths; and characteristically lack
upload/down symmetry. Although fit for many customer purposes, best
efforts services do not meet the requirements of all BDS purchasers,
nor is it offered by sellers as a product intended for all customers.
Sellers generally distinguish best effort services from other BDS
products to meet customer needs at the right price point, and organize
sales efforts accordingly. Finally, underlying characteristics of the
way best efforts services are supplied can make it hard for certain
higher quality BDS to be supplied on the same network as best efforts
services. We seek comment on this view.
9. If two readily available services have substantially different
prices, then they are likely dissimilar (otherwise buyers would prefer
the cheaper service which would constrain the price of the other
service). Best efforts services are uniformly the least cost
alternative offered by carriers, with the lowest functionality. Prices
for best efforts services typically start at levels consistent with
residential broadband service, increasing as service speed, capacity
and reliability increase. For example, ``Comcast's Business Internet
service is available for purchase online starting at $69 per month for
its 16/3 Mbps service.'' Verizon similarly offers a variety of best
efforts services under $100, beginning with a ``Starter'' package with
speeds up to: 1 Mbps download/384 Kbps upload (``Best for: Single--
person business, Light Internet use'') to the ``Fastest'' with speeds
up to 10-15 Mbps download/1 Mbps upload (``Best for: Multiple
employees, Online-based business eCommerce with orders''), with prices
ranging from $39.99 to 94.99 per month. Verizon's Fios ranges from 50/
50 Mbps to 500/500 Mbps, with prices from $49.99 to 269.99 per month.
TWC offers six best efforts products online, ranging from $14.99 for
(``up to'') 2 Mbps download/1 Mbps upload to $64.99 for (``up to'') 50
Mbps download/5 Mbps upload. In contrast to these best efforts
services, TWC's average monthly BDS pricing ranges from [REDACTED].
10. That demand exists for symmetric [REDACTED], and customers do
not switch to available best efforts services with at least as much
bandwidth in both directions that are priced at approximately one tenth
of that level (compare with the FiOS 50/50 price of $49.99), implies
some customers must value certain characteristics of BDS highly
relative to best efforts service. This suggests such customers would be
unlikely to be tempted to switch to a best efforts service even if its
price were to fall by a significant amount. It also suggests a customer
currently purchasing a best efforts service would not switch to a BDS
with a price of several multiples of the best efforts service, even if
the BDS price were to fall significantly.
11. In fact, the characteristics of best efforts service and BDS
appear to be
[[Page 36032]]
very different. BDS comes with substantial reliability guarantees and
functionality that do not accompany best efforts services, leading us
to the view that the two services do not play important roles in
constraining the quality-adjusted prices of each other. Consistent with
the observed price differences between the different types of services,
some end users do not require ``mission critical'' connectivity, and
prefer best efforts services to BDS, prioritizing cost savings over
reliability and specific functionality. Other end users are willing to
pay considerably more for services that include greater (particularly
upload) speeds, are more reliable, and come with more rigorous
guarantees. Sprint, for example, [REDACTED]. Best efforts services do
not satisfy these requirements.
12. BDS uptime reliability is also generally higher than with best
efforts services. For example, Windstream on its Web site contrasts an
Ethernet Internet service with a 99.99% uptime guarantee with cable
(presumably) best efforts services, while best efforts services do not
typically come with such guarantees. AT&T's best efforts Broadband SLA
applicable to its High Speed Internet Business Edition family of
services (AT&T U-verse[supreg] HSI-Business Edition; AT&T High Speed
Internet Business Edition; and FastAccess[supreg] Business DSL) comes
with a guarantee of 99.9% uptime. The AT&T ``three nines'' service
(99.9%) service permits approximately 8.76 hours of downtime a year,
plus disclosed allowances for many other downtime events, which are
material to the offering and, as discussed immediately above, would not
be acceptable for many users. ``Comcast best efforts Business Internet
service is sold without SLAs or contractual performance objectives.''
Comcast best effort offers include seven Internet packages online
ranging from a 3 Mbps, ``Economy Plus'' service to a 2000 Mbps,
``Xfinity Gigabit Pro'' service; each of the seven Comcast services
include a disclaimer, ``Actual speeds vary and are not guaranteed.''
And in contrast Comcast BDS, like those of Windstream and AT&T, come
with considerably greater reliability guarantees. Comcast ``business
class data services come with a variety of performance metrics and
assurances,'' which for Ethernet transport services include an SLA
``committing to [REDACTED] for fiber-based service and [REDACTED] for
HFC-based service, with penalties for failure to meet those service
levels.'' Similarly, without a guaranteed throughput speed, ``Time
Warner Cable offers six Internet speed options, up to 50 Mbps in most
locations and up to 300 Mbps in select areas.'' Time Warner Cable
guarantees for its Business Internet Access (BIA) service vary slightly
from Comcast, ``[w]hile TWC's BIA service may be just as [REDACTED],
leading certain customers to choose one service over the other.''
Moreover, as discussed above, the price differences for these services
are large, suggesting customers highly value the product differential
BDS has over best effort services.
13. We seek comment on these analyses. We ask whether the
Commission should consider alternative factors or aspects of the market
and invite parties to submit alternative evidence in the record.
14. Some commenters argue that packet BDS place competitive
pressure on TDM BDS. TDM BDS offers point-to-point connectivity in
essentially the same way that packet BDS does. Since each technology
can be used for the same purposes, this suggests that they are in the
same product market. This is not to say that there are no differences
between packet and TDM services. For example, while both perform
similar roles, Ethernet is more easily scaled.
15. But Existing Customers Can Face High Switching Costs. Record
evidence suggests that once a customer has installed a business data
service, it faces high costs in switching. Consequently, switching most
commonly occurs when a customer outgrows its service, for example,
requiring a demand not available on their current service, or because
they need the functionality of a different technology (most usually
leading to a switch from TDM to packet BDS). In particular, high
switching costs can both slow the transition from TDM to packet BDS and
limit the potential market for packet BDS which could in turn limit
investment.
3. Customer Markets
16. Carriers organize how they market around distinct fairly
similar customer groups. These customer groups also have their own
distinct characteristics, and hence distinct service requirements. As
Comcast explains, ``although all of Comcast's business class data
services may be used by various types of customers, the unique needs of
certain customers may make one service more appropriate than others.''
Put together these facts suggest the possibility of separate customer
markets. In particular, if supply to a first customer group cannot be
readily extended to supply to a second, then supply to the first
customer group may not place material competitive constraints on supply
to the second. We seek comment on whether such customer markets are
possible in the supply of business data services, and if so, what these
are. We are particularly interested in the extent that multisite
customers may fall into such a category as we propose below.
17. At a high level, possible customer categories are retail
purchasers of business data services and carrier purchasers. These
groups, in turn, could be further subdivided. Retail purchasers of
business data services come in all shapes and sizes, and include retail
businesses, governmental and educational institutions, and other
enterprises that require dedicated enterprise services. Their needs
vary depending on, among other factors, the number of employees and
locations they have, the volume of their traffic, and the technological
sophistication of the services they require. Many call for a
competitive wholesale BDS access market. Large businesses are
especially likely to require ``high quality phone and Internet
services'' that ``depend upon special access services as the building
blocks of their corporate networks, from workhorse DS1s to the growing
number of Ethernet connections to the highest capacity OCns.'' Medium-
sized and small businesses also require ``advanced IP and fiber
connections,'' which are ``mission critical.'' Retail banks, for
example, ``rely heavily on broadband service'' to enable ``financial
transactions and provide [customer] support in a timely fashion.''
Reliable broadband connections also allow brick and mortar companies to
meet customer needs ``as efficiently and effectively as possible'' and
to ``enhance the customer shopping and buying experience.''
18. Most larger, sometimes called enterprise, customers require
connections to more than one site, and some, such as retail banks, and
large retail sales outlets, may require many sites in diverse
locations, often in areas with limited business density. Moreover, at
many of these locations such large customers may only have low
bandwidth requirements, even if each connection must have a high degree
of reliability (for example, in the case of a retailing outlet, to
ensure rapid credit card processing) and/or be highly secure (in the
case of a retail bank). Larger customers are typical users of dedicated
fiber-based, symmetric services; some have service demands for a
limited geographic area while others require service for any number of
locations within the country. Multi-location customers are often
provisioned by BDS providers that ``have a broad regional footprint
without significant gaps in coverage to serve large enterprises with
[[Page 36033]]
multiple sites across given geographic regions effectively.'' Such
providers may be relatively rare. We seek comment on our implicit
finding below that such ``spread-out'' multi-site customers may be
sufficiently distinct from other customers to constitute a separate
market (below we find that competitive supply to other customers may
not place a competitive constraint on supply to these ``spread-out''
multi-site customers), especially to the extent that such customers
require lower bandwidth, highly reliable, services in areas with lower
business densities, may not face the same competitive choices as other
customers.
19. Carrier purchasers are different again. They are typically
large and sophisticated buyers, with substantial capacity to leverage
scale, for example, in seeking tenders to supply. Wireless carriers
rely on business data services to connect their radio towers to their
mobile switching centers. Mobile carriers purchase business data
services often with bandwidths of around 50 Mbps and greater, but small
cell demands, which look set to grow, may generally require lower
bandwidths, and may require backhaul to many locations with low levels
of business density. Sprint, a purchaser of wireless backhaul transit
services, explains that it requires a specific BDS capable of more than
traditional copper twisted pair and coaxial cable can support. Even
where next-generation HFC is available, it is more suitable for mid-
range demands. Sprint, for example, describes Ethernet over HFC as a
poor substitute for fiber-based services because [REDACTED]. Sprint
specifically notes that its macrocell sites [REDACTED] and a service
level guarantee not available for generally best efforts or mid-tiered
products.
20. Competitive LECs purchase BDS wholesale to sell retail services
to end users. They do this where the purchasing competitive LEC does
not currently have network and where extending their networks would not
be profitable. While competitive LEC demand reflects end-user demand
and so is highly diverse, competitive LECs again have the ability to
leverage scale. We seek comment on whether carrier purchasers have
countervailing power even when dealing with an entity that may
otherwise have market power, and whether they need different
protections than end users.
4. Geographic Markets
21. In this section, we express the view that the likely BDS
geographic market, even for lower bandwidth services, likely extends
beyond the area of the average Census block in which there is BDS
demand. We come to this assessment by focusing on supply-side
substitution, and seek comment on how we might refine this definition.
22. Relevant geographic markets are often determined by estimating
demand side response if a hypothetical monopolist in a specified
region, facing competition from beyond that region, tried to set prices
above competitive levels. In this industry, given that most BDS
customers would not shift their location to purchase special access
from a different carrier, we focus on the supply response, that is--
under what circumstances, if any, will nearby suppliers geographically
extend their existing facilities distances to obtain new consumers. If
suppliers were generally willing to extend their networks to meet
nearby demand, then they would place a degree of competitive pressure
on the prices nearby customers would face.
23. Geography also impacts product substitution. In certain areas,
higher bandwidth services are not available due to the lack of
technical capability. Available service could be limited in speed and
capability to best efforts and similar, lower-level service levels that
are provisioned over copper and coaxial lines. Increased service
speeds, capacity, and guarantees are not available unless and until a
BDS provider builds or extends new facilities (such as fiber or a
hybrid technology) in a range close enough to the customer to readily
extend a service that replaces best effort. Sprint points out, for
example, that Ethernet over HFC ``is not yet available in all business
locations served by ILEC special access--nor at most cellular tower
sites.''
24. We consider it unlikely that BDS supply in one part of an MSA
would constrain the provision of BDS where it is demanded everywhere in
the MSA. However, we also see good evidence that the presence of fiber
competition not only could be expected to impact, but actually can
impact, supply of lower bandwidth services over the whole Census block
in which that fiber is located. This suggests a geographic market
definition for lower bandwidth BDS lies somewhere above the average
area of the Census block with BDS demand and below the MSA. We seek
comment on these assessments and how to refine them. We seek this
information for the purpose of developing an administratively feasible
test for determining where we can replace regulation with market
forces.
25. In the Suspension Order, the Commission explained that ``demand
varies significantly within any MSA, with highly concentrated demand in
areas far smaller than the MSA'' and some areas with little or no
demand. Our record reinforces that view. The Commission stated that
competitive entry is considerably less likely to occur in areas of low
demand, regardless of whether other areas within the MSA contain
sufficient demand to warrant competitive entry. The Commission also
observed that ``competitors have a strong tendency to enter in
concentrated areas of high business demand, and have not expanded
beyond those areas despite the passage of more than a decade since the
grant of Phase II relief.''
26. The distances competitive LECs are generally willing to extend
their facilities to reach potential customers beyond the locations they
currently reach are quite short. These distances, which vary among
competitive LECs and business opportunities, typically range from
[REDACTED]. In fact, the distance Comcast will generally build within
[REDACTED]. Similarly, TDS Metrocom estimates the average length of its
competitive LEC's fiber laterals is [REDACTED]. Most [REDACTED]. If an
end point of a ``transport facility is outside a [central business
district], and perhaps the first ring of suburbs . . . the competitive
presence is far less. . . . As a result, these non-[central business
district] areas are largely served only by ILEC facilities.'' Buildouts
of [REDACTED] and farther occur, but variables, including cost and
demand factors, entailing traditional return-on-investment
calculations, become increasingly determinative as the distance from a
cost-effective and viable fiber junction point increases, which ``are
often collocated at or housed near ILEC central offices.'' Incumbent
LECs have similar buildout criteria. AT&T, for example, ``engineering
guidelines demonstrate that AT&T engineers its network to maintain
lateral distances at or below about [REDACTED].
27. Responses to the data request indicate that competitive
buildout to customers becomes increasingly less likely with a potential
customer at a location [REDACTED] or farther away. Narrative
descriptions of how far competitive carriers will buildout broadly
align with observations of data submitted. For example, Cbeyond
reported its ``maximum build distance'' is a ``distance of [REDACTED]
from existing lit fiber of a competitive fiber provider.'' TDS METROCOM
explained, ``If the location is beyond [REDACTED] experience has shown
us that customers are not willing to pay the extra monthly cost that
would be required to pay for such an expensive build.'' Cablevision
[[Page 36034]]
Lightpath reported [REDACTED] buildout parameters, requiring a
potential customer ``be within [REDACTED] of a splice point in [its]
core network,'' excluding certain areas of density, and ``[i]f
[REDACTED] from splice point, no business case is required [while]
[b]uild[ing] [REDACTED] from splice point involves ROI [analysis].'' XO
similarly notes that ``[REDACTED] or less from its existing fiber
infrastructure'' is most attractive, while ``buildings that are 200
feet or less from exiting fiber assets are of particular interest.''
The distances and build criteria reported by Submitting Parties are
generally in-line with that the Department of Justice in 2006. Beyond
these general distances (and to a lesser extent within these
distances), carriers typically rely on long-term loyalty agreement to
guarantee a return-of-investment.
28. These buildout distances, which rarely exceed [REDACTED] are
orders of magnitude less than those encountered in an MSA. For example,
the smallest MSA, Carson City, Nevada has a land area of 144.7 square
miles. If competitive fiber is deployed in the center of Carson City,
it will be 6.9 miles from Mound House, Nevada, or 5.8 miles from Indian
Hills, Nevada. Moreover, the Carson City MSA is quite small. The land
area of the average MSA, 2,494.5 square miles, is 17.2 times larger
than the Carson City MSA. In fact, the largest MSA, Riverside-San
Bernardino-Ontario, California, has a land area of 27,263.4 square
miles. If competitive fiber is deployed in the center of Riverside, it
would be 20.6 miles from Chino, California. Indeed, MSAs are large
geographic areas that ``often contain smaller geographic areas across
which competitive conditions are widely disparate.'' As the Commission
has observed, ``MSAs are comprised of communities that share a locus of
commerce, but not necessarily common economic characteristics as they
relate to telecommunications facilities deployment . . . Due to the
wide variability in market characteristics within an MSA, MSA-wide
conclusions would substantially over-predict the presence of actual
deployment, as well as the potential ability to deploy.''
29. Census tracts are large relative to the deployment distances
discussed immediately above. If the median Census tract in which we
observe BDS demand were a circle, it would be approximately 1.5 miles
across. Moreover, the geography of Census tracts vary significantly. A
circular tract at the 75th percentile would be around 2.6 miles across.
In contrast, if the median Census block were a circle, then it would be
approximately 0.2 miles across. Again Census blocks can be
significantly larger than the median. If the Census block at the 75th
percentile were circular, then it would be around 0.4 miles across.
This analysis suggests that a supplier's presence anywhere in most, if
not all, Census blocks could have a material competitive effect on
other suppliers. It also suggests that a supplier's presence anywhere
in smaller Census tracts could have a material competitive effect on
other suppliers. This is consistent with the analysis contained in the
Rysman White Paper, and in the Baker Declaration, which suggests that
the presence of a fiber competitor can have material competitive
effects on lower bandwidth services in Census blocks in which we see
BDS demand.
30. We seek comment on how close competition must be to place
material competitive pressure on supply at a given location, and
whether this distance might vary with the nature, most notably the
bandwidth, of the BDS in question. We also seek comment on how such
analysis might be developed, and call for that analysis to be
undertaken. For example, recognizing that Census tracts and Census
blocks vary in size, we recently placed in the secure data enclave
information on the distance from all locations with BDS demand to the
nearest competitive providers' fiber networks. Consequently, regression
analysis might be used to identify the range over which distant
networks no longer have material competitive effects.
5. Concentration by Any Measure Appears High in This Industry
31. In this section, we report several measures of geographic
concentration, including at the national level. What these measures
show are uniformly high levels of concentration. While we remain
agnostic as to what the right unit or units of geography are for
measuring concentration (noting these might also vary for different
services and customer groups), we expressly reject the idea that many,
if any, BDS markets are national in scope (it is unlikely that a
supplier's presence in Miami constrains prices in Seattle). To the
extent that markets are not national, national measures of
concentration likely understate both market concentration measures and
the shares of incumbent LECs. While national revenue shares make sense
from the perspective of incumbent LECs, whose territories do not
overlap, and which, in aggregate, cover all price cap territories,
national shares greatly exaggerate competitive LEC presence, since
there are many geographically diverse, and in some cases very small,
competitive LECs, none of which competes across all the incumbent price
cap LECs' footprints.
32. As part of our data collection, carriers reported their
aggregate BDS revenues. These provide an approximate indication of the
revenue shares of different provider types supplying sophisticated
services to end users, that is, of revenue shares in the supply of BDS
and more complex managed services. As the pie chart below shows
independent competitive LECs, that is, competitive LECs not affiliated
with incumbent LECs, only capture 18% of BDS revenues. However, this
estimate is subject to three biases, which in aggregate overstate the
shares of independent LECs. First, a greater proportion of incumbent
LECs' sales of BDS and managed services are BDS as compared with
competitive LECs, a bias that likely overstates incumbent LEC revenue
shares. Second, because a valid measure of concentration would measure
facilities-based revenues, rather than resale revenues, and because a
substantial proportion of incumbent LEC BDS sales are to competitive
LECs who then resell those services, the preceding bias is likely to be
more than offset (managed service revenues earned on the resale of
incumbent LEC BDS will be greater than the LEC BDS sales to the
resellers). Third, there is the bias identified immediately above from
measuring national shares.
33. In 2013, cable companies reported nearly two billion in BDS
sales (or less than 5% of all sales). However, because cable BDS
revenues have been growing at around 20 percent per year, by the end of
2016 cable BDS revenues will be close to $3.5 billion (likely still
less than eight percent of BDS revenues).
34. This section considers the extent to which in 2013 there was
competition, as indicated by various measures of the number of rivals
(for example, by counting or excluding competition based on UNEs and/or
HFC with DOCSIS 3.0) at the level of the unique location, Census block
and ZIP code. We take this broad approach because, as discussed above,
we are agnostic as to the exact geographic range of BDS markets. In
particular, we do not yet know is how much competitive pressure
different forms of supply place on other suppliers, or how many
suppliers, accounting for their differences, are sufficient to make
prices effectively competitive (matters we have sought comment on
above). Moreover, the Rysman White Paper suggests that competitive
effects may occur at the level of the building, even when there are
additional competitive effects from
[[Page 36035]]
more distant competition. Under all these measures, market
concentration is large. For example, when counting fiber, and DOCSIS
3.0 over HFC and UNE supply as forms of competition, we find more than
ten percent of unique locations with BDS demand are supplied by one
provider, and that slightly over half of such locations are only
supplied by two providers (so \2/3\rds of such locations have only a
choice of one or two suppliers).
35. Table 3 considers how many unique locations have one through
six suppliers in the location, under two measures of competition. In
both cases, the incumbent LEC is considered ubiquitous, and ILEC-
affiliated supply is counted as competitive, but in the first case (the
left side of the table), only competitors with fiber in the building
are counted, while in the second, competition over UNEs is also
counted. Under both cases, more than half of all unique locations only
have one supplier, and less than five percent have three or more.
36. In 2013, cable companies reported being able to serve something
just over 150,000 unique locations (or less than 15 percent of unique
locations with BDS demand), almost entirely on their own facilities
(cable companies make limited use of UNEs). Looking forward, if cable
adds 20 percent more lines every year (in line with historic BDS
revenue growth), then at the end of 2016 cable would be able to serve
over 260,000 unique locations. However, in 2013, cable provision of BDS
was much more limited than it is today. In particular, BDS was not
typically supplied over HFC. Looking forward, it may already be or soon
will be the case that cable companies are able to supply BDS everywhere
they have deployed DOCSIS 3.0. We seek comment on this. Counting cable
supply as being capable of reaching every unique location with BDS
demand in every Census block that cable reports as being able to serve
greatly increases the extent of competition at the level of unique
location. Table 4 shows the resulting number of providers that can
supply one through six buildings. More than half of unique locations
are only supplied by one or two providers, and more than ten percent
have only one supplier.
37. Firm concentration falls as the square areas of the geographic
region under examination increases. Table 5 provides the number of
Census blocks with BDS demand that have one through six fiber suppliers
(so is similar to the left half of Table 3 in that it excludes UNE
competition). It shows that around 16 percent of Census blocks with BDS
demand are only served by an incumbent LEC (compared with more than 75
percent in Table 3), while more half of such Census blocks have a
choice of two suppliers (compared with more than 20 percent in Table
3). It remains true that nearly 70 percent of Census blocks with BDS
demand have two or fewer competitors capable of serving a unique
location in the block.
38. Table 5 also gives an indication of the strength of different
classes of providers. For example, incumbent-affiliated competitive
LECs have very few facilities indeed. This is true even if competition
over UNEs is added in (not shown in the table) and is indicative of the
extent to which incumbent-affiliated competitive LECs rely on other
incumbent LECs' BDS.
6. Entry and Entry Barriers
39. Similar to the antitrust enforcement agencies, we consider
entry by competitors to be an important part of our analysis of
competition. The viability of potential competition is significantly
affected by barriers to entry, which are ``cost[s] of production that
must be borne by competitors entering a market that is not borne by an
incumbent already operating in the market,'' as well as conditions that
impact entry. Both costs and conditions exist in the BDS market with
enough significance in any measure of a geographic market to deter
rapid competitive entry or expansion, including ``high capital
expenditures, large sunk costs, long lead times, scale economies, and
cost disadvantages.'' High barriers to entry at local levels may
particularly affect competitive entry or expansion to service customers
with national and multi-region demand that requires ``an extensive
network footprint to be able offer services widely.'' The competitive
provider's footprint most often includes a combination of locally-based
facilities owned by the competitor and network access purchased from
the regional incumbent or other competitors, which may be available at
a regulated UNE- (by the incumbent LEC) or unregulated wholesale-basis
(by a LEC or, in some instances, a cable company or other competitive
LEC). Although there is evidence of potential competitors becoming
increasingly relevant, commenters assert substantial barriers limit the
timelines, likelihood, and sufficiency of entry to counteract
anticompetitive effects in BDS markets.
40. The passage of the 1996 Act increased the Commission's focus on
how barriers to entry impact competitive buildout. Like incumbent LECs,
competitive LECs build facilities to meet consumer demand. Deploying
facilities requires incurring costs that vary, ``among other things, on
the length of the laterals and fiber rings built, the nature of the
electronics added, whether the lines are buried, and local regulations
(e.g., a city may require replacement of cobblestones on scenic
streets).'' In addition to deploying facilities, a provider frequently
needs to obtain building access and/or rights of way to reach the
building.
41. The barriers to entry do not materially differ whether the
technology being deployed is TDM- or Ethernet-based. As Ad Hoc notes,
``[t]he underlying transport facilities for Ethernet services are the
same as the underlying transport facilities for TDM services,'' which
is consistent with AT&T's observation that ``Ethernet is simply a
service that can be provided over many different types of transport
facilities, including copper, fiber, coaxial, and wireless
facilities.'' BT adds that it is reasonable to conclude that that the
main Ethernet access cost elements--duct, fiber, and electronics--do
not vary much across service speeds up to 1 Gbps.'' Legacy TDM services
require the same transport facilities and, in most geographic areas,
the incumbent already provides TDM service and therefore has an
advantage over a new entrant. That historical incumbent advantage
allows the incumbent LEC to lower its costs through its ``initial
control of all customers'' and ``us[ing] the same rights of way,
trenches, conduit, wires, poles, building access, riser, truck rolls,
employees, outside plant, central office equipment, administrative
expenses, and other legacy inputs that they use when the provision TDM-
based special access services.''
42. One recent study asserts that current barriers are sufficient
to deter new construction in most business locations. Certain issues
cannot be easily overcome, such as ``when the building owner refuses to
grant the CLEC access or charges a high access fee, or when it is
difficult or costly to obtain rights of way to a specific building
(e.g., pole access or costs of burying lines).'' Also, competitive
carriers can connect their networks to ``customer locations that are
near to their fiber transport facilities, where the customer at the
location is suitable for the competitive carrier's service offerings,
and where the revenues associated with the location are sufficient to
make loop deployment profitable.'' Areas of low BDS demand, which would
include most suburban and rural areas, present additional issues for
those considering an extension of facilities, principally a lack
[[Page 36036]]
of a timely potential for a positive return on investment. Charter, for
example, notes how in its [REDACTED]. Cablevision Lightpath also faced
issues outside of its traditional, denser, region because [REDACTED].
Many simply avoid higher-cost areas, such as, [REDACTED].
43. In addition to deploying their own facilities, competitive LECs
extend their network reach by purchasing incumbent LEC facilities at a
regulated price on an unbundled basis or at non-regulated wholesale
prices. Obtaining UNEs often is the most economical way to reach a new
customer for a competitive LEC, and it is important to account for the
effects of UNE competition. However, UNE competition has its limits.
UNEs are not always available ``because of insufficient or
insufficiently-conditioned facilities, regulatory or contractual
constraints.'' And even with significant investment in facilities in an
area, competitors ``must depend heavily access to on the incumbent
LECs' facilities and services to serve its customers.'' When purchasing
from the incumbent LEC, proximity to a collocation point near the
customer lowers cost, meaning costs increase the farther the
competitor's facilities are located from the potential customer. UNE
reliance, therefore, is successful ``only in some locations, only for
some customers, and only to some extent.''
44. Competitive LECs also lease dedicated, non-regulated, wholesale
services to connect to commercial buildings over non-UNE facilities
from incumbent LECs or other competitive LECs. Even competitive LECs
with well-developed regional fiber rings rely on an incumbent or
competitive LEC wholesale inputs for last-mile connections. Leasing
last-mile dedicated services from the ubiquitous incumbent LEC
oftentimes is the only option due to a lack of competitive build-out.
Level 3, for example, explains that it ``usually has no choice but to
lease dedicated services from the incumbent LEC in order to reach
locations that Level 3 cannot reach with its own network.''
45. While wholesale access can be a cost effective means for a
competitive LEC to expand its reach, such a wholesale purchaser cannot
place competitive pressure on supply of the underlying facility that it
purchases, but rather can only compete by being more efficient at
retailing. Thus, we do not consider competition over resold lines as a
material competitive restraint on any facility-based supplier with
market power. Moreover, we are told that in some cases an incumbent
LEC's wholesale prices can be near or above retail levels (sometimes
referred to as a ``price squeeze''). Similarly, we are told that rates
below retail, available through many incumbent LEC purchase agreements,
also can create barriers to entry when they include ``penalty clauses
and loyalty discount provisions in their wholesale contracts'' that are
not related to a competitive efficiency and simply have the effect of
raising the rival's cost. XO, for example, generally declines to build
facilities when doing so will increase its risk of falling short of a
minimum purchase requirement under an incumbent LEC commitment plan.
Level 3 similarly reports added costs due to incumbent LEC loyalty
agreements, which forecloses an opportunity to purchase from other
lower-priced wholesale inputs. In the end, competition is constrained.
A motivated and efficient competitive LEC, such as Level 3--the largest
competitive LEC and the third largest provider of fiber optic internet
access (based on coverage area) in the United States--only ``deploy[s]
new loops to approximately 3,000 to 4,000 commercial buildings in the
U.S. each year.''
46. Cable providers encounter similar barriers to entry, even
within their incumbent franchise areas, although their in-region
networks present economies of scale, similar to incumbent LECs, and
present lower barriers for in-region expansion, compared to other
competitive LECs. Nevertheless, for traditional competitive LECs and
cable companies alike, ``loop deployment costs are distance-
sensitive,'' limiting competitive reach, even if cable companies would
likely have ``lower loop deployment costs in areas where they have
deployed extensive transport networks.'' As CenturyLink notes, even
cable companies must incur significant investment costs and rely on the
networks of others to expand their footprints.''
47. Efforts to enter and expand in markets are being made with
success, however, which has required investment and new networking
initiatives to address barriers to entry. Comcast, for example, has
recently established a new business unit to target Fortune 1000
businesses. But to reach Fortune 1000 companies, and satisfy their
varying and broad geographic requirements, Comcast could not rely on
its own facilities alone. To compete, ``[i]t struck wholesale
agreements with other cable companies including Charter, Time Warner
Cable, Cox, Cablevision, and Mediacom, and it acquired Contingent
Network Services--a managed services firm with ``aggregation or
wholesale relationships with many other CLECs, ILECs, [and] small cable
providers.'' Some companies are more risk-adverse or sensitive to
barriers than others, however. Charter, for example, notes that a
``partner model creates high transaction costs, as multiple networks
and personnel must be coordinated, and these costs impact the price at
which these services can be offered.''
48. Incumbent LECs face lower overall barriers within region and
barriers similar to independent competitive LECs out-of-region. Within
region, the Commission has recognized that incumbents can ``increase
capacity on many special access routes at a relatively low incremental
cost (relative to the total cost of trenching and placing poles,
manholes, conduit, fiber, and copper, and securing rights and access)
by adding or upgrading terminating electronics.'' Carriers with
incumbent LEC and competitive LEC affiliated entities confirm the lower
incumbent LEC barriers to entry. For example, TDS, which operates both
incumbent LEC and competitive LEC subsidiaries, has explained that ``it
is generally far less expensive and more efficient for TDS ILEC to
deploy new fiber to business customer locations than is the case for
TDS CLEC.'' Windstream, which also operates both incumbent LEC and
competitive LEC businesses, has found that ``ILECs continue to enjoy a
dramatic advantage over CLECs in the average cost per building of new
last-mile fiber deployment--an advantage that is largely attributable
to the incumbents' much larger market shares, which is 6+ a direct
result of the ILEC first mover advantage rooted in the monopoly era.''
As TDS explains, this is because (1) ``business customer locations are,
on average, located much closer to TDS ILEC's existing fiber plant than
TDS CLEC's''; (2) ``TDS ILEC possesses many advantages due [to] its
operation of a preexisting network along potential fiber routes''; and
(3) ``TDS CLEC must incur much higher equipment and fiber splicing
costs than TDS ILEC when deploying new fiber.''
49. High barriers to entry and carrier agreements that have the
effect of preventing switching over an extended time create ``low
elasticities of demand for the incumbent and low elasticities of supply
for competitors.'' Such low elasticities respectively mean few
customers switch away from a supplier due to an increase in price, and
few suppliers are able to switch away from resale to reliance on new
network deployment. If the service had lower barriers of entry,
customers would be more able to switch carriers when faced with higher
prices or unfavorable or
[[Page 36037]]
inefficient supply agreement terms and conditions. Level 3, for
example, reports that it must purchase ``a large percentage of its
overall dedicated services requirements'' under what it terms ``lock-
in'' agreements, which mean it cannot switch to purchasing from a
lower-priced competitive providers when a lower rate is available. The
resulting higher downstream prices, therefore, offset any claimed
efficiencies brought by the so-called lock-in requirements.
50. It would be a mistake to assume, however, that all barriers to
entry are insurmountable, or that they exist to the same degree
everywhere. The record and our data collection support the view that
competition is growing, and that potential competition, appropriately
defined, is important. When investments are made to self-provision
facilities to customers, competitors typically first look to a region,
such as a metropolitan region, and then focus on deploying facilities,
such as fiber construction, to reach specific buildings. ``[U]rban
centers where costs are low (e.g., zero or low mileage) and demand is
significant'' are attractive to competitive LECs. For many competitive
LECs, ``the reach of an embedded network can extend beyond the location
of its current connections to serve additional customers in the
surrounding region.'' XO, for example, ``entered initially by building
metro rings in dense areas of major cities, since these could aggregate
traffic from more users and hence were more economical.'' Many
competitor carriers prefer to provide services over their own network
facilities because it allows greater efficiency and permits flexibility
to control the type and quality of the competitor's service offerings.
After deploying a ``core fiber network . . . extending laterals
requires significantly smaller capital expenditure per unit of
bandwidth'' resulting in a lower-cost expansion. Relying solely on
independent lateral facilities without a core fiber presence, in
contrast (by carrying traffic from a single location), limits scale of
economies and requires significant customer spend to justify investing
in facilities. Other advantages with a region-first approach include
familiarity with local marketplace, which can be useful for a local
sales force.
51. The great entry success story has been that of cable. Less than
a decade ago cable largely provided no businesses services of any kind
that were materially different from the services marketed to
residential customers. Yet, for more than half a decade cable business
revenues have experienced compound annual growth rate of 20 percent,
starting with the smallest business customers and working their way up
to the largest. More recently, cable began offering BDS services over
HFC, as well as fiber, and has forced even the largest incumbent LECs
to focus on maintaining market share. In addition, Israel et al.,
estimate, based on our data collection, that over the course of 2013,
competitive LECs' ``bandwidth grew at six times the growth of the rate
of the ILECs''.
7. Evidence of Market Power in the Delivery of DS1 and DS3 Services and
Lack Thereof for Higher Bandwidth Services
52. Our own analysis, the Rysman White Paper, and the Baker
Declaration, provide direct evidence of market power in the supply of
various services. We seek comment on validity of these analyses, on how
they might be extended, or tested. At the same time, we recognize that
no analysis is ever perfect, and look for comments on what the broad
evidence available to us ultimately says about competition and market
power, even if alternative theories cannot be entirely ruled out. Key
pieces of evidence before us are regression analyses that show price
effects due to the presence of competition, which imply that in the
absence of competition prices are higher than they otherwise would be;
the fact the price capped incumbent LECs have no headroom under our
price caps, and have been in that situation for at least several years;
that competition in areas with pricing flexibility lowers prices more
than in price cap areas; and that incumbent-affiliated competitive LECs
do not appear to be focused on facility-based or UNE competition (with
some interesting exceptions). We also note that the Rysman White Paper
concludes that there may not be market power in the supply BDS at
bandwidths in excess of approximately 50 Mbps and seek comment on this
analysis.
53. A central finding in the Rysman White Paper is that, in
regressions controlling for a range of other factors, competitive
supply in a unique location is correlated in both statistically and
economically significant ways with lower ILEC prices for DS1s and DS3s
at that location. Similarly, the Rysman White Paper finds that
competitive supply in a unique location anywhere in a Census block, and
competitive supply anywhere in the Census tract, is correlated in both
statistically and economically significant ways with lower prices
within the Census block. Analysis in the Baker Declaration comes to
similar conclusions, though others have criticized the Baker
Declaration. We seek comment on these analyses, on how such analyses
might be extended, further verified or disproved, and indeed for
additional analysis from interested parties.
54. As a result of the CALLS Order, the price cap indices for BDS
services have been frozen (outside of exogenous cost adjustments) since
2004. Over the period since then, there has been no evidence that the
price caps have been a source of any kind of financial stress to the
incumbent LECs. Yet, at the same time, the price capped incumbent LECs
have essentially raised prices up to the maximum allowed by the price
caps. In our view, this does not suggest that over the last decade or
more our caps were too harsh, and rates as constrained by the caps were
too low, and this was the reason the price capped incumbent LECs kept
their prices at the top of the cap. Consequently, it is our view that
the fact that the price capped incumbent LECs have kept their prices at
the top of the cap is additional evidence of market power.
55. Price cap incumbent LECs file their respective annual access
charge tariff filings to become effective on or around July 1st of each
year. In that filing, price cap incumbent LECs file Tariff Review Plans
(TRPs) to demonstrate that the carrier's Actual Price Index (API) does
not exceed its Price Cap Index (PCI). To the extent that a carrier's
API is less than its PCI, the difference, often referred to as ``head
room,'' is a measure of the extent to which such a carrier is able to
increase its rates under the price cap rules. By calculating the
average ratio of the API to the PCI, based on the APIs and PCIs in each
carrier's TRPs, we can determine how close each carrier is to the
maximum prices it is permitted to charge overall. The ratios, based on
the TRPs, demonstrate that the six largest price cap incumbent LECs
have been charging close to maximum prices for the last four tariff
years. This also implies that if the price capped carrier had any
headroom in previous years, then in or prior to 2012 took advantage of
that headroom and raised its prices effectively eliminating that
headroom.
56. As demonstrated from the table above, the APIs of the six
largest price cap incumbent LECs are more than 99 percent of their
PCIs. Therefore, the largest carriers have almost zero headroom under
the price caps; even a small rate increase would likely cause the
carriers' APIs to exceed their PCIs.
57. The Rysman White Paper finds evidence that prices in areas
granted pricing flexibility respond more to competition than prices in
pure price
[[Page 36038]]
capped areas. We seek comment on the validity of this finding, and
whether it might be evidence that granting incumbent LECs the ability
to offer contract tariffs allows them to respond more effectively to
competitive pressures in pricing flexibility areas, and if so, does
this support allowing contract tariffs throughout areas we might
designate in a future order as non-competitive. We also seek comment on
the Rysman White Paper finding that in price cap only areas competitive
effects are smaller than in pricing flexibility I and II areas. Is that
a valid finding, and if so does it indicate less competition in pricing
flexibility areas, or something else?
58. The Approach to Competition of Competitive LECs Affiliated with
Incumbent LECs. Competitive LECs affiliated with incumbent LECs have
engaged in limited facilities-based investment relative to certain
other competitive LECs and in some cases have avoided the use of UNEs.
In particular, the [REDACTED].
59. The Rysman White Paper finds little statistical relationship
between the presence of local fiber-based competition and lower
incumbent LEC prices for BDS above 45 Mbps. At least three
possibilities could account for this observation: (1) Competition
broadly exists for these services, (2) to the extent any competition
existed, it was too little competition to produce material competitive
effects, or (3) there are too little data and/or too many uncontrolled
for variables for a statistical relationship to emerge. However, given
limited complaints in the record about higher bandwidth services, and
evidence that competitive LEC market share of fibered buildings is much
higher than its general share, we recognize that supply of higher
bandwidth services may often be more competitive than supply of lower
bandwidth services. We, however, seek comment on this assessment. Is it
correct generally? If so, could it be incorrect in particular cases
that are sufficiently important that the Commission should consider
action specific to those cases? How should any conclusion reached in
the future about the nature of higher bandwidth services be applied,
given the data on geographic areas, different categories of customers,
and other factors?
B. New Technology Neutral Regulatory Framework for Business Data
Services
60. The BDS market has changed substantially since this proceeding
was initiated, both in terms of technology and providers. While the
price cap LECs maintain substantial market power in some areas for some
services, it is clear the market will continue to evolve and that
market power and market positions are likely to shift over the next ten
to fifteen years and beyond. The Commission's prior adoption of bright
line rules based on what turned out to be a poor measure of the
presence of competition led to some of the problems we start to solve
today.
61. Some parties to the proceeding have raised objections to being
fully included in the new framework. We note that business data
services are telecommunications services, regardless of the provider
supplying the service. BDS providers are therefore common carriers. And
as such, with the unique exception of Verizon's forbearance, the
providers are subject to Title II in the provision of their services,
including packet-based BDS services such as Ethernet. Sections 201 and
202 of the Act require that the rates, terms, and conditions under
which common carriers provide telecommunications services, such as the
broadband data services we address herein, must be just, reasonable,
and not unjustly or unreasonably discriminatory. These requirements are
enforced through section 208 of the Act, which permits any person to
file a complaint against any common carrier for acts or omissions in
violation of the Act or a Commission rule or order.
62. The presence, and use, of market power can inhibit the
evolution of a competitive market, both through prices and terms and
conditions. For example, we examine certain terms and conditions in the
Tariff Investigation Order and prescribe changes to address terms we
found to be unreasonable and, in some cases, anticompetitive. This
Order and its findings in this and other areas will provide substantial
precedent to guide the Commission in its consideration of any section
208 complaints challenging the reasonableness of conduct in the
provision of business data services. Likewise, the Commission seeks
comment in this FNPRM on significant issues such as the basis for
determining the presence of material competitive effects that would
support the removal of direct rate regulation in some areas for some
services. Such analysis will provide further guidance for resolving the
threshold question whether the services are offered in a non-
competitive area, in any complaint asserting unreasonable conduct under
sections 201 and 202.
63. While a case-by-case adjudication under section 208 is one
option to provide guidance for what is reasonable conduct in light of
the market analysis conducted in this proceeding, we find clear rules
of the road will be valuable to all broadband data service providers as
the market evolves. Accordingly, in this FNPRM, we propose a new
regulatory framework for broadband data service that distinguishes
between broadband data service providers based on market circumstances,
rather than technology or the happenstance of prior Commission action
and inaction.
64. The proposed technology-neutral framework will apply depending
on the classification of a specific market as either competitive or
non-competitive. This framework will depend on the adoption of a new
Competitive Market Test to then determine whether market power is
present and we additionally seek comment on such test below. As another
significant piece of the technology neutral framework, we additionally
propose actions to change the regulatory structure for the historically
dominant price cap LECs. These proposed rules will establish a path
towards technology-neutral regulation for broadband data services,
while protecting against harm from lack of competition where it
continues to exist.
C. Statutory Authority for New Regulatory Framework
65. Sections 201 and 202 of the Communications Act are foundational
requirements for all telecommunications services, designed to ensure
that such services are offered to the public on just and reasonable
rates, terms and conditions, and that services are not offered on an
unreasonably discriminatory basis.
66. These sections have served as the statutory basis for a wide
range of rules and other actions over the years. In addition to
providing the substantive authority for various rules and requirements,
section 201(b) states that the Commission ``may prescribe such rules
and regulations as may be necessary in the public interest to carry out
the provisions of this Act.''
67. We propose that sections 201 and 202 of the Act serve as an
adequate basis of statutory authority for actions that the Commission
would take to create and implement the Technology-Neutral Framework
that we propose to apply to BDS going forward. We have forborne from
tariffing provisions for many BDS providers over the years. In this
FNPRM, the Commission proposes to transition away from tariffing
requirements for the last portion of BDS (incumbent LEC TDM), and to
establish benchmarked prices for non-TDM services. We note that the
Verizon/INCOMPAS Joint Letter urges that the Commission should make
clear ``that all
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providers offering dedicated services are subject to Title II of the
Communications Act, including Sections 201 and 202 of the
Communications Act.'' The Commission seeks comment on whether its
authority to ensure just and reasonable prices, terms and conditions
under sections 201 and 202, and its explicit rulemaking authority in
section 201(b), is adequate to require price cap filings for TDM
services and benchmarked prices for non-TDM services.
68. Commenters have noted that the Commission's existing price cap
regime was adopted with reference to section 204. If the Commission
were to forbear from tariffing provisions for incumbent LEC TDM
services, as it has with respect to the incumbent LECs' non-TDM
services and all BDS telecommunications services of competitive
providers, could it continue to require price cap filings for incumbent
LEC TDM services in non-competitive markets based solely on the
statutory authority in section 201(b)? Likewise, could the Commission
use benchmarked prices to ensure that non-TDM services in non-
competitive markets are offered on just and reasonable prices, as
required by section 201? If not, why not, and what additional authority
or action would be needed?
69. The Commission's proposed Technology-Neutral Framework also
would place certain limits on terms and conditions of BDS to ensure
that they are offered on just, reasonable, and not unreasonably
discriminatory terms, especially in non-competitive markets. We seek
comment on whether sections 201 and 202 provide the Commission with the
statutory authority to take such actions. If not, why not, and what
additional authority or action would be needed?
70. A fundamental aspect of the new Technology-Neutral Framework
for BDS would be the adoption of new triggers to determine whether
markets are competitive or non-competitive. We seek comment on whether
sections 201 and 202 are themselves sufficient to support the adoption
of such triggers, which could be used to determine whether (and if so,
where) regulations are required to ensure that rates, terms and
conditions of BDS services are just and reasonable. We note that such
triggers have been tied in the past to the Commission's authority under
sections 201-205, and we seek comment on whether the Commission should
rely on additional sources of authority.
71. Some entities have suggested that the Commission address
certain issues such as wholesale pricing under section 251, where
Congress has imposed specific resale requirements. However, section 251
has an explicit savings clause, which states: ``Nothing in this section
shall be construed to limit or otherwise affect the Commission's
authority under section 201.'' Does the savings clause indicate that
the Commission has ample statutory authority to address resale issues
for BDS under section 201 authority, notwithstanding that the statute
imposes particular resale requirements on certain types of providers in
sections 251(b) (local exchange carriers) and 251(c)(4) (incumbent
local exchange carriers)? If not, why not, and what additional
authority or action would be needed?
72. Are there any other statutory provisions that the Commission
should consider invoking to support a Technology-Neutral Framework for
BDS? For example, section 706 of the 1996 Act provides that the
Commission ``shall encourage the deployment on a reasonable and timely
basis of advanced telecommunications capability to all Americans
(including, in particular, elementary and secondary schools and
classrooms) by utilizing, in a manner consistent with the public
interest, convenience, and necessity, price cap regulation, regulatory
forbearance, measures that promote competition in the local
telecommunications market, or other regulating methods that remove
barriers to infrastructure investment.'' Does that section have any
particular applicability to the actions proposed in this FNPRM, such as
promoting competition for BDS and removing obstacles to technology
transitions?
73. Finally, we seek comment on whether any transitional or
incremental policy actions are appropriate as the Commission considers
and moves to comprehensively reform the BDS regulatory framework. Are
there incremental changes the Commission could take as it evaluates
broader reforms and a Competitive Market Test that furthers our goals?
Should we adopt any transition to a new Competitive Market Test and, if
so, how should we structure the transition?
D. Competitive Market Test
74. We propose to replace the 1999 pricing flexibility regime with
a new regulatory framework for BDS. The new framework, as proposed,
builds on the analysis of the 2015 Collection to establish a
comprehensive Competitive Market Test to determine whether a relevant
market is competitive or non-competitive. Where competition is
sufficient in a relevant market, based on objective criteria to measure
competitive effects, the Commission is proposing to rely upon market
forces to constrain rates, terms, and conditions. That is, we propose
to subject markets determined competitive to minimal regulation to
protect consumers as proposed in Part V.E. The Commission would subject
relevant markets, determined non-competitive, to specific rules as
proposed in Part V.F on the ground that customers in those markets are
being harmed. A separate question concerns the scope of regulation in a
non-competitive market, and whether it should apply to all or some
providers and, if some, which ones and on what basis (such as market
power)--and we seek comment on these questions below. The ultimate goal
going forward is to apply regulatory obligations on a technology and
provider neutral basis where it is necessary to protect and promote
competition.
75. On the criteria for the Competitive Market Test, we invite
comment. Initially, we are proposing a test, which focuses on multiple
factors, including bandwidth, different customer classes, business
density, and the number of providers in areas consisting of census
blocks where each block in the relevant market meets the specified
criteria. As described above, the data and our analysis suggests that
competition is lacking in BDS at or below 50 Mbps in many
circumstances, and that competition is present in BDS above 50 Mbps in
many circumstances. Such evidence will guide how the Commission uses
product market characteristics in applying the Competitive Market Test
to a relevant market. We seek comment on the appropriate factors to
include in the test and, in particular, the appropriate weight to
attribute to the various factors in application of the test. With any
test criteria and for application of the test as a whole, we seek
comment on how to create a test that is simple to administer and, to
this end, ask about the commercial practicalities and administrative
feasibility of any particular approach. We also seek comment on how any
approach would further our goals of promoting competition and
investment.
76. We propose to apply the Competitive Market Test across all
geographic areas served by price cap carriers. The Commission would use
publicly available information, the 2015 Collection, and other
information in the record to apply the test to create a list of
geographic areas that are deemed competitive and non-competitive by
relevant product market. To provide certainty but also ensure accuracy
of the data, we seek comment on whether the
[[Page 36040]]
Commission should reapply the test every three years for example, with
updated data to reflect changes in business density or the number of
providers in a geographic area. Once the initial competitive/non-
competitive determination is made, we seek comment on a process to
address instances where a provider or purchaser disagrees with the
determination finding and suggestions for the appropriate standards and
procedures to govern that process.
77. The pricing flexibility framework adopted in 1999 based
regulatory relief on the presence of third-party collocations in the
incumbent LEC's wire centers, which were considered proxies for
competition in the marketplace. In 2012 the Commission concluded after
a substantial review that, despite the many administrative benefits to
reliance on the triggers, collocations are a poor proxy for predicting
the entry of facilities-based competition and suspended, on an interim
basis, further automatic grants of pricing flexibility. The Commission
found the 1999 regime retained unnecessary regulation in areas that
were very likely to be very competitive and deregulated over large
areas where competition was unlikely to occur.
78. Our review of the 2015 Collection supports the Commission's
earlier findings that the existing triggers do not reflect the existing
competitive nature of the market. Specifically, in 97.9 percent of the
wire center territories where a cable competitive LEC has reported
locations--where the connection to the location is not a UNE obtained
from an incumbent LEC, a cable company has not collocated in the wire
center. Of these wire centers, 62 percent remain subject to price cap
regulation without pricing flexibility for channel terminations. If we
include census blocks where a cable company reported having DOCSIS 3.0
coverage for 2013 for the National Broadband Map, the percentage of
wire center territories without any collocations from the cable company
increases to 98.4 percent. Of these wire centers, 66 percent remain
subject to price cap regulation without pricing flexibility for channel
terminations. This strongly shows the collocation triggers are
substantially underestimating the entry of facilities-based competition
from cable companies for last-mile facilities and hindering
deregulation.
79. When we look at all competitive providers and remove locations
with UNEs, in 32.3 percent of the wire center territories where the
Commission has granted the incumbent LEC pricing flexibility for
channel terminations, competitive providers have reported no locations
where they own or lease, pursuant to an indefeasible right of use
(IRU), a connection to a location. If we expand the inquiry to include
census blocks where a cable company reported having DOCSIS 3.0 coverage
for 2013 for the National Broadband Map, this percentage decreases to
24.7 percent. This shows that collocations at a substantial percentage
of wire centers do not accurately predict the entry of facilities-based
competition for last-mile connections.
80. We now believe it is appropriate to modernize our triggers to
ensure we capture all competitive entrants. Therefore, we propose to
abandon the collocation-based competition showings for channel
terminations and other dedicated transport services for determining
regulatory relief for incumbent LECs. Instead, we propose to apply a
new Competitive Market Test. Our intent, discussed in more detail
below, is to create a framework that is provider and technology
neutral. Our goal is also to create a framework that is simple and
minimizes regulation only to the extent necessary to ensure rates are
just and reasonable.
1. Business Data Service Definition
81. A definition for BDS is critical to any new regulatory
framework. We suggest below a definition similar to the definition used
for dedicated services in the 2015 Collection. Specifically, we would
define BDS as a telecommunications service that: Transports data
between two or more designated points at a rate of at least 1.5 Mbps in
both directions (upstream/downstream) with prescribed performance
requirements that typically include bandwidth, reliability, latency,
jitter, and/or packet loss. BDS does not include ``best effort''
services, e.g., mass market BIAS such as DSL and cable modem broadband
access.
82. We seek comment on this definition and ask whether the
definition should include minimum performance guarantees, such as 99.99
percent reliability. Also we seek comment on whether we should reduce
the minimum symmetrical speed to 1 Mbps to account for dedicated
service offerings below 1.5 Mbps.
2. Multi-Factor Competitive Market Test--Relevant Market(s) and Test
Criteria
83. We are guided by traditional economic principles in identifying
relevant market(s) and the competition criteria for a Competitive
Market Test. We also consider, and seek comment on, the administrative
feasibility and commercial practicalities of any particular approach
both for providers as well as the Commission. A proposal under
consideration, as discussed in more detail below, is to define the
relevant market for applying a test along customer classes and varying
bandwidths in geographic areas consisting of census blocks, including
groupings of census blocks. The proposed criteria for the test would
focus on business density and the number of providers in the relevant
market area.
84. The Commission has traditionally applied the pricing
flexibility competitive showings to two different BDS segments, channel
terminations and other dedicated transport services. There is little
discussion in the Pricing Flexibility Order as to why the Commission
chose these two particular service categories. Historically, incumbent
LECs tariffed these services separately, and the charges reflected
different traffic sensitivities. The Commission explained in the
Pricing Flexibility Order that a lower competitive showing was required
for other dedicated transport services because these services, which
move traffic from one point of concentration to another, require ``less
investment per unit of traffic,'' than channel terminations. The
Commission found that competitors were more likely to enter the market
to provide other dedicated transport services than channel
terminations. Looking at how non-cable competitive LECs have deployed
their networks, we find this approach holds true today for those types
of providers (and as discussed above, appears as much driven by
bandwidth demand as it does by the channel termination/transport
distinction).
85. Developing a new framework, however, gives us the opportunity
to re-evaluate the triggers and product markets used in the application
of a competitive test to ensure that they reflect technology
transitions and the current market. Today, competitors, and even
incumbent LECs with their forborne services, do not typically offer
consumers BDS by charging a customer separately for transport, last-
mile access, and channel mileage. They instead offer connectivity at
certain bandwidth levels and performance guarantees and packaged
communications solutions that include a transmission component to meet
the demands of different types of customers. Our framework should
reflect how the market operates today.
86. Moreover, the needs of the customer dictate the service
offerings. As discussed in our competition
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analysis and as providers have told us, different types of customers
have different needs. A small business with less than 20 employees at
one location is unlikely to need the multi-office networking
connectivity, or even the same level of bandwidth capacity, as would a
large enterprise customer. The needs of a mobile operator to backhaul
aggregated traffic from cell sites are different than the needs of a
retail chain wanting to securely process credit transactions. The needs
of competitive LECs, as wholesale customers, for last mile access as an
input for their own service offerings differ from the needs of retail
end users. And as the needs change by customer class so do the service
substitutes, the economics of providing service, and the likelihood of
facilities-based entry by competitors.
87. We therefore seek comment on whether to apply our Competitive
Market Test based on different BDS customer classes at varying
bandwidths and ask for comment on whether, and if so how, the
Commission should separate the product market by customer type and
bandwidth. For example, should the customer classes consist of the
following categories: Small business with less than 20 employees, mid-
sized businesses with 20-500 employees, national/enterprise businesses
with 500+ employees that typically require service at multiple
locations? And should we adopt a separate product market to address the
cell site backhaul needs of mobile providers and another one for sales
to wholesale customers? We seek comment on the benefits of segmenting
product markets by customer class and whether the data supports such an
approach. In lieu of customer classes by size of retail customers,
should we instead have fewer customer classes, such as just wholesale,
mobile backhaul, and retail? Or are the benefits of using customer
classes outweighed by the burdens due to the complexity and
practicality of implementing such a framework?
88. To the extent the Commission adopts such an approach, we seek
comment on whether we should also subdivide the relevant product
markets by bandwidth to capture the varying demand and competition
levels within each customer class. For example, we could divide the
wholesale segment into BDS <=50 Mbps and >50 Mbps. In developing the
appropriate bandwidth overlay, we can look to evidence in the record
and our own analysis of the 2015 Collection as to the level of
competition at different bandwidth levels. To what extent, should
evidence indicating that the supply of BDS above 50 Mbps tends to be
more competitive than the supply of BDS at lower bandwidths factor into
this overlay? We seek comment on whether 100 Mbps or some other
bandwidth level is better supported by the evidence in particular
market segments? Should we recognize different tiers of products (or
distinct product markets) based on differences in speed? Should the
bandwidth overlay levels vary depending on a particular customer class?
Should the relevant bandwidth level(s) be static or evolve over time?
For example, should product market re-evaluation be made part of the
review conducted in light of future data collections?
89. We seek comment on these issues and encourage commenters to
suggest other alternatives for consideration. Commenters should address
whether a customer class/bandwidth approach would appropriately capture
the nature of competition in these markets, whether the approach is
administratively feasible, the appropriate bandwidth and/or product-
feature categories, and whether we should include additional customer
classes or make other modifications to the classes identified. For
example, is it correct to base a product market identification on speed
or do we need to factor in as well additional performance features and,
if so, which ones should be used and how should multiple product
features be used to identify different product markets? We also seek
comment on how various approaches would further our goal of promoting
competition and investment for BDS services.
90. In 1999, the Commission chose to grant pricing flexibility on
an MSA and non-MSA basis with the intent of defining ``geographic areas
narrowly enough so that the competitive conditions within each area are
reasonably similar, yet broadly enough to be administratively
workable.'' The Commission in the Suspension Order concluded ``MSAs
have generally failed to reflect the scope of competitive entry.'' In
reaching this conclusion, the Commission found ``that business demand
can vary significantly across an MSA'' and that competitive entry tends
to occur in smaller areas with the highest density of business
establishments. The GAO reached a similar conclusion in 2006.
91. Our analysis of the 2015 Collection further confirms these
findings. According to our analysis, the price regressions of incumbent
LEC rates for DS1 and DS3 lines show consistent negative effects for
the presence of competition in the building, and the census block, much
of which is both economically and statistically significant. In
addition, the regressions show some effects for the presence of
competitive fiber in the census block, even if that fiber is not
connected to any buildings in the block.
92. Given our analysis, we seek comment on using census blocks as
the geographic area for applying the Competitive Market Test. We also
ask whether using a more granular area, e.g., the building or cell site
location as the relevant geographic market, or whether a larger
geographic area is appropriate. For example, if the geographic area
were the building location, the provider's regulatory obligations could
change building-by-building, which could make it difficult not only for
regulators but also for providers trying to offer services to customers
at multiple locations. Could a building approach reduce the challenges
to determining the necessary proximity to fiber, thereby simplifying
administration? A census block or even census tract approach would
create a similar patchwork of geographic areas with different
regulatory treatment. Census blocks in metropolitan areas are also
often very small in size. For example, according to AT&T, ``[t]he
average size of census blocks in MSAs with demand for special access
services is only about one-seventh of a square mile.'' However, we
anticipate that areas adjacent to a census block will often have
similar business density and facilities-based competitor
characteristics resulting in a similar determination as to the level of
competition.
93. Our goal is to learn from past experiences and to not repeat
the errors of the 1999 pricing flexibility regime by granting relief
too broadly to cover areas where competition is not present or unlikely
to occur.
94. We seek comment on these proposals. Commenters should address
the administrative feasibility of the proposals and how each option
would impact the goal of promoting competition and investment in the
BDS market. We also invite commenters to suggest alternative geographic
units and ask commenters to explain how any alternative is supported by
the data and furthers our goals.
95. Our intent, as with any of the proposals under consideration,
is to focus regulation on areas where actual or potential competition
is insufficient to ensure rates, terms and conditions are at just and
reasonable levels. We believe that bright-line criteria are best suited
to meet these goals. Based on our review, we have identified two
possible criteria for determining whether or not a market is
competitive, i.e., business density and the number of providers in the
relevant
[[Page 36042]]
geographic area. We seek comment on these criteria below and whether
alternative or additional criteria should be incorporated into the
test.
96. Our analysis shows there is a significant correlation between
business density and the presence, or likelihood, of competition. We
therefore seek comment on the appropriate business density metric for
the Competitive Market Test. Should we use the number of businesses
establishments in a defined geographic area, the number employees, the
level of payroll, or some other variable that is readily available and
shown to be a good proxy for business demand? For example, should we
look to any census block with more than some number of businesses
establishments per square mile? Also to what extent should a different
density standard apply when evaluating mobile backhaul? The deployment
of cell sites may not necessarily correspond to business density and
may more likely relate to population density or public travel areas.
Should the Commission instead focus on the density of existing cell
sites in a census block area when evaluating a mobile backhaul market?
If so, what is the appropriate cell site density metric?
97. Our analysis further shows that the competitive effect on
pricing increases as the number of competitors in the area increases.
How should we incorporate this into a bright-line trigger? The
Commission in the Qwest Phoenix Order found a market with only two
competitors, a duopoly, not sufficiently competitive. Should we require
more than two facilities-based competitors in any area for a
competitive trigger? Are there instances where having just one or two
competitors is sufficient given the bandwidth level and business
density in a given area? There is also the question of whether the type
of competitor in the market makes a difference? Should we weight
competition from a cable company differently than a non-cable
competitive LEC or vice versa? If so, should this different weighting
vary with bandwidth levels? There is also the question of how we
identify the presence of a competitor in the area. Is it enough for a
competitor to have one served location in the area? Is it enough for a
cable company to just have DOCSIS 3.0 coverage over their HFC network
in the area or should we weight an HFC network differently based on the
presence of Metro-E capable nodes in the area? Should we also base the
presence of a competitor on the presence of their fiber in the area or
is it the presence of a competitor's fiber node in the area? For each
customer class and bandwidth level, should we only count competitors in
the area that are currently offering such services to that customer
class within the stated bandwidth level?
98. We seek comment on the administratively feasibility of using
the above test criteria, and encourage commenters to suggest
alternative test metrics.
99. Our goal in creating the Competitive Market Test is to adopt a
formula using available data, e.g., publicly available business density
information and information provided in the 2015 Collection, and
information from the National Broadband Map on the presence of
facilities-based providers in a given geographic area, to determine
whether or not a relevant market in areas served by price cap carriers
is competitive.
100. The Competitive Market Test matrix would generate lists of
census blocks or whatever geographic area the Commission adopts for
each relevant market determined competitive and non-competitive. The
corresponding regulatory obligations would then apply to markets within
the relevant geographic area going forward, e.g., census block areas.
We seek comment on how to ensure that this information is disclosed in
a transparent, easily accessible format. For example, should the
Commission create a central repository for information on its Web site
that could contain an interactive map, which reviewers could filter by
product class like the National Broadband Map? Or alternatively or in
addition to a map, should the Commission simply create a publicly
available database, which simply contains lists of relevant geographic
areas by product market as competitive and non-competitive? Commenters
should address which approach would be the easiest to administer and
simplest for providers.
101. To provide certainty but also ensure that data are accurate
and updated, we seek comment on re-applying the Competitive Market Test
across all areas served by price cap carriers every three years to
account for example, for changes in business density and the presence
of facilities-based providers in geographic areas. This periodic
reassessment could coincide with our separate proposal discussed in
Part V.J to collect data from providers on their supply capabilities
every three years starting in 2018. The re-application of the
Competitive Market Test matrix using updated data would likely result
in changes to the market delineation established by its prior
application. For example, the Commission could subsequently determine a
relevant market area, previously considered non-competitive, as
competitive based on the updated data. And the opposite might also be
true.
102. A periodic reassessment reduces burdens on providers as well
as the Commission and balances the need to ensure accurate data. We
generally seek comment on the administrative feasibility of this
approach, both as a whole and as to its individual parts. We also
welcome suggestions for alternative approaches. We additionally seek
comment on whether we should provide some implementation period to
allow providers to conform operations following the application of the
Competitive Market Test before any new regulatory obligations resulting
from the determination of a relevant market as competitive or non-
competitive are effective? If so, how long of a period should we
provide? Commenters should also address the commercial practicalities
of changing the regulatory treatment of a relevant market area every
few years? For example, how could this impact contractual obligations
with customers and to what extent could commercial providers adjust or
account for a potentially changing regulatory environment every few
years? Should the Commission re-apply the Competitive Market Test less
frequently, like every five years?
3. Post-Determination Process
103. We ask to what extent and how the Commission should give
providers and purchasers an opportunity to challenge the determinations
rendered. We seek comment on how best to structure such a process to
minimize administrative burdens on providers, purchasers, and the
Commission.
104. We seek comment on the timing and frequency of such post-
determination challenges. Should the Commission open a window to permit
challenges within a specified period of time after the Competitive
Market Test determinations are rendered, e.g., 30 or 60 days? If
commenters believe that challenges should be permitted on a rolling
basis, how would that impact market certainty and the transactions
between providers and purchasers of BDS services?
105. We also seek comment on how to build upon lessons learned from
the Connect America Fund challenge process. Based on the Connect
America Fund experience, we believe a specific, bright-line test is
appropriate to ensure that the Commission has data necessary to
evaluate the merits of any challenges. We propose that parties seeking
to
[[Page 36043]]
challenge an area determined non-competitive to be designated as
competitive should have the burden of proof to provide data
demonstrating that the given area satisfies the Competitive Market
Test. Should the same hold true of a challenge that a competitive
market is non-competitive? What standards or showing should the
challenger have to make to overcome a Competitive Market Test
determination? For example, should challengers be required to submit
new maps of fiber? In addition to providing challengers with access to
data collection results subject to confidentiality restrictions, should
the Commission give challengers a limited right of discovery to obtain
information from providers to help make their requisite showing? If so,
should the petitioner be required to meet a threshold evidentiary
burden to initiate discovery and what should that be?
106. Should there be a different process if a provider challenges
that an area determined competitive is non-competitive? What standard
should apply? Is pricing data relevant or just the number of providers?
Should the burden shift upon a prima facie showing? If so, what should
constitute a prima facie case?
107. To the extent the Commission adopts product markets, how
should such product markets factor into a challenge process? For
example, what evidence would be necessary to show that a certain class
of business customers face competition but smaller businesses do not?
108. In evaluating any challenges, should we limit filings to an
affirmative case and a response? Should all challengers be required to
submit certifications from officers attesting to the accuracy? We seek
comment on how the Commission could build upon lessons from the Connect
America Fund challenge processes to improve the implementation and
reduce burdens for providers and the Commission.
109. We also seek comment on the how the Commission should
implement the results of a post-determination challenge. If a challenge
were successful, we propose that any determination for the relevant
market changed from competitive to non-competitive as a result of the
challenge (thereby changing the regulatory treatment of the relevant
market area) would apply prospectively. If a successful challenge
resulted in the change of a determination in 2017 to competitive,
hypothetically, how should the Commission treat this relevant market
area when it comes time to reapply the Competitive Market Test in a
later year, like 2018? Should the Commission just reapply the test at
that time, which could then trigger another round of challenges for
that relevant market depending on the outcome of the determination?
110. Any post-determination process that allows for challenges or
even a request for waiver raises serious administrative feasibility and
burden concerns for the agency. The Commission must weigh the equitable
benefits of allowing such a process to prevent undue harm to providers
and customers in the relevant markets against these concerns. We seek
comment on the above questions and invite commenters to suggest
alternatives balancing benefit and burden.
4. Regulation for Provider(s) in Areas Determined Non-Competitive
111. Once the Competitive Market Test is applied, we ask which
provider(s) should be subject to the specific rules that apply to
markets determined non-competitive. Should such rules only apply to the
largest BDS provider in the non-competitive market as measured by
network coverage, locations served, revenues or some other metric or
metric combinations? If so, how would we define the appropriate measure
of ``largest'' (e.g., share of customers, share of revenue)? If we
borrow upon antitrust principles and Commission precedent that focused
on dominance, should we focus on the provider with the largest market
share and therefore market power? Should we focus on the provider with
the largest market share? If so, what is the appropriate measure of
market share?
112. Alternatively, should we apply specific rules to any firm in
the non-competitive market that has a near ubiquitous network in the
local territory and rights of way? This could result in specific rules
applying to more than one firm in the non-competitive area. Another
approach is to apply this framework to all BDS providers in the non-
competitive area. However, such an approach could apply additional
regulation to new entrants with little or no market share. Given our
desire to promote new competitive entry, should new entrants or
providers with market share below a certain threshold not be subject to
all or some of the proposed rules applicable to non-competitive
markets? If so, what is the appropriate market share where providers
should be exempt from such framework and why? Is there a better way to
encourage new entrants?
113. We seek comment on these questions. Commenters should consider
the regulation that would apply, as proposed in Part V.F where the
Competitive Market Test resulted in a finding of a non-competitive
service area. For example, if it were merely that our proposed
benchmarks would apply to disputes about whether a price is just and
reasonable, this may not impact providers that currently price below
the benchmark. Other proposals, such as limitations on terms and
conditions, may be more onerous.
114. Commenters should specifically address the potential impacts
on infrastructure investment, innovation, administrative feasibility,
and commercial practicalities of any particular approach. We also ask
commenters to explain how each approach minimizes regulation to where
necessary to ensure that rates, terms and conditions are just and
reasonable in the absence of competitive pressures to do so. Commenters
should also address the Commission's ability to implement any
particular approach given the previous grants of forbearance authority
to incumbent LECs for packet-based and optical carrier transmission
services.
E. Rules Applying to All Markets
115. We first propose limited requirements that would apply to the
provision of BDS in all markets, both competitive and non-competitive.
All BDS providers are common carriers and, are subject to sections 201
and 202 of the Act. The Commission has long relied on these provisions
to ensure just, reasonable and non-discriminatory conduct by
competitive telecommunications service providers and we do so here. We
have, however, identified an area for which a general prohibition could
be valuable in our effort to facilitate the evolution of competitive
markets. The proposed rule would limit the use of NDAs to block
providers from sharing, subject to appropriate protective orders, the
terms of business data services commercial agreements with the
Commission and other government entities with oversight
responsibilities. Such agreements have restricted competitive LECs from
providing information that we believe would have been useful in the
course of this proceeding and we find that they could inhibit the
Commission's oversight of the business data services market going
forward. We additionally seek comment on certain terms and conditions
we found unlawful in the Tariff Investigation Order and whether such
provisions should be prohibited in connection with the provision of BDS
either generally or more narrowly in non-competitive markets. These
proposed requirements would be technology neutral in nature and would
[[Page 36044]]
form a part of our proposed overarching framework for the regulation of
BDS generally.
1. Non-Disclosure Agreements
116. We seek comment on prohibiting the use of NDAs or their
functional equivalents in business data service commercial agreements
that restrict providers' and purchasers' ability to disclose
information to the Commission or other government entities with
oversight responsibilities. Competitive LECs have asserted that such
requirements preclude them from sharing information with the Commission
that would inform the Commission's oversight of the business data
services market. We recognize that such agreements contain commercially
sensitive information and underscore our continuing commitment to
ensure the protection of confidential information submitted to the
Commission through our protective orders.
117. We acknowledge the important role NDAs play in ensuring the
protection of confidential information in commercial agreements.
Parties to a commercial agreement have the right to seek protection of
their confidential information and would be unlikely to enter into such
commercial agreements without reasonable assurance that their sensitive
business information would not be compromised. The Commission is fully
cognizant of this need and ensures confidential data submitted by
parties is accorded all necessary protections, principally through the
use of protective orders. Protective orders have almost universally
fulfilled their purpose. In the rare cases that confidential
information has been misused by a party, the Commission has undertaken
appropriate steps to ensure the protective orders are enforced.
118. While we respect the importance of protecting parties'
confidential information, the Commission must also ensure its access to
the information necessary to discharge its core statutory duties. NDAs
that obstruct this access may unreasonably interfere with the core
oversight functions of the Commission and undermine the public interest
in a full and complete record on which the Commission can base its
decisions. We therefore propose several alternative prohibitions and
restrictions on NDAs for business data service commercial agreements.
First, we seek comment on adopting a prohibition on NDAs for commercial
agreements that bar the provision to the Commission of any information
regarding a commercial agreement. While such NDAs may be uncommon,
should any such NDAs be permitted? We seek comment on the effect
allowing such NDAs would have on the Commission's fact finding efforts
and on its ability to base its decisions on all relevant information.
We also seek comment on whether there are any circumstances which would
justify precluding parties' ability to share any information in such a
blanket fashion.
119. Second, we seek comment on whether the Commission should
prohibit NDAs that effectively require the Commission's legal
compulsion before parties are able to produce information from a
business data service commercial agreement. Do NDAs that require
parties to disclose confidential information only when required to do
so by the Commission unduly restrict the Commission's access to
information necessary to discharge its statutory functions? To what
extent does this kind of constraint in practice restrict the
Commission's ability to access information to the small number of cases
where it is both aware of the existence of a commercial agreement and
can devote the time and resources necessary for issuing an express
direction for the production of information from the agreement? To what
extent do such NDAs place the Commission in a quandary where it can
only access information it specifically seeks, the existence and
substance of which the parties are bound not to disclose?
120. Finally, we seek comment on whether we should prohibit NDAs
that limit parties to disclosing information subject to an NDA only in
response to a request by the Commission (in a notice of proposed
rulemaking, a public notice or otherwise). Such a prohibition would
allow parties to disclose information to the Commission on a voluntary
basis at their own initiative and apart from any express request by the
Commission. We note that the Commission has previously imposed rules
effectively requiring a prior request from the Commission before
parties could disclose information subject to an NDA. Section
51.301(c)(1) of the Commission's rules states that ``a nondisclosure
agreement that precludes [a] party from providing information requested
by the Commission'' is a violation of the section 251 duty to negotiate
in good faith. Should the Commission adopt similar restrictions on NDAs
in business data services commercial agreements? Would such an approach
to NDAs impact parties' advocacy before the Commission? Would it still
constrain the Commission's access to important information from
commercial agreements? As with NDAs that require legal compulsion prior
to disclosure, how would the Commission know to request disclosure of
information in commercial agreements that it may have no way of knowing
existed?
121. Eliminating the requirement of a prior request for information
would effectively enable parties to disclose information from a
commercial agreement on a voluntary basis. We seek comment on whether
this is an appropriate approach for the Commission to take. TDS
Metrocom notes that NDAs impact parties' ability to fully participate
in the rulemaking process. It states that the ``practice of subjecting
the rates, terms, and conditions of commercial Ethernet agreements to
confidentiality restrictions impedes TDS CLEC's ability to advocate in
support of new rules and detect unreasonable and discriminatory
rates.'' Would allowing parties to disclose voluntarily information
from a commercial agreement enable fuller and freer advocacy by those
parties? Would it also assist the Commission in identifying issues that
it otherwise would be unaware of? We also seek comment on how the
Commission would ensure the confidentiality of such information once
disclosed to the Commission. To the extent the information was related
to an existing proceeding, the Commission would presumably either have
already adopted a suitable protective order or would be able to do so
in response to such a submission. What steps should the Commission take
to ensure the protection of such information if the information was not
related to an existing proceeding? Are there any other steps the
Commission should take to ensure the protection of confidential
information voluntarily submitted by a party?
122. Additionally, we seek comment on whether there are other types
of NDAs or confidentiality provisions that may inhibit the Commission's
discharge of its core oversight and fact finding functions. If so, we
seek comment on whether the Commission should also prohibit these or
take some other action to modify them. We seek comment on how any rules
the Commission adopts related to NDAs or other confidentiality
provisions should affect existing contracts? Finally, how would the
Commission implement a prohibition on NDAs that restrict its access to
information contained in commercial agreements?
[[Page 36045]]
2. Scope of Application of Terms and Conditions Requirements Adopted in
the Tariff Investigation Order
123. In this section of the FNPRM, we seek comment on the scope of
application of the three requirements we adopt in the accompanying
Tariff Investigation Order to other tariff pricing plans not subject to
the tariff investigation and to commercial agreements for IP based
business data services such as Ethernet. We also seek comment on
whether such requirements should be applied in non-competitive markets
or more generally in all markets.
124. In the Designation Order, the Bureau designated for
investigation ``all-or-nothing'' provisions in certain incumbent LEC
tariff pricing plans that required customers that participate in one of
the plans to make all of their TDM purchases out of that single plan.
In the Tariff Investigation Order, we determined that all-or-nothing
provisions are unreasonable and anti-competitive because they restrict
a customer's purchase options from both incumbent LECs and other
providers.
125. We seek comment on whether we should extend the Tariff
Investigation Order's prohibition on all-or-nothing provisions in the
plans under investigation to a general prohibition on all-or-nothing
provisions in all business data services, including both tariffed
offerings and commercial agreements, and whether such a prohibition
should be imposed in noncompetitive markets or in all markets. We seek
comment on whether other pricing plans or other providers use all-or-
nothing provisions or provisions that have materially similar effects
for purchasers of TDM or packet business data services. How common are
such provisions in TDM tariffs or Ethernet commercial agreements? If
all-or-nothing provisions are used in other tariffs or in commercial
agreements, what is the business justification for using them? What
impact do all-or-nothing restrictions have on the transition to IP
business data services? How, if at all, are such requirements different
for Ethernet than TDM business data services? Do Ethernet commercial
agreements raise any special considerations that would merit unique
consideration? Do these provisions help providers lower costs or create
efficiencies? If so, we seek quantification of these costs and whether
there is any rational relationship between these costs and efficiencies
generated by all-or-nothing provisions? Additionally, we seek comment
on whether we should impose such a prohibition on noncompetitive
markets or all markets.
126. We also seek comment on potential issues regarding the
implementation of a prohibition on all-or-nothing requirements. To the
extent there are other tariffed incumbent LEC pricing plans or contract
tariffs that contain all-or-nothing provisions, how should the
Commission implement this proposed prohibition? Should such a
prohibition be effective immediately upon publication in the Federal
Register? Should it consider a transition period to allow parties to
implement this rule? If so, what would be an appropriate transition
period for phasing out these provisions? Should the Commission
institute a fresh look opportunity to enable customers of existing
pricing plans with all-or-nothing restrictions to remedy the effects of
these restrictions prior to the expiration of their current, often long
term, pricing plans.
127. Multiple purchases under a single plan. We also seek comment
on whether we should find unreasonable restrictions on customers'
ability to participate in an incumbent tariff pricing plan more than
one time concurrently. In other words, should customers be restricted
from splitting their purchases under one pricing plan into two or more
separate agreements and managing those separately? Some incumbent LEC
tariff pricing plans address this issue and expressly restrict
customers to participating in a single version of a pricing plan at any
one point in time. For example, the RCP in the CenturyLink Tariff
F.C.C. No. 11 states: ``A customer can have only one RCP in effect at a
time.'' We seek comment on whether other pricing plans impose a similar
requirement in this or other ways.
128. We seek comment on whether these restrictions on customers are
reasonable. Should incumbent LECs effectively force customers to
aggregate all their purchases into a single purchase under a pricing
plan? Would eliminating such restrictions and allowing customers to
split their overall purchases under a pricing plan into separate
purchases under that plan provide them with greater flexibility in
managing their purchases? Would it allow competitive LECs to better
manage increasing shortfall penalty liability in a declining TDM market
that is transitioning to packet business data services? We also seek
comment on the business rationale for such a requirement. What
additional management or tracking burdens would this impose on
incumbent LECs and how significant would they be? Can such costs or
burdens be quantified? How would any such administrative burdens
compare with the benefits of added flexibility for customers in the
business data services market?
129. We also seek comment on whether such restrictions are used in
Ethernet commercial agreements. If so, commenters should cite examples
and discuss the impact they have on customers' flexibility in managing
their Ethernet purchases. Would allowing customers to treat their
purchases under one Ethernet commercial agreement as separate purchases
impose any burdens on providers of business data services? Would the
benefits of increased flexibility outweigh any such burdens? Should the
Commission prohibit such restrictions solely in noncompetitive markets
or should it prohibit them in all markets?
130. Shortfall penalties are fees that are imposed for violations
of percentage-based commitments, which competitive LECs assert require
them to maintain a large proportion of their total spend with an
incumbent LEC provider to obtain discounts and circuit portability
typically necessary for wholesale providers. In the Tariff
Investigation Order, we found shortfall penalties that provided
compensation beyond a price cap LEC's expectation damages were
unreasonable and directed certain price cap LECs to remove such
provisions from their tariffs under investigation and directed them to
make tariff revisions consistent with the terms of the order. We seek
comment in this FNPRM on whether we should prohibit the assessment of
shortfall penalties that provide compensation beyond expectation
damages. Should we prohibit such penalties both in tariff pricing plans
and in commercial agreements and should any such prohibition be imposed
only on noncompetitive markets or also on competitive markets?
131. We now seek further comment on the reasonableness of shortfall
penalties that are contained either in tariff pricing plans that were
not the subject of the Bureau's tariff investigation or are contained
in commercial agreements for the sale of IP-based business data
services. We seek comment on whether shortfall penalties should reflect
the economic costs of breaching an agreement or whether they should be
set at some other level. Would unreasonable and excessive penalties
impair providers' ability to transition to IP based business data
services? Could such penalties negatively affect wholesale competition
and end-user customers in the form of higher prices,
[[Page 36046]]
reduced innovation, and reduced investment in broadband services?
132. We seek comment on whether the standard for assessing the
reasonableness of shortfall penalties that we adopted in the Tariff
Investigation Order should be applied more broadly to all providers of
TDM and packet-based BDS through either tariff pricing plans or
commercial agreements and either in noncompetitive markets or in all
markets. We propose that any action we take in this regard should be
applied on a technology neutral manner. Would such a standard allow
providers to recover from their customers in the event of a breach
sufficient, insufficient or excessive damages? We seek comment on the
wide variety of methodologies for calculating shortfall penalties both
in tariff provisions and commercial agreements. Commenters advocating
for other measures of reasonableness for shortfall penalties should
explain their concerns with the proposed standard and identify an
alternative standard and provide examples.
133. We seek comment on what approach would best ensure that both
parties to a contract, whether through a tariff or a commercial
agreement, receive the benefit of their bargain. Would a higher ceiling
on reasonable penalties distort market incentives and lead to a
windfall for providers? Would a lower ceiling be sufficient to
compensate providers? We note that some incumbent LEC plans assess
shortfall penalties that are a fraction of full expectation damages for
DS1 and DS3 services. Would it be reasonable to require incumbent LECs
to apply these lower penalty calculation methods to all plans? If
providers currently have shortfall penalties that are a fraction of
expectation damages in some of their plans or agreements, should they
be allowed to adopt higher penalties without first substantiating a
reasonable basis for an increase? What showing should such providers
have to make? For example, if carriers claim shortfall penalties are
necessary to recover their risks and costs, should they be required to
make a cost showing or some other financial demonstration to justify
the level of the shortfall penalty?
134. We also seek comment on the impact of shortfall provisions in
tariff pricing plans on customers' Ethernet purchase and construction
decisions. The record shows that, if these penalties are not set
equitably and reasonably, they can provide incumbent LECs with economic
leverage that may cause competitive LEC customers to forgo purchasing
IP-based business data services and other services from potential
competitors or self-provisioning these services over their own
networks. For example, competitive LECs have provided evidence that the
decline in TDM sales has exposed wholesale buyers to ever-increasing
shortfall penalties, which in concert with high purchase commitments
and the need for circuit portability, have ``left them no choice but to
commit to purchasing large volumes of Ethernet from incumbent LECs in
return for relief from the penalties.'' Would ensuring the
reasonableness of shortfall penalties provide relief for competitive
LECs that claim to experience pressure to make most if not all Ethernet
purchases from price cap LECs where a shortfall liability is present?
135. Finally, we seek more specific comment on the framework that
should be applied to ensure the reasonableness of shortfall penalties
in commercial agreements for the provision of IP-based business data
services both in noncompetitive and competitive markets. Competitive
LECs have provided evidence of the use of shortfall fees in Ethernet
commercial agreements. We seek comment on the use of shortfall fees in
commercial agreements generally. How common is the use of shortfall
fees in commercial agreements, overlay agreements, and other agreements
for the provision of Ethernet service? How are such fees calculated and
by what methodology are they set? How do they impact the dynamics of
the market for Ethernet services? What are the economic costs that
providers and purchasers face in the event of a breach? What is the
best way to structure shortfall penalties in Ethernet commercial
agreements so that they reasonably compensate providers while not
excessively penalizing purchasers?
136. Early termination fees, as distinguished from shortfall or
other fees, are charges assessed on a purchaser under business data
services tariff pricing plans if a purchaser exits the plan prior to
the expiration of the purchaser's term commitment. In the Tariff
Investigation Order, we found early termination fees to be unreasonable
when they allow the incumbent LEC seller to recover damages that exceed
the lesser of either: (1) The revenues the incumbent LEC would have
received if the purchaser had retained the circuit or circuits through
the end of the term commitment; or (2) the revenues the incumbent LEC
would have received if the purchaser had paid the lesser discount
corresponding to the shorter term the purchaser actually used the
circuit or circuits. We also found that certain tariffs at issue
contained early termination provisions in excess of this measure of
damage, concluded such provisions are unjust and unreasonable practices
under section 201(b), and directed the incumbent LECs to revise their
tariffs accordingly. We now seek comment on whether and how the
Commission should consider imposing constraints on early termination
fees beyond the plans subject to the tariff investigation and what the
scope of such constraints should be.
137. We first seek comment on imposing limits on early termination
fees in other price cap LEC tariff pricing plans and contract tariffs
for the provision of TDM based services. Competitive LECs assert that
incumbent LECs failed to provide cost justification or other support
for the early termination fees they charge. For example, in the tariff
investigation, the Joint CLECs argue that incumbent LECs did not
attempt to ``quantify [their] fixed and incremental costs or the extent
to which both have already been recovered over many years of charging
customers for DS1 and DS3 services.'' Sprint also asserts that
incumbent LECs are ``unable to explain why it is reasonable to impose
penalty amounts that bear no relationship to the costs of [ ] early
termination, and that frequently exceed even the amount the customer
would pay if it met its commitment level.'' On the other hand,
incumbent LECs assert that early termination provisions are necessary
to enforce term commitments and that they are calculated reasonably.
For example, AT&T argues that early termination provisions in its
tariffs are ``lower than what the customer would have paid if they had
held the circuit to term.'' CenturyLink contends that ``[e]arly
termination fees help ensure that at least a portion of the expected
revenue stream on which CenturyLink's investment was premised will
continue over the life of the customer's commitment, and to provide
some compensation to CenturyLink if it does not.''
138. We seek comment on the use of early termination fees more
generally and on their potential impact on the development of
competition and the technology transitions. Are early termination fees
that penalize customers beyond the full cost of the term plan they
agreed to reasonable? We seek comment on whether we should extend and
apply the framework we adopted in the Tariff Investigation Order to
other providers of TDM and Ethernet-based business data services either
solely in noncompetitive markets or in all markets. That framework
entailed capping early termination fees at the
[[Page 36047]]
lesser of either: (1) The revenues the incumbent LEC would have
received if the purchaser had retained the circuit or circuits through
the end of the term commitment; or (2) the revenues the incumbent LEC
would have received if the purchaser had paid the lesser discount
corresponding to the shorter term the purchaser actually used the
circuit or circuits.
139. In commenting on this proposal, commenters should address the
following questions. Do these two measures adequately compensate
providers without excessively penalizing customers? Are there other
ways to calculate a reasonable early termination penalty? Would a cost-
based calculation be appropriate? Are there any circumstances where a
penalty that compensates providers beyond their opportunity cost is
reasonable? If so, please describe such circumstances and what evidence
a provider could use to establish that such a penalty is reasonable?
What showing should the Commission require if a provider seeks to raise
its existing early termination fees? Commenters are invited to discuss
factors that the Commission might take into consideration in
calculating reasonable early termination penalties, such as cost
studies, revenue expectations, avoided maintenance and administrative
costs, and any alternative means of valuing parties' expectations.
140. A number of existing tariff pricing plans set early
termination fees lower than this proposed standard. Some assess fees
that represent only a fraction of the incumbent LEC's revenue
expectations under the plan. These penalty amounts were filed as part
of the incumbent LECs' tariffs and therefore presumably provide
reasonable compensation to the incumbent LEC in the case of a
customer's breach of its term commitment. We therefore seek comment on
whether we should impose an upper bound on what we would consider a
reasonable early termination fee that is lower than the incumbent LEC's
revenue expectations under its plan. To the extent commenters suggest
lower limits for early termination fees, they should provide business
and cost justification for their recommendations.
141. Further, we seek comment on whether, in the case of the
retirement of a copper network, to require providers to eliminate any
early termination fee liability where the termination is caused by the
provider electing to discontinue the plan or service that is the
subject of the term commitment. In such cases, where it is the
provider's decision to cancel the service, is eliminating early
termination fees appropriate so as not to penalize the customer? Are
there any circumstances under which providers could reasonably assess
early termination fees in this situation?
142. We also seek comment on any unique issues that would arise in
applying this prohibition on early termination fees in commercial
agreements for Ethernet-based business data services, either solely in
noncompetitive markets or in all markets. Do overlay or other
commercial agreements for the provision of Ethernet-based service
assess early termination penalties? At what level are these penalties
set? How are early termination penalties calculated in these commercial
agreements? What are the economic costs that providers and purchasers
face in the event of a breach? What is the best way to structure early
termination fees in Ethernet commercial agreements to ensure that such
fees reasonably compensate providers while not excessively penalizing
purchasers?
F. Rules Applying to Non-Competitive Markets
143. We next propose requirements that would apply to the provision
of business data services only in those markets that are characterized
as non-competitive. These rules are intended to provide clear guidance
as to what conduct is just and reasonable in a non-competitive market
and thereby facilitate the resolution of disputes through commercial
negotiations and we seek comment generally on what actions should be
taken to ensure that conduct is just and reasonable in a non-
competitive market. Providers with market power are able to exercise
such market power to the detriment of their customers. Recognizing that
the market is evolving and competition may develop in many markets not
currently subject to material competitive effects, these rules are
intended to constrain potentially anti-competitive conduct while also
providing the flexibility to allow all providers to respond to
competition. Like the limited rules that would be applicable in all
markets, these proposed requirements would be technology neutral in
nature and would form a part of our proposed overarching framework for
the regulation of BDS generally.
1. Price Cap Regulation
144. We believe that we should continue to apply price caps to
business data services now subject to price cap regulation to the
extent an application of our proposed Competitive Market Test
determines that such price regulation is necessary or such services are
not otherwise made subject to an alternative pricing mechanism. The
principal price cap services are TDM business data services (i.e., DS1
and DS3 services). Elsewhere in this order, we propose a number of
actions that will impact how and to which services price caps will
continue to apply. As described above, we propose to adopt a
Competitive Market Test as a basis for determining which broadband data
services are competitive or non-competitive. And, as described below,
we propose to remove competitive TDM services from price cap
regulation. We further propose to subject non-competitive TDM services
to price cap regulation and allow for providers to enter into
individually negotiated agreements for such services. Finally, we
propose and seek comment on maintaining price caps for non-competitive
TDM services consistent with these proposals on a non-tariffed basis.
While we seek comment on our view and each of these proposals
individually, we ask commenters to keep all these proposed actions in
mind and address advantages or concerns with their collective impact as
appropriate in their comments.
145. We also seek comment on the scope of the application of rate
regulation in non-competitive markets to packet-based BDS (and, as
well, to TDM BDS). At some point in the future, there may be non-
competitive BDS markets in which TDM is no longer available. In such a
case, how would we regulate the non-competitive business data services?
How do we ensure the regulation we adopt here is technology-neutral and
sufficient to permit it to be applied to such a non-competitive BDS
market?
146. As discussed above, the record makes clear that the market for
lower-bandwidth TDM business data services such as those currently
subject to price caps is non-competitive in significant measure. Firms
with market power do not have incentives to price services at just and
reasonable levels consistent with section 201 of the Act. We believe
that the price cap system, as modified by any measures we adopt in this
proceeding, will limit the extent to which price cap LECs can exercise
their market power over non-competitive TDM BDS rates. When properly
applied, price cap regulation replicates the beneficial incentives of
competition in the provision of business data services while balancing
ratepayer and stockholder interests. The price cap indices provide
benchmarks of price cap LEC cost changes that encourage them to become
more productive and innovative by permitting them to retain
[[Page 36048]]
reasonably higher earnings. Those indices are designed to limit the
prices price cap LECs charge for service to just and reasonable levels.
By establishing limits on prices carriers can charge for business data
services, and placing downward pressure on those limits or ``caps,''
price caps creates a regulatory environment that incentivizes carriers
to become more productive and forces them to pass a portion of their
cost savings to ratepayers.
147. We are not aware of any other presently available alternative
to price cap regulation that more effectively balances the interests of
ratepayers and carriers. For instance, extending Phase II pricing
flexibility relief to services presently under price caps would be
inconsistent with our findings that these services are provided in non-
competitive areas. Applying rate of return regulation, in contrast,
would entail overcoming daunting administrative challenges and would
dampen firms' incentives to become more productive. And consistent with
our proposal below to apply a technology-neutral anchor or benchmark
pricing system to all business data services, we also propose to use
TDM BDS rates as the benchmark for establishing reasonable packet-based
BDS rates. Accordingly, we believe we should continue applying price
cap regulation to BDS, including TDM DS1 or DS3 services, to the extent
an application of our proposed Competitive Market Test determines such
services are non-competitive. We invite comment on the above analysis
and on these views.
148. We invite comment on extending price cap regulation to
business data services presently subject to Phase II pricing
flexibility to the extent an application of our proposed Competitive
Market Test determines such services are non-competitive consistent
with our proposal below. We believe that we should not take that step--
or indeed apply any sort of ex ante pricing regulation--where our
analysis shows that the market is competitive. We invite comment on
this approach.
149. A productivity-based X factor and a corresponding inflation
measure had been a fundamental feature of the Commission's price cap
system from the system's inception in 1987 until the adoption of the
CALLS plan. This balance reflected two propositions that we believe are
essential to any effort to ensure reasonable rates in non-competitive
markets: (a) That the service provider have an opportunity to recover
its costs of service; and (b) that the ratepayer benefit from any
decrease in those costs in much the same way as a customer in a
competitive market benefits from cost decreases. We believe we should
restore this balance between ratepayer and price cap carrier interests
by incorporating a productivity-based X factor into our price caps
system for business data services on a forward-going basis. We invite
comment on this view. We also ask whether we should make any
adjustments to current price caps to reflect any past productivity
gains that were not reflected in our past regulatory regimes. Below, we
propose corresponding action to regulate the rates of IP-based BDS in
non-competitive markets.
150. The goal of price cap regulation is to have rates and output
levels roughly mirror rates and output levels in a competitive market,
at least on average over an extended period of time. If inflation
outpaces productivity growth, price cap rates may become unreasonably
low. Conversely, if productivity growth outpaces inflation, companies
with market power will be able to charge unreasonably high rates. Our
current system, in which the X-factor equals its inflation measure,
implicitly assumes that changes in business data services productivity
perfectly offset inflation in the general economy. We think such a
perfect offset likely did not occur in the business data services
industry during the period since the expiration of the CALLS plan.
Given the rapid growth in business data services output, and the ever-
increasing economies of scale with respect to providing business data
services, per unit costs likely have decreased significantly since that
time. We seek comment on whether this analysis is correct and, if so,
whether this productivity trend will continue.
151. Over the period since the expiration of the CALLS plan, as
technology has evolved and for other business reasons, price cap LECs,
like other LECs, have been consolidating TDM switches, placing soft-
switches, increasing fiber deployments, and decreasing maintenance
costs. We believe that, as a consequence, business data services
productivity growth has significantly outpaced inflation and therefore
that the price cap LECs are likely charging unreasonably high rates. In
a regulatory environment where prices fail to reflect productivity
gains and, consequently, carriers set prices too high, end users will
purchase less of the services produced, and the quantity of output will
be lower than if prices were set at a competitive level. The
productivity of which the plant is capable will not be realized.
152. We note that some price cap LECs assert that their costs have
risen and the fact that the X factor has been set equal to the GDP-PI
has forced them to charge below-cost prices. We are skeptical of this
claim: These price cap LECs have not provided any evidence to support
their claim that business data services productivity increases have
departed from historical patterns and now lag behind productivity
increases in the economy as a whole. Additionally, we note that no
price cap LEC has filed any request that we examine the frozen
productivity factor in light of their claimed increased costs. But even
if we were to accept the price cap LECs' claim, that would only prove
that we need to restore the fundamental balance between carriers and
ratepayers inherent in the Commission's price cap system.
153. Competitive LECs, in contrast, maintain that price cap LECs
have been reaping the benefits of cost-saving productivity gains and
have not passed these cost savings to customers. If the competitive
LECs are correct--as our analysis strongly suggests, prices are higher
than an appropriate X-factor would have produced. We therefore believe
we should incorporate a productivity-based X factor into our price caps
system for business data services. We invite comment on the above
analysis and this approach.
154. We agree with Sprint that we should explore all available
methodologies for determining a productivity-based X-factor for
business data services. Accordingly, we seek comment on several
methodologies and ask the parties to suggest additional alternatives
that they believe will lead to reasonable rates for those business data
services regulated under price caps.
155. We believe that we should balance potential precision with
administrative feasibility in deciding how to set a productivity-based
X-factor. Measuring past productivity and predicting its future
trajectory are inexact sciences; we are not required ``to enter precise
predictive judgments on all questions as to which neither [our] staff
nor interested commenters [are] able to supply certainty.'' On the
contrary, we believe that we may properly rely on available data to
estimate productivity growth in the provision of business data services
and use that estimate to calculate a reasonable productivity-based X
factor. We invite comment on this analysis and on how we should balance
potential precision with administrative feasibility in setting a
productivity-based X-factor.
156. We invite comment below on three methodologies for calculating
a productivity-based X-factor and corresponding price cap indices
[[Page 36049]]
adjustments. We think these methodologies capture cost-reduction
incentives while mimicking competitive-market outcomes by using
projections of productivity gains, rather than actual values, based on
historical trends. They calculate possible productivity-based X-factors
by taking the difference between an economy-wide rate of inflation and
the growth rate of industry input prices and the projected growth rate
of a firm's productivity level.
157. Our calculations rely on three data sources: (a) The U.S.
Bureau of Labor Statistics' (BLS's) Capital, Labor, Energy, Materials,
and Services (KLEMS) data; (b) data from the peer review process in
connection with the deployment of the Commission's Connect America Cost
Model (CACM); and (c) those data in combination with cost data that TDS
submitted in this proceeding. We seek comment on whether data from
these sources provide a reasonable basis for calculating a
productivity-based X factor. Do they properly balance potential
precision with administrative feasibility? Are there alternative
sources of data that would more precisely calculate productivity
increases in the provision of business data services? If so, would the
additional precision associated with obtaining those data and using
them to calculate a productivity-based X-factor outweigh the associated
burdens?
158. The KLEMS data used in our calculations are publicly
available, annual industry-level data on industry-level measures of
input prices and total factor productivity (TFP) for the
telecommunications and broadcasting industries. We seek comment on any
adjustments to the KLEMS data that we should make to improve its
utility as a measure of business data services productivity. We seek
comment on the relevant years for which we should use KLEMS data.
159. In response to a peer review of the CACM, the CACM was used to
generate cost share data for ten cost categories. Are there other cost
categories that we should include or should we exclude some of these
cost categories from our calculations? Does combining CACM peer review
data with company-specific data, such as the TDS data used in
calculating the proposed X factor and corresponding adjustments to
price cap indices, provide a more precise estimate of business data
services productivity growth? Are there other sources of available
company-specific cost data that would increase that precision?
160. We invite comment on whether we should require price cap LECs
to submit their expense matrix data from 2005 to 2015? If so, should we
require that these data be reported using the categories previously
required under the Commission's rules and, if not, what categories
should we specify? Would the benefits from these data outweigh the
burdens?
161. We ask whether we should require the price cap LECs to submit
cost studies, as Sprint suggests, to help us determine business data
services productivity growth. If so, what methodology should we specify
for those costs studies? Would the benefits from relying on company-
specific data from these cost studies, as opposed to economy-wide or
industry-wide KLEMS and CAPM data, outweigh the burdens?
162. We invite comment on whether and, if so, how we may use the
pricing data collected in this proceeding to supplement our other
calculations. Would regressions comparing prices for DS1 and DS3
services in competitive and non-competitive areas provide proxies for
the minimum amount that prices should have fallen in non-competitive
areas and, if so, how we should use those proxies in setting an X-
factor and price cap indices adjustments? We seek comment on the pros
and cons of using regressions to supplement other X-factor
calculations. We ask the parties to submit their own regressions.
163. We seek comment on whether we should incorporate a consumer
productivity dividend into our price cap system. If so, how should we
calculate that dividend? Should we incorporate a dividend component
into any X-factor that we set? Should we include such a dividend in a
price cap indices adjustment if we decide to take that approach?
164. GDP-PI (i.e., the gross domestic product price index) is a
measure of inflation incorporated into the Commission's price cap index
formula as one of three basic components in addition to the X-factor
and exogenous cost adjustments.
165. The Commission currently uses the BEA chain-weighted GDP-PI to
measure inflation. We find that this measure accurately reflects cost
changes that carriers face without being susceptible to carrier
influence or manipulation. We propose that we should continue to use
GDP-PI as the inflation measure in the price cap index formula
consistent with BEA's measure for purposes of setting the X Factor. We
seek comment on this proposal.
166. In the 2005 Special Access NPRM, the Commission invited
comment on a series of additional issues relating to price caps. These
issues included: (a) Whether the price cap index formula for business
data services should include a growth or ``g'' factor to account for
any demand growth effects that are not reflected in an X factor; (b)
whether the Commission should require price cap LECs to share a portion
of their business data services earnings with ratepayers through
adjustments to the price cap indices; (c) whether the Commission should
retain a low-end adjustment mechanism for price cap LECs that have not
implemented pricing flexibility; and (d) whether the Commission should
subdivide its special access price cap basket into additional or
different categories and subcategories.
167. We ask the parties to update the record on each of these
issues. We also ask whether there are any additional issues we should
resolve to help ensure that our price cap system produces reasonable
rates for business data services in non-competitive markets.
168. A growth or ``g'' factor would allow ratepayers to benefit
from at least of portion of any business data services demand growth
effects that are not reflected in a productivity-based X-factor. We
invite comment on whether we should adopt a ``g'' factor and, if so,
how we should calculate it. We also ask how we should how we should
measure demand growth and how we can ensure that any ``g'' factor does
not double count growth already reflected in a productivity-based X-
factor. We ask, in particular, whether demand growth benefits not
reflected in an X factor should be shared between business data
services providers and their customers. Should any ``g'' factor we
adopt be applied only on a going-forward basis, or should we also
adjust the price caps indices to account for prior demand growth?
169. Earnings sharing allows ratepayers to benefit from business
data services profitability and was a feature of the Commission price
cap regime until 1997. In abolishing sharing, the Commission found that
it blunted price cap LECs' efficiency incentives and that eliminating
it would remove vestiges of rate of return regulation from the price
cap system. We find these reasons persuasive and therefore believe that
we should not reinstate sharing. We invite comment on this approach.
170. The low-end adjustment permits price cap LECs that earn a rate
of return 100 basis points or more below the prescribed rate of return
for rate-of-return carriers to increase their price cap indices in the
next year to a level that would allow them to earn 100 basis points
below that rate of return. This mechanism is available to all price cap
[[Page 36050]]
LECS that have not implemented pricing flexibility. In the 2005 Special
Access NPRM, the Commission tentatively concluded that, if it were to
continue to apply price caps to business data services, it should
retain a low-end adjustment mechanism for price cap LECs that have not
implemented pricing flexibility.
171. In this FNPRM, we propose below to replace the current pricing
flexibility framework with a new technology-neutral framework. Under
the proposed framework, price cap LECs' TDM BDS in non-competitive
markets will be subject to price caps and can be offered through
individually negotiated agreements, a regime that parallels in most
practical respects the Phase I pricing rules. And price cap LECs' TDM
BDS in competitive markets will be removed from price cap regulation
and offered pursuant to commercial agreements. We invite comment on how
our action on this proposed paradigm should affect our consideration of
whether we should retain a low-end adjustment as part of our price cap
system. In particular, should we allow business data services providers
that provide their TDM services under these varying regimes to seek
low-end adjustments? If so, how can we assure that the providers'
claimed earnings on services provided under price caps accurately
reflect their costs of providing those services?
172. In March 2016, the Commission reduced the prescribed rate of
return for rate-of-return carriers from 11.25 percent to 9.75 percent,
subject to a transition. Effective July 1, 2016, this transition will
reduce the 11.25 percent rate of return by 25 basis points per year
until it reaches the represcribed 9.75 percent on July 1, 2021. We ask
that the parties address whether we should use this reduced rate of
return to measure eligibility for a low-end adjustment in the event we
retain that mechanism. If so, how, if at all, should we adjust the
percentage that determines eligibility for a low-end adjustment and the
level to which price cap indices are retargeted as this transition
proceeds? Specifically, should we use the 9.75 percent prescribed rate
of return in considering low-end adjustments when it is effective or
should the applicable rate of return track the rate of return
transition?
173. A price cap basket is a broad grouping of services, such as
TDM services. Prices for services in a given basket are capped by its
price cap index. Placing services together in the same basket limits
the LEC's pricing flexibility and incentives to shift costs. Within the
special access service basket, services currently are grouped into
service categories and subcategories. Similar services are grouped
together into service categories within a single basket to act as a
substantial bar on the LEC's ability to engage in anticompetitive
behavior.
174. In the 2005 Special Access NPRM, the Commission sought comment
on the categories and subcategories the Commission should establish in
a special access basket if we continued to apply price cap regulation
to business data services. In response, commenters proposed a number of
changes to the categories and subcategories for the special access
basket. We ask interested parties to update their comments with respect
to the special access basket categories and subcategories in light of
technological and operational changes that have occurred in the
business data services marketplace since 2005.
175. We seek comment on whether the special access basket should be
subdivided into more than one basket, and whether the baskets should be
further subdivided into categories and subcategories. We ask whether
should use a single basket or multiple baskets and the advantages and
disadvantages of each approach. What categories and subcategories
should we establish in a BDS basket if we adopt a price cap method to
regulate BDS prices? Should we retain without modification for BDS the
existing special access category and subcategories? If not, parties
should identify the specific categories and subcategories of BDS that
they contend we should adopt.
176. We ask parties to discuss the advantages and disadvantages of
having a BDS basket with relatively few categories or subcategories
compared to one with many. We also seek comment on what criteria and
data we should examine to determine which services to place in which
categories or subcategories. We ask parties proposing categories or
subcategories, to explain in detail the bases for their proposed
categories or subcategories, and to support their proposals with data
and studies.
177. Should we establish separate categories or subcategories based
on BDS line densities? For example, channel termination services
extending between a LEC end office and a customer premise in areas
where there are more than 10,000 special access lines per square mile
could be placed in a particular subcategory.
178. For the same reasons that the Commission eliminated the lower
pricing bands, we believe that there should be no lower band for
service categories or subcategories to restrict the price cap LECs'
downward pricing flexibility. We seek comment on this approach. We
likewise seek comment on the upper band value to limit the price cap
LECs' upward pricing flexibility for the categories or subcategories.
Should we retain five percent as the value? Should we use different
values for different categories or subcategories? What criteria and
data should we use to determine these values?
179. We invite comment on whether business data services
productivity gains have outpaced inflation during the period since June
30, 2005, the date the CALLS plan expired. We ask that the parties
support their position on this issue with detailed data and economic
analysis. We seek comment on whether in the event we conclude that
business data services productivity gains outpaced inflation during
that period, we should adjust the baseline price cap levels to capture
those gains for ratepayers. As noted above, we propose that a new
forward-looking productivity factor should be applied to TDM services
in non-competitive markets (with corresponding rate regulation for IP-
based BDS in non-competitive markets).
180. As indicated above, our X-factor and price cap indices
adjustment calculations rely on BLS's KLEMS data; the Commission's CACM
peer review data; and CACM peer review data in combination with TDS
cost data. We think our X-factor calculations capture cost-reduction
incentives while mimicking competitive-market outcomes by using
projections of productivity gains, rather than actual values, based on
historical trends. We use a proxy for the growth rate of input prices,
a measure of economy-wide rate of inflation based on a national price
index (i.e., GDP-PI) adjusted to account for systematic difference
between the growth rates of national prices and telecommunications
industry-specific input prices. To adjust the price cap index to
account for the historic productivity X-factor, this estimation of X is
subtracted from the annual change in the GDP-PI to determine the annual
change in the price cap index.
181. We calculate the X-factor by subtracting from the change in
GDP-PI, the change in industry prices and add the change in industry
total factor productivity (TFP). The change in industry TFP is the
difference between the change in TFP for price cap LECs and the change
in TFP for the overall U.S. economy. We calculate an input price
differential reflecting the historical difference in the average annual
rate of change in price cap LEC input prices as
[[Page 36051]]
compared with the historical average annual rate of change in the
economy as a whole. These two factors are then added together for each
year and subtracted from the measure of the change in the rate of
inflation (i.e. the change in GDP-PI).
182. Applying this basic calculation, we apply various data sources
and models for estimating the inputs in the X-factor equation. From
these calculations, we develop a forward-looking X-factor adjustment to
the price cap index applied annually.
183. Method One--KLEMS Model. Our first set of calculations rely on
KLEMS from BEA and the U.S. Department of Labor's Bureau of Labor
Statistics (BLS). The BLS maintains yearly KLEMS statistics on
Broadcasting and Telecommunications. These industry-level measures of
input prices and total factor productivity (TFP) are publically
available. This is the most granular level of industry detail for which
KLEMS data is available on a regular and consistent basis. Input price
indexes are available for each of the five components of KLEMS--capital
(K), labor (L), energy (E), non-energy materials (M), and services
purchased from other businesses (S).
184. Commission staff computed three X-factor estimates using KLEMS
data: (1) The first estimate uses growth rates that are averaged over
all years for which we have data, 1997 through 2013; (2) the second
considers only the years for which data would have been available in
2005, 1997 through 2003; and (3) the third considers data from 2005
(the year in which the CALLS plan ended) through 2013. The year 1997
provides a helpful starting point as the last year in which the
Commission prescribed a productivity-based X-factor and 2013 represents
the year for which the business data services data was collected. The
results are as follows:
185. Method Two--Connect America Cost Model. Our second set of
calculations uses data from the CACM peer review process. In the 2011
USF/ICC Transformation Order, the Commission adopted CACM to provide a
forward-looking estimate by census block of the costs of providing a
voice and broadband-capable network for use in determining Connect
America Fund support for broadband necessary to serve price cap areas.
The Commission's response to a peer review of the CACM set forth data,
including shares and estimates of changing prices, for ten cost
categories. Relying on cost models and industry financial accounts, the
Commission staff determined the key cost components of business data
services supply, estimated their shares, and estimated changes in the
input prices of each key component. These calculations relied on the
following input categories and estimates of the cost shares of each of
these categories: Labor, fiber, poles, conduit, drop, optical net
terminal, fiber pedestals, splitters, electronics, and land/buildings.
186. The CACM methodology provides base information about the key
costs of supplying business data services. The CACM was developed to
estimate the costs of a mass market residential broadband fiber-to-the-
premise network that also is used to provide telephone service, and was
built to also provide business data services. Consequently, it is
essentially a model of the costs of an incumbent LEC supply, but with a
focus on residential rather than business data services. Despite this,
there are no reasons to think that either (1) the underlying cost
categories of the CACM or (2) the rates of change in input prices of
these cost categories would be significantly different for business
data services than for residential data services. The CACM peer review
response provides at least a very rough indication of shares even
though its modeling is not limited to business data services.
187. For each category, Commission staff calculated low and high
estimates for changes in input prices. Two measures, one high and one
low, were used for changes in total factor productivity. The low
estimate for net impact on costs applies the low estimate for input
prices and the high estimate for productivity. The high estimate for
net impact on costs applies the high estimate for input price and the
low estimate for productivity. Weighted averages were computed for both
low and high estimate, where the weights were the cost category shares.
Commission staff calculated the net impact on costs which equals the
change in industry input prices plus the change in industry TFP. The
results are as follows:
188. Method Three--TDS and Connect America Cost Model. Our third
set of calculations is a modification of method two, relying on CACM
calculation supplemented with data provided by TDS Telecom (TDS). The
TDS data consist of booked financial data on TDS's incumbent LEC
operations. Commission staff used these data as an alternative set of
input categories. However, the TDS categories, other than those for
labor and real estate, were not at the same level of detail as in the
same CACM calculations. This required that the TDS categories for
switching and transmission be mapped to the remaining eight CACM
categories. The results are as follows:
189. We invite comment on whether these methodologies provide a
reasonable basis for assessing industry productivity for use in X-
factor and price cap indices adjustment and whether we should use them
for such purpose. How precise are they? Are there alternative
methodologies that would provide comparable or greater precision at
comparable, or lower, cost? If so, we ask the parties to describe those
methodologies in detail and to explain how we should apply them.
190. Are the data used in our calculations reliable? Are other,
more detailed data available that would more accurately portray
productivity trends? Do data that provide broad measures of large
economic sectors, like the KLEMS data, provide the most reliable data
for measuring BDS productivity trends in relation to production trends
in the overall economy? Or are telecommunications-specific data, like
the CAPM data, or company-specific data, like the TDS data, preferable?
We ask the commenters to address the relative merits of each of these
categories of data and to suggest additional sources of reliable data
within each category.
191. The calculations present three different time periods that we
could use to determine a productivity-based X-factor and, if we decide
to take that course, price cap indices adjustments. We ask whether
these time periods accurately capture BDS productivity trends for such
purposes and, if not, which other time periods would provide increased
accuracy and why.
192. Finally, we ask the parties to recommend, based on our
analysis or their proposed alternative, whether we should make
adjustments to the X factor and price cap indices. We also seek comment
on capping existing price cap indices and ask whether this should be
done in all areas or just certain areas with pricing flexibility. We
ask commenters to explain the basis for their recommendation and
explain how such approaches would impact competition and the technology
transitions.
193. We seek comment below in this FNPRM on applying the substance
of the current Phase I pricing flexibility requirements to TDM BDS
offered in non-competitive areas. To implement such proposal, we also
seek comment above on extending price cap regulation to TDM BDS offered
in non-competitive areas that presently are subject to Phase II pricing
flexibility. We now seek comment on how we would move such
[[Page 36052]]
services back into price caps. Because the services we now consider
currently are subject to Phase II pricing flexibility, their rates have
been moved out of price cap constrained tariffs and are, in some cases,
higher than they would have been had they been consistently constrained
by the price caps. What, if any, changes to the currently applicable
rates should be made as part of a transition back into price caps and
why? If so, how should such changes be implemented? Does this
transition raise any special considerations? We seek comment on these
questions.
194. We propose that if the Commission adopts a new X-factor or
otherwise requires adjustments to the price cap indices, price cap
carriers would implement the associated rate decreases by submitting
TRPs (i.e., Tariff Review Plans) and special access tariff revisions
for all rate elements associated with special access. Such TRPs would
set forth the calculations underlying the API, and demonstrate that the
revised API for the special access basket does not exceed the revised
price cap index. We seek comment on this proposal.
195. How shall we adjust the price cap indices if the Commission
adopts a new X-factor or otherwise requires adjustments to the price
cap indices? Should the rate decreases that result from these actions
apply to all rate elements associated with special access services, or
should carriers be permitted to choose the manner in which the
decreases are made as long as the revised API for the special access
basket does not exceed the revised price cap index? What process should
the Commission employ for purposes of implementing a new X-factor or
any required adjustments to the price cap indices? In this regard, we
invite comment on implementation issues such as the timing for
complying with the required rate reductions, what should be included in
related TRP submissions and tariff filings, and carrier certification
requirements.
2. Anchor or Benchmarking Pricing
196. In non-competitive markets, absent guidance as to the range of
rates that would be considered reasonable, a provider could exercise
market power through the charging of supracompetitive rates. As
discussed above, TDM BDS rates currently are constrained to some extent
by price caps. In this section, we propose and seek comment on a
methodology to ensure that, in non-competitive markets, rates for
Ethernet business data services not subject to price cap regulation are
just and reasonable. We emphasize that the proposed mechanism described
below would be used in those markets where the Commission determines,
based on an application of the Competitive Market Test, the market is
non-competitive such that it is likely competition is not constraining
rates to just and reasonable levels. That said, the proposed
methodology is not prescriptive, and is intended to facilitate
providers and customers negotiating reasonable commercial agreements.
197. We first took action to protect against concerns regarding
Ethernet pricing during the transition to IP in the Emerging Wireline
Order by adopting an interim rule to ensure that incumbent LEC BDS
providers that are discontinuing legacy TDM services offer Ethernet
services, used as wholesale inputs by competitive carriers, at
reasonably comparable rates, terms, and conditions. This interim rule
applies to two categories of services: (1) BDS services at DS1 speed
and above; and (2) commercial wholesale platform services such as
AT&T's Local Service Complete and Verizon's Wholesale Advantage. The
interim reasonably comparable wholesale access requirement is a
condition to a grant of an incumbent LEC's discontinuance application
imposed under our authority pursuant to section 214(c) of the Act, and
helps ``bridg[e] the gap'' between the current competitive situation
and the completion of the BDS rulemaking. The condition that the rule
imposes expires when ``all of the following have occurred: (1) The
Commission identifies a set of rules and/or policies that will ensure
rates, terms, and conditions for special access services are just and
reasonable; (2) the Commission provides notice such rules are effective
in the Federal Register; and (3) such rules and/or policies become
effective.'' The rules and policies that we propose establishing from
this FNPRM are intended to meet the first prong of the Emerging
Wireline Order's standards governing expiration of the condition. Once
we adopt permanent rules subsequent to this FNPRM, we will provide the
Federal Register notice called for in the second prong, which will
announce the effective date called for in the third prong. We
anticipate that the condition the interim rule imposes will expire as
of the effective date of our permanent pricing rules for BDS, absent
action staying or overturning our rules and policies. We further
discuss our various methods for considering a permanent pricing
methodology below.
198. In this FNPRM, we propose an anchor pricing or benchmarking
approach to replace, as it applies to BDS, the interim rule currently
in effect. We consider three options below. The first option is to rely
on regulated TDM service prices to anchor the prices of similar packet
services. This option would be effective only where TDM prices could be
expected to reasonably constrain the rates for higher speed packet-
based services. In that case, we could decline to otherwise regulate
packet-based BDS rates. If, however, we were unable to determine that
regulated TDM prices would provide a reasonable constraint on packet-
based BDS, a second option would be to establish one regulated price
for packet-based BDS, for example, establish a regulated rate for a 10
Mbps Ethernet service, which could serve as an anchor for nearby-
bandwidth packet-based BDS, and could arguably constrain those rates.
Our third option is to initially use reasonably comparable prices for
regulated TDM services as a benchmark to help the Commission determine
whether rates for various packet-based BDS are just and reasonable, but
over time using, as a benchmark, the packet-based BDS prices
established under this approach. Price cap TDM rates do not have a
single rate for a particular TDM service but a series of rates that,
when combined, create a rate. How should we account for differences in
rate structures between price-capped TDM rates and packet-based BDS?
199. We seek comment on which option we should use and how such a
pricing regime should operate. We believe we should adopt the third
option--using regulated TDM prices, but over time using the packet-
based BDS prices established under this approach as a benchmarking tool
in determining whether packet-based BDS rates are just and reasonable,
similar to the interim rule adopted in the Emerging Wireline Order. We
believe this option would be most effective in constraining rates and
most consistent with the Commission's goals of promoting facilities-
based competition and facilitating technology transitions. We question
whether, under the first option, TDM services could effectively
constrain the prices for higher speed packet-based services in the
current environment of increasing demand for high-bandwidth services.
In addition, such reliance may create incentives at odds with our goal
of facilitating the technology transitions. We also question the
desirability of the second option, establishing rates for one tier of
packet-based BDS, for two reasons. First, because it is doubtful that
such an approach could reasonably constrain a relatively wide range of
bandwidths (for example, it is unlikely that a 25 Mbps
[[Page 36053]]
anchor price would effectively constrain prices for 2 Mbps and 50 Mbps
services). Second, for reasons similar to our hesitation to bring such
services under price cap regulation, any price regulation where the
Commission would be establishing rates for carriers to charge (even for
just one service) would still add reporting and monitoring burdens on
carriers, which could inhibit innovation. In contrast, we believe the
third option would be the least burdensome and most effective in
encouraging competition through commercial negotiation. We seek comment
on these various options and our views.
200. Certain parties have suggested we could use a cost model to
establish benchmarks for packet-based BDS Ethernet services. For
instance, as noted above, the CACM was used to provide a forward-
looking estimate by census block of the costs of providing a voice and
broadband-capable network for use in determining Connect America Fund
support for broadband necessary to serve price cap areas. We seek
comment on whether we could either establish a new cost model or modify
an existing cost model to provide a basis for establishing Ethernet
rate benchmarks within price cap incumbent LEC service areas to the
extent that price regulation might otherwise apply? What would be the
benefits of a model-based approach in contrast to the anchor or
benchmarking approaches described above? Is there a particular model
that we should consider? What would be the benefits of establishing a
new model instead of modifying an existing model?
201. Although packet-based BDS have largely been provided outside
of price cap regulation, we expect adoption of an anchor or
benchmarking pricing mechanism would provide many of the advantages of
price caps and other forms of pricing regulation without some of the
disadvantages. Through the adoption of price cap regulation, the
Commission attempted to encourage incumbent LECs to innovate and
increase efficiencies in providing service. However, bringing more
services under our price caps would entail reporting and monitoring
costs which we can avoid under our proposed anchor or benchmarking
approach (since such an approach, in part by its expression, and in
part through setting of precedents in adjudications, will encourage
parties to negotiate reasonable terms and conditions). We seek comment
on this approach. Would our proposed approach work effectively to
constrain prices and increase innovation? Would one of the alternative
forms be more effective than our proposed approach?
202. We note that the Verizon/INCOMPAS Joint Letter suggests that
the Commission should rely on ex ante rate regulation in relevant
markets with insufficient competition. We seek comment on the
principles in the Verizon/INCOMPAS Joint Letter. How would we implement
ex ante pricing regulation that would further the goals of constraining
prices and ensuring just and reasonable rates and be imposed on a
technology neutral basis? How would such regulation be implemented on
an operational basis?
203. As described above, we propose to use as a benchmark for
reasonable packet-based BDS rates the price of the most comparable
legacy TDM technology and base the reasonableness of the price on that
service level, even if the services are provided using a new or
different technology. Over time, as TDM benchmarks are discontinued,
packet-based BDS rates established as being fair and reasonable under
this approach would serve as a continuing benchmark. We seek comment on
this proposal. How would this methodology be implemented? Should this
price be a ceiling for the rates of various packet-based services or
should it merely be used as a tool to determine whether rates are
reasonable? Would this method be a workable solution to ensure that
packet-based BDS rates are just and reasonable? If not, what
alternative solutions should the Commission consider?
204. We believe we should impose anchor or benchmarking pricing
only in non-competitive markets. Is that the correct determination? Why
or why not? Would there be reasons to impose anchor or benchmarking
pricing in competitive markets? We believe that in effectively
competitive markets, anchor or benchmarking pricing would not be
necessary because competition would be sufficient to constrain prices
to just and reasonable levels. We also believe that anchor or
benchmarking pricing would not be appropriate where we find sufficient
material competitive effects under the Competitive Market Test, even
where that means competition is not necessarily driving prices to
effectively competitive levels. This is because we must account for
limitations on our ability to establish what a competitive price is,
the harms of unintended consequences from regulatory action (for
example, to the extent regulatory action encourages waste through rent-
seeking), as well as its administrative costs. Is that a reasonable
approach? If not, what impact would anchor or benchmarking pricing have
on areas that already have material competitive effects?
205. We seek comment on the scope of the application of rate
regulation in non-competitive markets to packet-based BDS (and, as
well, to TDM BDS). In non-competitive areas, should all providers be
subject to rate regulation or should only some providers be so
impacted? If the latter, how should we determine which providers? So,
for example, should rate regulation apply only to the largest providers
(and how would such an outcome be implemented as market shares change
over time)? Conversely, should we consider adopting a rule that
providers with less than a certain percentage of market share would not
be subject to rate regulation on the ground that smaller providers
likely represent new entrants? Or should we use another factor than
market share were we to adopt this approach, such as the ubiquity of
infrastructure capable of delivering BDS service in a relevant
geographic market, or the effective ability of a provider to reach some
percentage of potential BDS customers? We seek general comment on the
scope of rate regulation in non-competitive markets.
206. We propose above to evaluate the reasonableness of rates for
packet-based BDS by benchmarking them against the incumbent LEC's TDM
price for the most comparable level of service available, and over
time, as TDM services are discontinued, benchmarking them against
packet-based BDS rates established as being just and reasonable under
this approach. For example, the anchor price for a particular market
for a 5 Mbps Ethernet service would be the cost of the closest TDM
equivalent offered by the incumbent LEC, which, for example, might be a
DS1. This would not imply that the price of the Ethernet service should
be the same as that of the nearest equivalent service, but only that
the Commission would judge whether the 5 Mbps service price was just
and reasonable in the light of the DS1 price. In this example, the
Commission could determine that the 5 Mbps service price should not
exceed the price of the DS1 multiplied by 3.3 (= 5 / 1.5), given the
prices of higher bandwidth services usually fall more than
proportionately with bandwidth, and that Ethernet services are
considered to have a lower cost in supply than legacy TDM services.
Would this anchor price approach be workable? If not--what method
should the Commission utilize? If it is workable, would the proposed
upper bound, that the ratio of the price of a packet-based BDS with a
bandwidth
[[Page 36054]]
in excess of a regulated TDM service to the price of the TDM service
should not exceed the ratio the packet-based BDS bandwidth to the TDM
service bandwidth, be reasonable? What about for packet-based BDS for
which the nearest comparable TDM service has a higher bandwidth?
207. We seek comment on this proposal. Does it adequately cover
situations in which an obvious comparable TDM service does not exist in
a given market? We welcome comment on any alternative or additional
ways for providers to address the situation where it is difficult to
find a comparable TDM service offering on which to base the anchor
price.
208. In addition to the bandwidth of the service offering, should
the rates differ based on the technology, service tier, geographic
location, quality of service, or any other factors? How should these
differences be accounted for in determining the ultimate rate ceilings
that providers are permitted to charge at or below for their packet-
based BDS? How would any discounts commonly provided for TDM services
influence the benchmark rates? Are there any other issues that should
be accounted for that may affect the ultimate rates (either higher or
lower) than the benchmark set by our anchor price? If so, what are
they, and why should BDS providers be entitled to adjust their rates
accordingly? How do we ensure that carriers are not permitted to
increase prices above the benchmark by imposing unreasonable charges on
related services, such as special construction?
209. Our anchor or benchmark prices must adjust to changes in
economic conditions and advancements in technology and productivity
that impact the costs of providing services. Specifically, how would
anchor prices be established once incumbent LECs have fully
transitioned from TDM to packet-based services? To address this
challenge, at least over the medium term, we propose to make permanent,
after the interim rule expires, the current network transition
requirement adopted in the Emerging Wireline Order which requires an
ILEC discontinuing TDM service to offer a comparable packet service at
comparable prices. We seek comment on that approach, and also on how
best to establish an anchor or benchmark price for the potential
situation where, due to increased bandwidth demands, sales of low
bandwidth Ethernet services decline and have been replaced by broad
demand for higher bandwidth BDS. Is this situation too speculative to
consider regulatory approaches at this point? In particular, would our
proposal to use as a benchmark any packet-based BDS with prices that
were established under this approach work? Is this approach
sufficiently technology-neutral, and if not, is there a more
appropriate technology-neutral alternative? Would this approach over
time be likely to become unmoored as TDM services are discontinued and
as the minimum bandwidth of service offerings rise? What other factors
would cause the Commission to reset anchor or benchmark pricing? Should
anchor or benchmark pricing be revisited on a regular, recurring basis?
In any case, is it likely there will be any need for regulation of such
higher bandwidth services or are there reasons to believe that, as this
transition takes place, such services will take on the characteristics
of low bandwidth services, including a lack of competitive supply for
such services?
210. In the Enterprise Broadband Forbearance Orders, the Commission
granted forbearance from the application of dominant carrier
regulation, including tariffing, to certain of the petitioning
incumbent LECs' broadband telecommunications services. The forbearance
grants did not include all price cap incumbent LECs and only included
certain IP services being offered at the time of the grants, resulting
in some inconsistency regarding the tariffing of IP-services. Upon
implementation of an anchor or benchmarking pricing methodology, we
believe we should continue the forbearance from tariffing for all
packet-based services currently subject to forbearance. In addition, we
believe we should expand the forbearance to include all price cap
incumbent LECs and all packet-based services. We believe that
forbearance from tariffing will allow for greater use of commercial
negotiations, which will facilitate innovative integrated service
offerings designed to meet changing market conditions and will increase
customers' ability to obtain service arrangements that are specifically
tailored to their individualized needs. We seek comment on these views.
Would this approach be consistent with the three-part test in section
10(a) of the Act? What impact would a more comprehensive forbearance
from tariffing have on the development of packet-based BDS? Would
greater flexibility lead to more competitive pricing and offerings? How
should the increased use of forbearance from tariffing requirements be
implemented? Should the detariffing be mandatory or should carriers be
permitted to file permissive tariffs? Should there be any
grandfathering for services that are currently offered pursuant to
tariff?
211. The success of the proposed anchor or benchmarking pricing
framework will rest in part on parties having access to generally
available rates that comply with the anchor or benchmarking pricing
requirements. Our primary goal under anchor or benchmarking pricing
would be to create a framework of technology-neutral regulation that
will facilitate the emergence of competition. We want to minimize
burdens on market participants and not increase barriers to market
entry. Tariffing has the potential to impose burdensome obligations and
may prevent more competitive offerings from being introduced by
limiting flexibility and the ability to individually tailor product
offerings. The disclosure tariffs require, however, is a positive
aspect in non-competitive areas because it can help combat unjust and
unreasonable rates, terms, and conditions. Requiring BDS providers to
disclose their rates, terms, and conditions publically would provide a
clear check as to whether they are compliant with our anchor pricing
requirements. Do these potential transparency benefits outweigh
potential benefits to competition that would arise from forbearance
from tariffing requirements? Are there other potential benefits to
tariffs that we should consider? We now turn to a proposed public
disclosure requirement that would offset any negative impact of
forbearance from tariffing requirements.
212. We believe we should require providers affected by our
proposed anchor or benchmarking pricing regime to publicly disclose
their generally available rates, terms, and conditions. The rates in
these public disclosures should be consistent with the anchor or
benchmarking pricing rules we adopt and should be available to
customers on the carrier's Web site. We seek comment on these
proposals. How should disclosure of rates be implemented? Is posting on
a carrier's Web site sufficient?
213. Currently, the Emerging Wireline Order's reasonably comparable
standard helps ensure that providers are offering just and reasonable
rates when they seek to discontinue certain legacy TDM services.
Accordingly, we have temporary policies in place that should help ease
any unjust and unreasonable rates in the Ethernet BDS market where
legacy TDM services are discontinued. With this in mind, what is a
reasonable timeline for implementing the new anchor or benchmarking
pricing methodology? Should the timeline be
[[Page 36055]]
linked to the determinations under the Competitive Market Test? What
types of changes and preparations would providers need to undertake to
switch to the anchor or benchmark prices that would justify time for a
transition? If a transition is needed, how long should it last to
ensure that providers are ready and customers are provided relief in as
timely a manner as possible?
214. Some BDS providers and purchasers enter into contracts with
terms that last for several years, especially in the context of
receiving term discounts. We do not intend to intervene where
sufficient material competitive effects keep rates at just and
reasonable levels. However, should the Commission need to take
additional action after adoption of our proposed anchor or benchmarking
pricing regime, it is well-established that ``[u]nder the Sierra-Mobile
doctrine, the Commission has the power to prescribe a change in
contract rates when it finds them to be unlawful, and to modify other
provisions of private contracts when necessary to serve the public
interest.'' Such a need may arise, for example, when contract terms
last long after adoption of our regime, which would prevent the rates
from falling to just and reasonable level under our anchored prices. We
note that an agency may modify or abrogate a valid contract ``only if
it harms the public interest.'' Under what circumstances should we
exercise our authority under the Sierra-Mobile doctrine to abrogate
such contracts that remain inconsistent with the benchmarked rates
under our anchor pricing system? In the context of the prices for BDS,
under what, if any, circumstances would rates above the anchor or
benchmark price justify contract abrogation?
215. We do not envision that our anchor or benchmarking pricing
methodology will impose any additional reporting requirements on
carriers that offer the Ethernet services falling under these new
anchor or benchmark rates. We have, however, proposed to require public
disclosure of generally available terms and conditions. We invite
commenters to explain whether any reporting requirements should be
imposed to ensure that providers comply with our rules and that those
rules serve the purposes for which they were designed. If reporting
requirements should be implemented, what form should they take? Should
we require certification that providers are in compliance? Are there
any other requirements we should consider, and what are the costs and
benefits of adopting additional requirements?
216. We expect the Commission's enforcement process and declaratory
ruling process will be critical components of our proposed anchor or
benchmarking pricing methodology that will help ensure our new rules
prevent providers from offering packet-based BDS at rates, terms, and
conditions that are unjust and unreasonable. For example, interested
parties may file complaints alleging that particular BDS providers'
rates, terms, and conditions are unjust, unreasonable, or unjustly or
unreasonably discriminatory. Based on these complaints, we would then
evaluate the rates providers' charge to determine whether they are just
and reasonable. This determination would be made based on the facts
before us in each individual circumstance. In response to complaints,
providers of Ethernet BDS could make arguments about why the services
at issue cost more to provide than the TDM services to which we would
look to benchmark prices. BDS providers, in addition, may seek
declaratory rulings that the rates they charge for services subject to
our anchor pricing system are just and reasonable. Such declaratory
rulings will provide BDS providers certainty that they are in
compliance with our new anchor or benchmarking pricing regime. We seek
comment on whether the complaint and declaratory ruling processes would
be reasonable processes to utilize in enforcing the proposed pricing
methodology. Should we adopt a timeframe for resolving these complaints
or declaratory rulings? Where the Commission concludes that the rates
for BDS services were unjust and unreasonable, should providers be
found liable for refunds? Are there better approaches to meeting these
goals?
3. Wholesale Pricing
217. Certain competitive LECs argue that business data services
providers are charging them wholesale rates higher than the retail
rates those same providers charge end user customers, and that such
wholesale rates are unreasonable. These competitive LECs argue that
when business data services providers price their wholesale services
higher than their retail services, this can result ``in a price
squeeze, preventing [competitors] from competing with the RBOCs for the
sale of Ethernet service to end users.'' As evidence of this price
squeeze, Windstream cites the fact that the ``ILECs' wholesale
Guidebook rates bear little relationship to real retail prices.
[REDACTED] which is below its wholesale Guidebook rate for an Ethernet
at the same capacity level and term ($1,225) as well as its DS3 three-
year rate ($1,232.50).'' TDS also argues that the ``RBOCs were offering
Ethernet service to wholesale customers such as TDS CLEC at a price
higher than they sold the same service at retail, even though they
avoided some significant costs when selling at wholesale.'' Windstream
adds that, [REDACTED].
218. These allegations raise concerns that are not novel. The
Commission previously has recognized that incumbent LECs can
``strategically manipulate the price of their direct competitors'
wholesale inputs to prevent competition in the downstream retail
market.'' While our proposed framework would move away from regulating
providers based on their historical categorizations, we find it likely
that providers in non-competitive markets have similar abilities and
incentives to engage in such price manipulation. We believe that
existing rules may apply to these concerns regarding wholesale pricing,
and that addressing such concerns in our proposed framework may provide
helpful guidance. We also note that the Verizon/INCOMPAS Joint Letter
states that ``[t]here should be a relationship between wholesale and
retail pricing'' for business data services.
219. We seek proposals for and comment on adopting rules, under
sections 201 and 202(a), ensuring just and reasonable wholesale rates
that would be applicable to provider(s) in non-competitive markets. Are
there other sources of authority that we should consider? How do we
best ensure that we employ sources of authority that operate in a
technology-neutral manner?
220. We ask commenters to explain how frequently business data
services providers charge wholesale customers rates that exceed the
corresponding retail rate. Does the practice vary depending on
bandwidth levels or other product features? Are there other examples of
this practice, and if so where is such pricing taking place? Windstream
argues that such practices violate ``Section 251(b)(1) as an
`unreasonable or discriminatory condition[] or limitation[]' that
results in a failure to provide carrier customers and end users
services `subject to the same conditions,' and violates prohibitions of
sections 201 and 202 against unjust and unreasonable as well as
unreasonably discriminatory practices and charges.'' We invite
commenters to explain whether charging higher rates for wholesale
business data services than for comparable retail services would
violate the Act and our rules. We also seek comment on the view that,
because of
[[Page 36056]]
avoided costs or other factors, reasonable wholesale rates should be
lower than retail. Do the services wholesale customers tend to purchase
use different portions of the incumbent LECs' networks than the
services retail customers purchase? Are there differences in the
incumbent LECs' expenses for sales, marketing, customer service,
technical support, and uncollectibles between wholesale and retail
customers? If there are differences justifying a discount, how would we
determine the just and reasonable discount that would apply to
wholesale rates?
221. We seek comment on what if any steps should be taken to ensure
that customers have a basis for determining whether wholesale rates are
just and reasonable under existing or proposed rules. For example, what
steps are incumbent LECs currently taking to disclose the lowest retail
price to potential customers under existing rules? Are such processes
effective, or should we take additional measures to ensure that
potential customers are aware of the lowest retail price? For example,
should we require some form of public disclosure, such as on a
carrier's Web site? Would such a disclosure put purchasers in a better
position to know whether the rates they are charged are just and
reasonable? Are there other requirements we should adopt regarding
wholesale rates?
222. Finally, we seek comment on the relationship between any
requirement concerning wholesale rates and the rate regulation we have
proposed for TDM and packet-based services in non-competitive markets.
Should both approaches be used? One or the other? Or are there certain
markets (by service, geography, customers or some combination of
factors) for which the relationship between wholesale and retail rates
is most salient?
4. Terms and Conditions
223. As part of the technology neutral framework for regulating
business data services, we propose prohibiting tariff and other
contractual arrangements that condition the sale of business data
services in a non-competitive market on the sale of such services in a
competitive market. Such rules would be applied on a technology neutral
basis. We seek comment on both the harms such agreements may impose and
on implementation of any prohibition in light of the ongoing purchase
agreements for such services that may contain tying arrangements. How
do we balance current business expectations of customers and providers
against the long term harms such arrangements may impose on the
evolution of the competitive market for business data services? We
address specifically three types of tying arrangements that have been
identified in the record: IP migration provisions, typically found in
incumbent LEC tariff pricing plans, provisions that leverage incumbent
LEC tariff pricing plan penalty liability to induce sales of Ethernet
and other services, and geographic tying. To what extent, if at all,
would a prohibition on tying obviate the need to identify multi-
location customers, or any other class of customers, for purposes of
the application of the Competitive Markets Test or alternative
regulatory approach? Are there any other actions that the Commission
should consider to address issues arising from customers who are
purchasing a service that spans competitive and non-competitive
markets?
224. IP migration provisions are common among incumbent LEC pricing
plans. These provisions allow customers to count Ethernet purchases
toward fulfillment of their TDM commitments. We seek comment on whether
we should prohibit such provisions as unreasonable tying arrangements.
To what extent do such provisions encourage and facilitate incumbent
LECs' leveraging of their dominance in the provision of TDM business
data services to increase sales of their Ethernet services? How do the
price cap incumbent LECs' market positions differ between the TDM and
Ethernet business data services markets that are usually covered by the
tariff containing such provisions? We seek comment on whether and, if
so, to what extent incumbent LEC IP migration provisions advantage
incumbent LECs competing for Ethernet sales. If IP migration provisions
were eliminated from incumbent LEC tariff pricing plans, what would be
the impact on customers of those plans? To what extent have customers
relied on IP migration provisions to meet their commitments under TDM
pricing plans? What volume of Ethernet purchases would be affected? If
customers were unable to count such purchases toward fulfillment of
their TDM commitments, what potential penalties would they incur? How
would a prohibition, if adopted, best be implemented? Should customers
be allowed a ``fresh look'' period to re-evaluate their tariff
commitments or other transition period to allow customers to adapt
their purchasing arrangements? Would this unreasonably deprive price
cap incumbent LECs of the benefit of their bargain? How could such a
prohibition best be applied in a technology-neutral manner? What
implementation questions are raised by our proposal to eliminate
tariffing? What additional factors should the Commission consider?
225. As explained above, competitive LECs have more recently
alleged incumbent LECs use tariff pricing plan penalty liability as
leverage to induce competitive LECs to agree to large Ethernet
purchases from the incumbent LECs. They claim that these practices
represent unreasonable tying arrangements and could extend incumbent
LECs' dominance of TDM business data services to IP services. We seek
comment on prohibiting the use of provisions that offset penalty
liability from tariff pricing plans in Ethernet commercial agreements.
We note that such provisions appear in multiple commercial agreements
submitted by the four large incumbent LECs in response to the Bureau's
tariff investigation. How pervasive are these practices? What is their
impact on competition for Ethernet services? What would be the impact
of eliminating such provisions on buyers, sellers and the market
generally? To what extent do such agreements contain change of law
provisions in anticipation of changes such as this? We also seek
comment on the use of other provisions in commercial agreements that
tie the sale of Ethernet services to the sale of services by providers
in non-competitive markets. Finally, if the Commission were to bar the
use of such provisions in Ethernet commercial agreements, how should
the Commission implement such a requirement? Should the Commission, as
some competitive LECs have advocated, require commercial agreements
that link purchases to tariffed penalties or other tariff provisions be
filed with the Commission as a contract tariff? What should the
parameters be of such a requirement? Would any other type of linkage
require such agreement to be filed as a tariff? How could such a
prohibition best be applied in a technology-neutral manner?
226. First, we recognize that in the competition analysis above we
find that the competitive triggers adopted in the Pricing Flexibility
Order were poor measures of competition. In this FNPRM, however, we
propose a new framework that includes a Competitive Market Test to
determine areas that are competitive and non-competitive. The
assertions and arguments concerning tying across markets subject to
different levels of market concentration remain relevant in the new
regulatory framework. We seek additional comment on whether and to what
extent
[[Page 36057]]
we should be concerned geographic tying could take place under the
proposed technology-neutral framework and, if so, what remedial action
we should take.
227. While prohibiting such tying arrangements would minimize
potential harm, it would also eliminate the ability of providers and
purchasers to link TDM purchases and Ethernet purchases in any way,
including the use of IP migration provisions in TDM tariffed services
and the use of credits to offset penalty liability conditioned on the
purchase of Ethernet service from the provider. It is clear from the
record that linking DSn purchases and Ethernet purchases involves
material short term benefits for purchasers as they attempt to manage
the effects of the decline in TDM services and the transition to IP
services. Some competitive LECs advocate in favor of such arrangements
and incumbent LECs generally defend their reasonableness. Considering
the benefits of these arrangements may be particularly relevant given
the current decline in TDM sales and the consequent penalty liabilities
that decline involves.
228. The Commission has established as one of its priorities
facilitating technology transitions. While we share the concerns of
commenters that incumbent LECs may have the incentive and ability to
leverage their market position in TDM services to increase their
Ethernet sales, we also recognize that addressing the harms of tying
TDM BDS to Ethernet services may require a more nuanced approach to
reflect the implications of such a prohibition on the technology
transition. AT&T states that such restrictions would ``artificially
discourage the replacement of TDM services with Ethernet services.'' We
seek comment on approaches that would encourage the transition to
Ethernet while limiting an incumbent LEC's ability to leverage its
market position in the provision of TDM BDS to gain a similar position
in the provision of Ethernet offerings. Are there other ways to provide
both parties with the benefits from these arrangements while limiting
the harms to competition in the market for business data services? We
also seek comment on ways to allow the benefits of such arrangements
during a defined period of time to facilitate the industry's transition
to IP services.
229. Finally, we seek comment on how we should implement any
prohibition on tying arrangements the Commission may adopt. What effect
would adopting such a prohibition have on existing tariff and
contractual arrangements in tariffs and commercial agreements? Should
the Commission consider either grandfathering existing agreements or
providing a transition period to allow parties to adapt their
agreements to reflect such a prohibition? Should there be a ``fresh''
look period to allow customers to reallocate their purchases in light
of the modifications or prohibitions we propose to tying arrangements?
230. Percentage commitments are requirements included in some
incumbent LEC tariff pricing plans that require customers to commit to
buy, over the term of the plan, a high percentage of the amount of
services they elect to purchase when initiating or renewing purchases
through a tariff pricing plan. Given the framework we adopted in the
Tariff Investigation Order that addresses the special access
marketplace by focusing on penalties, we declined to take action on
percentage commitments in that Order. We seek comment on whether this
approach is sufficient to ensure that percentage commitments will not
harm competition, impede investment and deployment of facilities-based
competitive networks, or hinder the transition to IP-based business
data services.
231. We also seek to broaden our inquiry into minimum percentage
commitments in this FNPRM and seek comment on the impact percentage
commitments have on the provision of TDM based business data services.
With regard to the TDM based market, how prevalent is the use of such
commitments in tariff pricing plans and contract tariffs beyond those
investigated in the Bureau's tariff investigation? What impact do such
commitments have systemically on the market for TDM based business data
services? How do they vary? Competitive LECs claim that such
commitments tend to ``lock up'' or foreclose significant portions of
the market for TDM based business data services, impairing competition
and inhibiting technology transition. Is that still the case? Incumbent
LECs assert in the tariff investigation that the decline in TDM based
business data services market effectively rendered the competitive
LECs' lock up arguments moot. We seek comment on whether that is in
fact the case or whether percentage commitments operate differently in
a declining market. What is their effect in a declining TDM market?
What remedies would be appropriate to ensure that percentage
commitments are reasonable and allow incumbent LECs the flexibility to
manage their businesses while also minimizing the potential harms
associated with ``locking in'' competitive LEC customers? Should the
Commission consider prohibiting the use of percentage commitments,
limiting the level at which the commitment is set, or taking some other
remedial step to ensure they do not negatively impact the market?
232. We also seek comment on the use of percentage commitments in
commercial agreements for the sale of packet based business data
services such as Ethernet. Competitive LECs cite the incumbent LECs'
use of such requirements in Ethernet commercial agreements and claim
incumbent LECs are attempting to lock up or control their Ethernet
purchases. Competitive LECs cite in particular the fact that their
Ethernet commercial agreements with incumbent LECs typically involve
large scale purchases and involve the sale of other telecommunications
services such as mobile wireless and long distance service. How
commonly are percentage commitments used in Ethernet commercial
agreements and at what percentage levels are they set? How do they
impact the market for Ethernet business data services? Should the fact
that commercial agreements can involve such large scale purchases
impact our analysis? If the Commission found percentage commitments
were impacting the Ethernet market, what remedies should the Commission
consider adopting? To the extent commenters suggest the adoption of
remedies, they should also address how such remedies should be
implemented.
233. Term commitments require customers that participate in a term
pricing plan to commit to continue to make those purchases for a set
term of months or years. Term commitments in tariff pricing plans vary
considerably from one year to as long as ten years. We declined to
address term commitments in the Tariff Investigation Order, instead
addressing competitive LECs' concerns by prohibiting penalties that
exceed the incumbent LECs' expectation damages. We seek comment on
whether action on term commitments is necessary to ensure that they
will not harm competition, impede investment and deployment of
facilities-based competitive networks, or hinder the transition to IP-
based business data services. We also seek to broaden our inquiry into
term commitments in this FNPRM and seek comment on the impact term
commitments have on the provision of TDM based business data services
generally. How prevalent is the use of such commitments in tariff
pricing plans and contract tariffs beyond those investigated in the
Bureau's tariff investigation? What impact do such
[[Page 36058]]
commitments have systemically on the market for TDM based business data
services? In the tariff investigation, the incumbent LECs submitted
data that showed that the average term lengths for agreements under the
plans at issue was considerably longer than the term lengths typically
reported by competitive LECs. It also showed that a very high
percentage of all sales in the plans at issue--over 97 percent--occur
in plans longer than three years. Are longer term agreements in any way
evidence of a seller's market power? Do incumbent LEC term plans that
are longer than most competitive LEC plans tend to inhibit the
technology transition or otherwise impact competition in the TDM based
market? What remedies would be appropriate to ensure that term
commitments are reasonable and allow incumbent LECs the flexibility to
manage their businesses while also minimizing the potential harms
associated with the alleged ``locking in'' competitive providers?
234. We also seek comment on the use of term commitments in
commercial agreements for the sale of IP based business data services
such as Ethernet. How do term commitments in Ethernet commercial
agreements compare with those in TDM tariff pricing plans and contract
tariffs? To what extent do term commitments impact the Ethernet market?
How does the length of term commitments offered by competitive
providers in Ethernet commercial agreements compare with the length of
term commitments offered by incumbent LECs? What remedies, if any,
should the Commission consider adopting either to limit or condition
term commitments in Ethernet commercial agreements? To the extent
commenters suggest the adoption of remedies, they should also address
how such remedies should be implemented. To the extent that the
Commission should consider restrictions on term commitments, should
such restrictions apply solely to non-competitive markets or more
broadly to all markets?
235. Under upper percentage thresholds, if a buyer's purchases
increase more than a set percentage above their initial volume
commitment during the term of the plan, the buyer is required either to
commit to an increased purchase volume or to pay an overage penalty. We
did not address upper percentage thresholds in the Tariff Investigation
Order, but instead seek comment on whether we should adopt a broad
prohibition on such requirements in non-competitive areas.
236. We seek comment on whether the use of upper percentage
thresholds in tariffs and contract tariffs generally is an unreasonable
practice. As discussed above, in both the Tariff Investigation Order
and earlier in this FNPRM, the price cap LECs' all-or-nothing
requirements often served to restrict customer options and inhibit the
ability of competitive LEC customers to plan for their network
evolution. Such unreasonable restrictions also may have contributed to
the asserted lock in effect of upper percentage thresholds. We seek
comment on whether the price cap LECs' arguments about their potential
risk exposure when customers add large amounts of circuits to their
plans with portability are more persuasive if the customer has the
choice to place its demand in a term plan without portability when
adding new circuits to its agreements with the price cap LEC. We seek
comment on whether upper percentage thresholds are unreasonable and
should be prohibited for providers of TDM business data services in
non-competitive markets. Under what circumstances might upper
percentage provisions be found reasonable? In the record, incumbents
LECs argued they incurred risks and costs when an increase in purchases
reached a certain point; however, they failed to provide any financial
information on what these costs are or how they are related to actual
upper percentages or overage penalties that are used. We seek comment
on what showing a carrier should be required to make if it supports
such a provision. Will removing the all-or-nothing requirements from
the providers' tariffs provide the flexibility customers need to make
different choices if they do not want to increase their spend under an
upper percentage threshold? If we were to adopt a prohibition on upper
percentage thresholds, what is an appropriate transition period for
phasing out these provisions?
237. We seek comment on the extent to which commercial agreements
for the provision of Ethernet-based service assess upper percentage
thresholds. We also seek comment on whether these provisions are found
elsewhere in the telecommunications industry or offered by other
carriers other than in incumbent LEC tariffs. Are upper percentage
thresholds in Ethernet commercial agreements unreasonable and, if so,
should the Commission prohibit them in this context as well? Should
such a prohibition apply solely to non-competitive markets or more
broadly to all markets?
238. Overage penalties effectively function as the enforcement
mechanism for the upper volume thresholds addressed in the previous
section of this FNPRM. We did not address overage penalties in the
Tariff Investigation Order, but instead seek further comment here. We
seek comment on the use of overage penalties to enforce upper
percentage thresholds in TDM based tariffs and contract tariffs. If the
Commission does not eliminate upper percentage thresholds, we seek
comment on the circumstances under which the Commission should find
overage penalties to be unreasonable. For example, in the Tariff
Investigation Order, we determined that shortfall penalties that
exceeded the seller's revenue expectations were unreasonable. We seek
comment on whether this is an appropriate approach to assessing overage
penalties as well. How would such a measure work in the case of an
overage? How should the Commission determine a seller's revenue
expectations in an overage situation? Are there alternative approaches
to determining the outer bound of reasonableness for overage penalties?
Commenters advocating for the use of a different measure of reasonable
overage penalties should explain their reasons for not applying the
standard used to assess shortfall penalties and identify an alternative
standard using examples. What is the best way to structure overage
penalties to ensure that the fees reasonably compensate providers while
not excessively penalizing purchasers?
239. We also seek comment on whether and to what extent overage
penalties are contained in commercial agreements for the provision of
Ethernet business data services. Is it reasonable to include such
penalties in agreements for Ethernet business data services in non-
competitive areas? If so, how do these contracts calculate these
penalties? If the Commission decides to eliminate overage penalties or
impose limitations on them, how should it implement those decisions?
Would there be any need for the Commission to consider adopting any
transitional rules to facilitate implementation? Should such a
prohibition apply solely to non-competitive markets or more broadly to
all markets?
240. Competitive LECs have asserted certain provisions in incumbent
LEC tariff pricing plans that apply upon expiration of a purchaser's
agreement to buy services tend to lock purchasers into re-committing to
purchase under those plans under essentially the same prices, terms and
conditions of their previous agreements. These provisions include
requirements for automatic renewal of subscription agreements under the
same terms and conditions as a previous agreement and requirements that
force buyers to pay higher,
[[Page 36059]]
undiscounted month-to-month rates immediately upon expiration of an
agreement. Competitive LECs claim these provisions impair competition
and inhibit technology transitions. We seek comment on the
reasonableness of such provisions in tariffs and commercial agreements
in areas where competition is not present. We also seek comment on
existing so-called ``evergreen'' provisions in some tariff pricing
plans that allow customers to extend service under the same prices,
terms and conditions for certain periods of time following the
expiration of an agreement, including whether we should require such
provisions in tariffs and commercial agreements in non-competitive
markets.
241. Incumbent LEC tariff pricing plans commonly contain provisions
related to the expiration of a purchaser's agreement. It is inherent in
the relatively long-term nature of the need for and provision of
business data services that parties generally must renegotiate their
agreements at the expiration of an agreement in order to continue the
service arrangement. Parties typically negotiate the terms and
conditions of a subsequent agreement as they approach the end of the
term of an existing agreement. The provisions we seek comment on--
automatic renewals and requirements to revert to undiscounted, month to
month rates--may impose unreasonable constraints on purchasers whose
agreements have expired in light of the long term nature of broadband
data services agreements and the substantial logistics required to move
purchases to other providers or construct facilities to self-provision.
242. Provisions requiring automatic renewal of agreements are
included in certain incumbent LEC tariff pricing plans. For example,
the Commitment Discount Plan (CDP) in Verizon Tariff No. 1 states
``[i]f the CDP Customer does not notify the Telephone Company of its
choice during the two (2) month extension, a new CDP will begin based
on the previously effective commitment period.'' We propose to prohibit
automatic renewal provisions in tariff pricing plans and contract
tariffs for the provision of TDM based broadband data services in non-
competitive areas as an unreasonable constraint on purchasers' ability
to modify their commitments or seek alternative providers to supply
their needs. We seek comment on whether automatic renewal provisions
are unreasonable. We also seek comment on how common they are and how
frequently they are invoked in practice. What is the practical impact
of such provisions on purchasers' options at the expiration of an
agreement? How do they impact the dynamics between the parties as they
renegotiate their arrangements? How do they impact the flexibility and
the timeframe customers have to negotiate or to develop alternative
sources of supply? Do competitive LECs also impose automatic renewal
provisions in their business data service sales agreements? We also
seek comment on whether such provisions are used in commercial
agreements for Ethernet business data services? Additionally, are such
provision included in agreements for managed services sold to retail
end users? Finally, we seek comment on whether such a prohibition
should apply solely to non-competitive markets or more broadly to all
markets?
243. Given the comments in the record, we are particularly
concerned that incumbent providers have the incentive and ability to
use the expiration of a contract as an opportunity to increase charges
for ongoing service and use that as leverage to induce customers to
recommit to their pricing plans. In areas without sufficient
competition, these provisions have the potential to put increased
pressure on customers to renew contracts with incumbent providers, even
if the terms are unfavorable, to avoid paying higher rates for an
extended period of time. We therefore believe that any provision that
enables a provider to increase its rates upon the expiration of either
a tariff or commercial agreement for TDM or Ethernet-based service in
areas without sufficient competition is unreasonable under section 201
of the Act.
244. We seek comment on our view and on the following additional
questions. How do such provisions constrain purchasers' options at the
end of an agreement? Could the reversion to month to month rates be
understood as, in effect, a penalty enforcing the re-subscription to a
subsequent agreement? How reasonable is it to assess month to month
rates, after a purchaser has already fulfilled its commitments under a
previous agreement which presumably compensated the incumbent LEC for
the circuits involved? Do competitive LECs also impose such a
requirement at the expiration of their sales agreements? If we were to
require the modification of such provisions, should the Commission
determine that evergreen provisions are a more reasonable alternative?
245. We note that incumbent LECs argue that one of the benefits to
a provider of offering term discount plans is that the plans allow it
``to recover its costs over the life of the plan.'' If the life of the
plan has ended, and the incumbent LEC has presumably recovered its
costs apart from on-going maintenance costs, is there any justification
for allowing the incumbent LEC to increase the price and charge higher
rates upon termination? How do these higher rates compare to the
shortfall penalties that customers pay if they terminate their plans
early? We also seek comment on whether an automatic reversion to
undiscounted rates is a feature common to IP based Ethernet commercial
agreements. To the extent such provisions appear in Ethernet commercial
agreements, should the Commission consider prohibiting or otherwise
restricting them? Finally, should such any such prohibition or
restriction apply solely to non-competitive markets or more broadly to
all markets?
246. We also seek comment on so-called ``evergreen'' provisions
that allow a purchaser to continue to purchase services under the same
terms and conditions following the expiration of an agreement as it had
under the expired agreement. We seek comment on whether the Commission
should require the inclusion of evergreen provisions in tariff pricing
plans and commercial agreements for business data services in non-
competitive markets. Would requiring carriers to provide evergreen
status on a monthly basis following the expiration of an agreement
provide purchasers flexibility in assessing their options or
transitioning their purchases to IP based services? Would it be
reasonable to impose such a requirement on providers in markets without
sufficient competition, which would be assured additional purchases of
their services under terms they have already agreed to?
247. We also seek comment on whether Ethernet commercial agreements
commonly include evergreen provisions to ensure continued service at
the same rates, terms and conditions following the expiration of an
agreement. Are such provisions more common in Ethernet agreements than
in TDM pricing plans? With regard to applying this framework to the
provision of Ethernet-based business data service, do parties face the
same constraints when negotiating agreements for TDM services and
Ethernet-based services after a contract's expiration? Are there
special terms and conditions that only apply when parties are
negotiating a move from a provider's TDM services to a provider's
Ethernet-based services and, if so, what impact do those terms and
conditions have on the provision of Ethernet services? We also seek
comment on whether a
[[Page 36060]]
mandate for evergreen provisions should apply solely to non-competitive
markets or more broadly to all markets.
248. We seek comment on whether required evergreen status should be
time limited. If so, what would be a reasonable period of time that
would provide flexibility to purchasers but also not unreasonably
extend uncertainty for providers in non-competitive areas? Should
customers be allowed to pay monthly rates equal to those under the
original agreement for up to one year past the contract's expiration?
Would this provide sufficient time to account for the average length of
contract negotiations and to protect the interests of both parties? Do
contract renewal negotiations typically extend beyond one year, and if
they do, are there examples of providers that are willing to continue
offering rates at the same level as those in the expired deal? We seek
comment on this time period and whether a shorter or longer term would
be more appropriate.
G. Alternative Approaches To Reforming BDS That Fulfill Core Goals
249. In addition to seeking comment on the new regulatory framework
outlined above, we invite commenters to suggest alternative frameworks
to apply to BDS. Are there other regulatory frameworks that would
minimize regulation where competition is sufficient to constrain BDS
rates, terms, and conditions and focus regulatory action on
circumstances in which sufficient competition is lacking? All proposals
should address the commercial practicalities and administrative
feasibility of applying the alternative framework and explain how it
furthers the Commission's core goals of promoting investment,
innovation, competition, and protecting customers in the BDS
marketplace.
250. In Part V.D.2 above, we invite comment a Competitive Market
Test that focuses on product markets, customer classes, business
density, and the number of facilities-based providers in a given
geographic area, such as the census block. In this section, we seek
comment on alternative approaches and criteria for determining whether
or not a market is competitive. Commenters proposing such an
alternative should explain how it will further the Commission's core
goals in application and address administrative feasibility.
251. In Part V.D.5 we ask for comment as to which provider(s)
specific rules in a non-competitive market should apply and how the
Commission should determine whether to apply specific regulation to a
particular provider, including the use of market shares, in non-
competitive markets. In this section, we seek alternative proposals
that would ensure that the Commission limits regulation to that which
is necessary to ensure just and reasonable rates, terms and conditions
within a non-competitive market while still encouraging new market
entrants. Should we use a test of market power and, if so, how should
market power be defined and how would such a market-power test be
applied in a way that minimizes burdens on providers and the
Commission? As to the scope of regulation, should we focus on the
conditions in non-competitive markets and consider regulations that
would apply generally or should we apply specific rules only to certain
entrants, and if so, which ones? And how can we maintain and/or create
incentives for new entry? How should we consider the potential presence
of barriers to entry and policies that might serve to lower artificial
barriers to entry? In general, what is the best form of regulation of a
non-competitive market? As in Part V.D.5, we ask commenters to consider
the impact of alternative new regulatory frameworks on investment and
innovation.
252. For any proposed frameworks submitted in response to this
section, commenters should explain how any triggers would be applied,
which provider(s) would be subject to regulation and how such
regulation would be implemented and enforced. For example, would there
be tariffs or another mechanism? How would any alternative market test
be applied, and would there be a process for challenges? Commenters
submitting proposals they believe are simpler than the framework
proposed above should explain why and how the administration would
differ from the alternative proposals in this FNPRM.
253. While we have focused in the immediately preceding paragraphs
on alternative tests of market competitiveness, we also encourage
commenters to consider and suggest higher-level alternative regulatory
regimes that would further the Commission's core goals.
H. Deregulation of the Pricing Process
254. In this section, we consider modifications to existing pricing
mechanisms to implement the technology neutral regulatory framework for
business data services proposed above. The proposed actions are
intended to remove significant regulatory burdens, maintain price cap
constraints where necessary to ensure just and reasonable rates, and
create incentives to facilitate the technology transitions. First, we
propose to replace the current pricing flexibility regime with rules
based on the results of the Competitive Market Test. Under such rules,
we would move competitive services out of price caps and move non-
competitive services into a structure that provides the protections of
price caps while allowing providers to negotiate individual contracts.
Second, we propose a path to detariff TDM business data services while
maintaining price caps on a detariffed basis. Finally, we seek comment
on a voluntary mechanism that would provide carriers with the
flexibility to adjust price cap rates for TDM BDS when replacement
packet-based business data services are available.
255. We recognize that in this FNPRM we propose a number of changes
to our interrelated regulatory rules. Specifically, in addition to the
proposals in this section, we propose adopting a price cap productivity
factor and relying on price cap TDM rates as benchmarks for non-
competitive IP rates. We seek comment on any impacts that various
proposals may have on each other.
1. Replacement of Pricing Flexibility Rules
256. In this section, we seek comment on the rules that will apply
to TDM services currently subject to regulation under price caps as
well as the pricing flexibility rules under the new regulatory
framework. Here, we propose and seek comment on changes to the existing
pricing flexibility rules.
257. We propose to treat competitive TDM and packet-based BDS on a
technology neutral basis and propose further to remove TDM BDS
determined to be competitive under the Competitive Market Test from
price cap regulation and apply the competitive regulatory framework
proposed above to these services. We seek comment on these proposals.
Are there any reasons to treat competitive TDM differently from other
competitive business data services? Are there implementation concerns
with regulating these competitive services in this manner? Why or why
not? If so, we seek proposals for addressing such concerns. If we adopt
these proposals, should we require mandatory detariffing?
258. The Competitive Market Test will likely find some business
data services are non-competitive and draw boundaries for such findings
on a level more granular than an MSA, the current pricing flexibility
boundary. Accordingly, it is possible that such non-competitive
business data services may currently be regulated under price
[[Page 36061]]
caps, Phase I pricing flexibility or Phase II pricing flexibility
rules. Regardless of their current status, a non-competitive finding is
a determination that we cannot rely on competition to constrain rates,
terms and conditions to just and reasonable levels. We thus would need
to have rules in place to constrain rates to just and reasonable
levels. Our analysis of the application of the pricing flexibility
rules indicates that customers have often benefited from individually
negotiated contracts, and we believe that allowing such contracts will
facilitate the development of a competitive market where possible. In
order to constrain rates to just and reasonable levels and preserve the
benefit of negotiated contracts where available, we propose to subject
non-competitive TDM business data services, regardless of the currently
applicable price cap and pricing flexibility rules, to a single, light-
handed price cap regime that protects customers while providing
flexibility to facilitate competition as it evolves. Specifically, we
propose to apply the substance of the current Phase I pricing
flexibility requirements to TDM business data services offered in non-
competitive areas and seek comment on this proposal. Do parties support
this proposal, why or why not? What concerns, administrative or
otherwise, are raised by this proposal? Commenters asserting such
services should be treated differently based on their current
regulatory status should explain why that is consistent with the
overall framework we propose in this order.
259. We seek comment on what changes to our current Phase I pricing
flexibility rules are necessary to apply their substance to non-
competitive TDM business data services. We propose to base our
application of those rules and any necessary rule modifications on our
authority under sections 201 and 202 of the Act. We seek comment on
this proposal.
I. Additional Regulatory Incentives for Price Cap Carriers
260. We seek comment on potential regulatory forbearance and
flexibility that will permit price cap incumbent LECs to continue to
facilitate the technology transition, and to have increased incentives
to develop innovative products and services.
261. We believe that implementation of our proposal for broadband
data services offered in competitive markets would require that we
forbear from the tariffing requirements in section 203 of the Act to
the extent a BDS provider is currently subject to those requirements.
We seek comment on this view and on the benefits of detariffing to
customers and carriers in a competitive area. We also seek comment on
whether the Commission should forbear from sections 204 and 205 of the
Act. We propose forbearing to the extent necessary to implement our
proposed framework and to condition the forbearance on the continuing
existence of a competitive market under the Competitive Market Test. We
expressly contemplate that should a market become non-competitive, then
all of the regulation of non-competitive markets would apply, including
price cap regulation. We invite comment on these proposals and on
whether such conditional forbearance would meet the statutory
forbearance criteria.
262. We propose the Commission make a similar finding for BDS in
non-competitive areas, including TDM services under the section 10(a)
standard, allowing forbearance from the tariffing requirements of
section 203 of the Act, but continuing to require price cap regulation.
We seek comment on this proposal, including the costs and benefits of
tariffing in a non-competitive market or a market in which competition
may be evolving over time. How would such a regulatory approach work to
meet the goals of our proposed framework? How should the Commission
consider the effect of any such forbearance on competition as set forth
in section 10(b)? If the Commission decides to forbear from section
203, should it require mandatory detariffing as it did with interstate
interexchange services or should it allow permissive tariffing? What
would be the benefits of either approach? Should the Commission
consider forbearing from sections 204 and 205 for these services? Would
relief from tariffing and other provisions meet the statutory
forbearance criteria? Would such relief provide additional incentives
for innovation and development of new services? How would such relief
benefit consumers and businesses? If providers continue to file similar
information with the Commission as a tariff, we ask whether this
impacts commenters' views on the benefits and burdens of such approach.
263. While we find above that TDM and packet-based BDS are in the
same product market, these services are not identical and we also
recognize significant switching costs in the market. We believe our
regulatory framework can and should take account of legitimate
differences in the provision of these services. We seek comment on how
to do so and how to harmonize our goal of technological neutrality with
the application of price cap regulation? Are there other methods of
regulation that we should consider applying to these services or
packet-based BDS to achieve our goals?
264. We note that without tariff filings, carriers would not
receive the protection pursuant to section 204(a) of the Act of deemed
lawful status for filing tariffs on a streamlined basis. This status
immunizes carriers from damages liability for the periods in which the
streamlined tariffs are in effect. We seek comment on how removing this
protection would impact carriers and customers and the remedies
available for rate challenges, including potential retroactive refunds.
Should we provide carriers the option of permissive tariffing that
would allow incumbent LECs to retain the ``deemed lawful'' protections
of section 204(a) if the carrier should choose that option?
265. How, if at all, should the Commission modify its price cap
filing rules in light of any forbearance from tariffing requirements?
Under current rules, price cap incumbent LECs are required to submit a
yearly filing to demonstrate that the carrier's API does not exceed its
PCI. Would any additional rules be necessary to provide for adding new
services? We seek comment on how any such filing should occur. Should
the Commission maintain the yearly annual access charge filing
requirement for this showing? Are there other alternatives that would
ensure compliance with the price cap rules? Without tariff filings, how
should the Commission best ensure that price cap incumbent LECs are
offering rates consistent with their price cap filings? How should the
Commission address a violation? Absent tariff filings, how would the
Commission examine the newly filed rates or require the price cap
incumbent LEC to modify its rates, to the extent appropriate, in the
event of a violation? Would the Commission need to take formal action
against the carrier and, if so, what form would that take? Are there
other means for the Commission to review changes to a carrier's rates
without the tariff filing requirement? Would the public disclosure
requirement discussed below be sufficient?
266. What additional rules or procedures would be necessary to
address rate or discount plan changes that would have resulted in a
tariff filing absent forbearance? For example, under our current rules,
a price cap LEC that grandfathers or otherwise discontinues a rate
discount plan would be reducing the rate options for that service,
which would constitute a rate restructure pursuant to section 61.49(e)
of our rules, requiring the carrier to file supporting
[[Page 36062]]
materials sufficient to make the adjustments to each affected API and
SBI. Such a change may or may not impact the price cap, depending on
the impact such a change will have on customer choices going forward.
For example, if the price cap LEC grandfathers a service that has no
customers, it potentially will have no impact on the carrier's API or
SBI. The same is not true when a carrier grandfathers a pricing plan
with substantial customers. We seek comment on what, if any, new
requirements are necessary to ensure effective operation of the price
cap as carriers begin to discontinue various discount plans.
267. Even if the Commission decides to forbear from tariffing
requirements, we understand the importance of transparency for the
price cap incumbent LEC's TDM rates. Accordingly, we propose to require
price cap incumbent LECs to publicly disclose the rates, terms, and
conditions for services currently subject to tariffing requirements. We
seek comment on this proposal. How should disclosure of rates be
implemented? Is posting on a carrier's Web site sufficient? Should the
public disclosure requirement be limited to non-competitive markets?
268. As the technology transition continues to progress, one option
for promoting an efficient move from TDM services to packet-based
business data services is to allow BDS providers, on an entirely
voluntary basis, the option to place some or all of their packet-based
services under price cap regulation by including them in the special
access basket. Moving these services into the basket would create
flexibility for the provider to make rate adjustments to services
within the confines of the cap. This would allow carriers flexibility
to set prices for both packet-based services and TDM services based on
the relative cost of and demand for these services, as would be the
case in a competitive market. At the same time, the price cap would
minimize the carriers' ability to charge non-competitive prices. We
seek comment on this voluntary option. If the Commission were to permit
this option, how should it be implemented? Would it incentivize
technology transitions? Should packet-based services be placed in a
separate service category and/or subcategories within the special
access basket? If so, should pricing flexibility within the packet-
based service category and/or subcategories be limited to an annual
increase of five percent, relative to the percentage change in the PCI,
the same percentage that applies to existing special access service
categories and subcategories? Should providers be able to utilize this
option at any time, or should there be a window or multiple windows of
opportunity for when it would be available?
J. Forbearance Grants and Deemed Grants
1. Verizon Deemed Grant
269. As discussed above, in 2006 Verizon's Enterprise Broadband
Forbearance Petition was deemed granted by operation of law after the
Commission did not act on that petition within the statutory time
limit. Consistent with Enterprise Broadband Forbearance Orders and with
the Commission's unanimous commitment to apply the AT&T Forbearance
Order to Verizon, we propose to reverse the Verizon deemed grant to the
extent it encompasses forbearance relief not granted other carriers. We
additionally propose that this decision would extend to Hawaiian Tel
and to the legacy Verizon portions of FairPoint and Frontier, which
were ``Verizon telephone companies'' at the time of the deemed grant.
We invite comment on these proposals and ask whether such action would
be consistent with the statutory forbearance criteria.
2. Other Forbearance Actions
270. In this FNPRM, we propose a number of interrelated changes to
our regulation of business data services, many of which would allow or
require carriers to detariff business data services that are presently
provided subject to the tariffing requirements in section 203.
Implementing those proposed changes would require that we expand the
prior forbearance from section 203 to additional business data services
providers and additional business data services. We believe we should
expand that forbearance to the extent necessary to implement any
regulatory changes we adopt in this proceeding. We invite comment on
this view and on whether such forbearance would be consistent with the
statutory forbearance criteria.
3. Legal Standard and Procedure
271. We believe that we have statutory authority to reverse a
forbearance grant and a forbearance ``deemed grant'' by the failure of
the Commission to act within the deadline of section 10(c). As the D.C.
Circuit has observed, the Commission's forbearance actions--and the
forbearance relief ``deemed granted'' to Verizon--are ``not chiseled in
marble.'' Instead, the Commission may ``reassess'' that forbearance as
it ``reasonably see[s] fit based on changes in market conditions,
technical, capabilities, or policy approaches to regulation'' of
business data services. We invite comment on the legal standard we
would need to meet to reverse forbearance that has been deemed granted.
Where, as here, Verizon does not oppose reversal of its deemed granted
forbearance to place it on the same footing with other carriers as part
of our proposed new framework, we believe that this standard is met. We
invite comment on this analysis.
272. While we choose to address potential forbearance reversal in
this rulemaking proceeding, we do not here consider whether rulemaking
procedures are required for a reversal of forbearance. Nor are we, in
taking this procedural approach here, classifying forbearance
proceedings as necessarily requiring rulemaking procedures. The
Commission has previously declined to classify forbearance as either
adjudication or rulemaking. Rather, we find only that it is appropriate
to address the proposed reversal here through a rulemaking proceeding.
K. Monitoring the Marketplace Going Forward
273. To update the analysis of the BDS industry going forward, we
propose to conduct a periodic collection of data every three years,
starting with the collection of year-end 2017 data. We seek comment on
this proposal and alternative mechanisms that would assure our market
definitions and competition analysis are updated on a regular basis.
1. Mandatory Periodic Collection
274. We propose to require BDS providers to submit information
similar to what was collected previously for 2013, starting in 2018 and
submitting 2017 data. In light of our experience with the data
collection and analysis conducted, significantly paring down the number
of providers required to report and the amount of reported information
to those data categories most relevant to our analysis is appropriate.
As with the earlier collection, we plan to focus on obtaining data on
market structure, pricing, demand, and responses to competitive
pressures. We propose, however, to eliminate many of the questions
directed at providers related to terms and conditions, coverage
footprints for ``best efforts'' services, marketing materials,
disconnection policies, and short term and long-range promotional and
advertising strategies. Our prior experience shows that the burden on
filers of collecting such information going forward is not justified by
the corresponding benefits of having this information for our core
[[Page 36063]]
market analysis. We do not underestimate the importance of best efforts
service, however, but can account for this service by using the
information already collected by the Commission annually pursuant to
the FCC Form 477 (Local Telephone Competition and Broadband Reporting).
We also propose to not collect data from BDS purchasers on a mandatory
basis and to instead use voluntary survey sampling of purchasers as
discussed below. These changes would substantially decrease the burden
on filers while providing the Commission with the data necessary to
periodically update its analysis.
2. Providers Covered by the Periodic Collection Requirement
275. We propose to narrow the scope of our collection to minimize
burdens on smaller providers where possible without compromising our
analysis. While we would require all price cap incumbent LECs to
provide data, we are considering excluding from the periodic collection
those competitive providers below a set threshold based on either
location with connection, number of BDS customers, or BDS revenues.
276. We continue to analyze whether the exclusion of providers
below various thresholds will significantly impact the results of our
price regressions and other methods of analysis. We seek comment on
this proposal generally and ask for commenters to suggest appropriate
thresholds and to quantify the potential impact of any exclusion on our
analysis of the BDS industry.
3. Required Data and Information
277. Based on what we have learned, the most valuable data to our
analysis is on the providers' locations with connections and billing
information. Accordingly, we propose to require incumbent LECs to
report locations where they have connections and provided BDS over the
applicable period consistent with the information collected for
questions II.B.2-3 in the 2015 Collection. Competitive providers would
report locations where they have in-service or idle connections
consistent with the reporting requirements for questions II.A.3-4 in
the 2015 Collection. The reported locations would include all locations
to which the competitive provider has a fiber connection (whether idle
or in-service). Providers would also submit monthly billing information
for the applicable period to the billed circuit element and linked to
the served location consistent with the reporting requirements for
questions II.A.12-14 for competitive providers and II.B.4-6 for
incumbent LECs in the 2015 Collection.
278. Other categories of information required from providers as
taken from the 2015 Collection would include the reporting of:
BDS revenues for applicable period separated by customer
and technology as required by questions II.A.15-16 for competitive
providers and questions II.B.8-9 for incumbent LECs;
Wire centers subject to price cap regulation by incumbent
LECs for the applicable period as required by question II.B.7;
Fiber network maps and information on fiber nodes by
competitive providers as required by question II.A.5; and
Information on recent RFPs from competitive providers as
required by question II.A.11.
279. During the course of the Bureau's review of the collected 2013
data and ex parte discussions with stakeholders, we have also
identified additional categories of questions or variations of previous
categories of questions for which we propose to collect from all
covered providers to assist with updating the Commission's analysis.
These categories are as follows:
A report on the different categories of BDS offered,
including the different bandwidth speeds offered and the performance
level guarantees offered with each type of service;
Descriptions of how the provider structures its market
operations to focus on particular classes of customers and the package
of services marketed to each customer class;
Information on BDS customer churn data, wins and losses
over the applicable period, and the provider type to whom they are
winning or losing customers to the extent known;
Internal business documents assessing competitive
pressures in the marketplace and changes to business operations in
response to competitive pressures;
Information to better track customer purchases across
providers;
Data on managed services purchased, which include a BDS
component; and
Information specific to the sale of leased lines to, and
use by, carrier customers.
280. We believe this additional information would help the
Commission further assess BDS demand by different classes of customers,
the needs of those customer classes, and the level of competition in
the marketplace. These changes would also address recommendations for
improvements by our outside economic consultant. We seek comment on the
proposed data points discussed above. In addition, depending on the
ultimate criteria adopted for a Competitive Market Test, we seek
comment on alternative data points for collection so the Commission can
better measure the effectiveness of the Competitive Market Test
criteria and revaluate and update its market definitions.
4. Voluntary Survey of Purchasers
281. We propose to not require BDS purchasers to submit data on a
mandatory basis as with the previous collection given the burdens
associated with such reporting compared to the value of the data for
our analysis. The Commission instead proposes to conduct, with the
assistance of a third-party, a voluntary survey of BDS purchasers,
starting in 2017. The survey would include a sampling of wholesale and
retail customers, a sampling of businesses of different sizes: small,
medium, and large, and a sampling of mobile wireless providers.
282. The survey would collect information on, but not limited to,
the BDS needs of the customer (e.g., establishing virtual or private
networks, accessing data centers or cloud-based services, accessing the
Internet, and processing credit card transactions, among other
information), the number of business locations requiring service, the
performance levels required by the customer (e.g., the service
guarantees required on reliability, latency, packet loss, jitter, and
mean time to repair), the purchaser's bandwidth requirements
(symmetrical and/or asymmetrical), the BDS provider(s) they purchase
from, the purchase and substitutability of ``best efforts'' services to
meet their BDS needs, the extent to which they purchase BDS using fixed
wireless, other potential BDS substitutes, number of available
providers to fulfill BDS needs in a given area, types of BDS typically
purchased by the customer (e.g., Ethernet at certain speeds or DS1s and
DS3s), prices typically paid for each type of BDS, any problems
encountered with obtaining BDS (availability, timing, problematic terms
and conditions, and the like), total BDS expenditures over the prior
calendar year, the extent to which purchaser buys TDM products and
plans to purchase such legacy services over the next three years. We
seek comment on this proposal and on other potential categories of
information to include in the survey.
5. Timing of the Collection
283. We believe that a periodic collection every three years is
reasonable for our oversight needs. We
[[Page 36064]]
seek comment on this view. This collection period would minimize the
burden on filers while still allowing the Commission to timely gather
data to update its analysis and monitor competition. The BDS industry
is changing and significant developments can occur from year-to-year.
By collecting data every three years, the Commission can effectively
take stock of these changing trends. That said, we propose to conduct
the first periodic collection in 2018, for year-end 2017 data. This
would mean more than a three-year gap from the 2013 data but is
reasonable to give covered providers time to update their systems to
better track the information requested.
III. Procedural Matters
A. Ex Parte Requirements
284. This proceeding shall be treated as a ``permit-but-disclose''
proceeding in accordance with the Commission's ex parte rules. Persons
making ex parte presentations must file a copy of any written
presentation or a memorandum summarizing any oral presentation within
two business days after the presentation (unless a different deadline
applicable to the Sunshine period applies). Persons making oral ex
parte presentations are reminded that memoranda summarizing the
presentation must (1) List all persons attending or otherwise
participating in the meeting at which the ex parte presentation was
made, and (2) summarize all data presented and arguments made during
the presentation. Memoranda must contain a summary of the substance of
the ex parte presentation ad not merely a list of the subjects
discussed. More than a one or two sentence description of the views and
arguments presented is generally required. If the oral presentation
consisted in whole or in part of the presentation of data or arguments
already reflected in the presenter's written comments, memoranda or
other filings in the proceeding, the presenter may provide citations to
such data or arguments in his or her prior comments, memoranda, or
other filings (specifying the relevant page and/or paragraph numbers
where such data or arguments can be found) in lieu of summarizing them
in the memorandum. Documents shown or given to Commission staff during
ex parte meetings are deemed to be written ex parte presentations and
must be filed consistent with rule 1.1206(b). In proceedings governed
by rule 1.49(f) or for which the Commission has made available a method
of electronic filing, written ex parte presentations and memoranda
summarizing oral ex parte presentations, and all attachments thereto,
must be filed through the electronic comment filing system available
for that proceeding, and must be filed in their native format (e.g.,
.doc, .xml, .ppt, searchable .pdf). Participants in this proceeding
should familiarize themselves with the Commission's ex parte rules.
B. Paperwork Reduction Act Analysis
285. This FNPRM contains proposed new information collection
requirements. The Commission, as part of its continuing effort to
reduce paperwork burdens, invites the general public and the OMB and
other Federal agencies to comment on the information collection
requirements contained in this document, as required by the PRA, Public
Law 104-13. In addition, pursuant to the Small Business Paperwork
Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we
seek specific comment on how we might further reduce the information
collection burden for small business concerns with fewer than 25
employees.
C. Initial Regulatory Flexibility Analysis
286. As required by the Regulatory Flexibility Act of 1980 (RFA),
the Commission has prepared an Initial Regulatory Flexibility Analysis
(IRFA) for this FNPRM, of the possible significant economic impact on
small entities of the policies and rules addressed in this document.
The IRFA is set forth as Appendix D. Written public comments are
requested on this IRFA. Comments must be identified as responses to the
IRFA and must be filed by the deadlines for comments on the FNPRM
provided on or before the dates indicated on the first page of this
document. The Commission's Consumer and Governmental Affairs Bureau,
Reference Information Center, will send a copy of this FNPRM, including
the IRFA, to the Chief Counsel for Advocacy of the Small Business
Administration (SBA).
IV. Ordering Clauses
287. Accordingly, it is ordered that, pursuant to sections 1, 2,
4(i)-(j), 10, 201(b), 202(a), 203, 204(a), 205, 303(r), and 403 of the
Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i)-(j),
160, 201(b), 202(a), 203, 204(a), 205, 303(r), and 403 this Tariff
Investigation Order and FNPRM is adopted.
288. It is further ordered that, pursuant to the applicable
procedures set forth in sections 1.415 and 1.419 of the Commission's
Rules, 47 CFR 1.415, 1.419, interested parties may file comments on the
FNPRM and the application of the prohibition on all-or-nothing
provisions in the tariff pricing plans subject to the tariff
investigation to existing agreements on or before June 28, 2016, and
reply comments on or before July 26, 2016.
289. It is further ordered that the Commission's Consumer &
Governmental Affairs Bureau, Reference Information Center, shall send a
copy of this FNPRM, including the Initial Regulatory Flexibility
Analyses to the Chief Counsel for Advocacy of the Small Business
Administration.
Initial Regulatory Flexibility Act Analysis
1. As required by the Regulatory Flexibility Act of 1980, as
amended (RFA), the Commission has prepared this Initial Regulatory
Flexibility Analysis (IRFA) of the possible significant economic impact
on a substantial number of small entities from the policies and rules
proposed in this FNPRM. The Commission requests written public comment
on this IRFA. Comments must be identified as responses to the IRFA and
must be filed by the deadlines for comments on the FNPRM provided in
the item. The Commission will send a copy of the FNPRM, including this
IRFA, to the Chief Counsel for Advocacy of the Small Business
Administration (SBA). In addition, the FNPRM and IRFA (or summaries
thereof) will be published in the Federal Register.
A. Need for, and Objectives of, the Proposed Rules
2. Technology-Neutral Framework. In the FNPRM the Commission
proposes to replace the existing, fragmented regulatory regime
applicable to business data services (BDS) (i.e., special access
services) with a new technology-neutral framework--the Competitive
Market Test--which subjects non-competitive markets to tailored
regulation, and competitive markets to minimal oversight. The pricing
flexibility framework adopted in 1999 based regulatory relief from
dominant carrier regulations on the presence of third-party
collocations in the incumbent local exchange carrier's (LEC's) wire
centers, which were considered proxies for competition in the
marketplace. The Commission's review of the 2015 Collection data
supports the Commission's earlier findings that collocations are a poor
proxy for predicting the entry of facilities-based competition and the
1999 regime retained unnecessary regulation in areas that were likely
competitive and deregulated over large areas where
[[Page 36065]]
competition was unlikely to occur. The Commission therefore proposes to
abandon the collocation-based competition showings for determining
regulatory relief for incumbent LECs and, instead, proposes to apply a
new Competitive Market Test and seeks comment on a regulatory framework
going forward.
3. Competitive Analysis. The Commission sets forth its analysis of
the extent of competition in the supply of BDS, based on its analysis
of the 2015 Collection, and stakeholders' comments, and seeks comment
on these findings. As far as the BDS product market, the Commission
finds that ``best efforts'' BIAS do not appear to be a substitute for
BDS whereas packet-based BDS, including HFC, is a substitute for TDM-
based BDS, and product markets are subdivided by customer requirements
and BDS performance characteristics. As far as the BDS geographic
market, geographic concentration on any measure is high. The Commission
found that supply of BDS with a bandwidth in excess of 50 Mbps tends to
be more competitive than supply of BDS with lower bandwidths and
allowing ILECs to offer contract tariffs benefits BDS purchasers and
suppliers. The Commission seeks comment on how many competitive choices
are necessary to ensure a competitive market, how important is
potential competition, whether facility-based supply beyond half a mile
has a material effect on prices and whether prices vary by the type of
supply. Finally, the Commission seeks comment on a white paper prepared
by an outside econometrician engaged by the Commission, Dr. Marc
Rysman, conducting an independent competition analysis of the BDS
market.
4. Competitive Market Test. As a replacement to the pricing
flexibility rules, the Commission proposes a Competitive Market Test to
determine the extent to which particular geographic areas and customer
classes are subject to sufficient competition. In the FNPRM, the
Commission proposes to define ``business data services'' (BDS) as a
telecommunications service that transports data between two or more
designated points at a rate of at least 1.5 Mbps in both directions
(upstream/downstream) with prescribed performance requirements that
include bandwidth, reliability, latency, jitter, and packet loss. The
Commission, however, proposes excluding ``best effort'' services, e.g.,
mass market broadband Internet access service (BIAS) such as DSL and
cable modem broadband access. The Commission is considering a test,
which focuses on bandwidth, different customer classes, business
density, and the number of providers in areas consisting of census
blocks where each block in the relevant market meets the specified
criteria. The Commission asks about applying the Competitive Market
Test across all areas served by price cap carriers every three years to
account for changes in business density and the presence of facilities-
based providers in geographic areas. The Commission asks to what extent
and how the Commission should give providers and purchasers an
opportunity to challenge the determinations rendered.
5. Rules Applicable to All Markets. The Commission proposes limited
requirements applicable to all competitive and non-competitive BDS
markets. First, the Commission seeks comment on prohibiting the use of
nondisclosure agreements (NDAs) in BDS commercial agreements that
restrict parties ability to provide information to the Commission,
effectively require legal compulsion to produce information, and limit
parties disclosure to a response to a request by the Commission (e.g.
Notice of Proposed Rulemaking). Second, the Commission asks for comment
on the appropriate treatment of the three types of tariff terms
identified as unreasonable in the accompanying Tariff Investigation
Order- ``all-or-nothing'' provisions, shortfall penalties, and early
termination fees--as well as other contractual terms and conditions
that have been subject to public comment. The Commission seeks comment
on whether these provisions should be applied in non-competitive
markets or more generally in all markets.
6. Non-Competitive Markets. The Commission proposes a tailored set
of rules to safeguard customers in non-competitive markets, including
the use of price regulation. In the FNPRM, the Commission proposes to
continue to apply price cap regulation to time-division multiplexing
(TDM)-based BDS in non-competitive markets, including non-competitive
areas subject to pricing flexibility. The Commission also seeks comment
on the application of rate regulation in non-competitive markets to
packet-based BDS. The Commission proposes to incorporate into its price
cap system a productivity-based ``X-factor''--an adjustment to the
price ceiling carriers can change reflecting the extent to which
carriers overall outperform economy-wide productivity to ensure they
are passing these gains to ratepayers while recovering their costs of
service. We seek comment on the methodologies and data sources we
should use to calculate the X-factor, including a staff-produced
productivity study, and the corresponding price cap adjustments as well
as the components of the price cap system.
7. Anchor Pricing and Benchmarking. In the FNPRM, the Commission
proposes to adopt an anchor pricing or benchmarking approach for BDS in
non-competitive markets to replace the interim rule adopted in the
Emerging Wireline Order. We likewise believe that that anchor or
benchmark pricing would not be appropriate in competitive markets. The
Commission considers three options: (1) Relying on regulated TDM-based
services pricing to anchor prices for similar packet-based services,
(2) establishing a price for packet-based BDS which could serve as an
anchor for similar packet-based services, and (3) initially using
reasonably comparable prices for TDM-based services as a benchmark for
packet-based services to determine whether those rates are just and
reasonable. The Commission proposes to adopt the third option but seeks
comment on this proposal and any associated implementation issues. Upon
implementation of anchor pricing or benchmarking, we propose to
continue forbearing from tariffing all packet-based services and to
expand forbearance to include all price cap carriers and all packet-
based services because this will allow for greater commercial
negotiation and innovation. For carriers subject to these requirements,
we propose to require them to publically disclose their generally
available rates, terms and conditions and seek comment on this
proposal. The Commission seeks comment on whether any reporting
requirements should be imposed and whether the complaint and
declaratory ruling process is reasonable to ensure compliance with the
proposed framework. The Commission also seeks proposals for ensuring
just and reasonable wholesale rates applicable in non-competitive
markets such as whether providers are charging higher rates for
wholesale than retail BDS, whether we should require public disclosure
of these rates.
8. Terms and Conditions. The Commission proposes generally
prohibiting tariff and other contractual ``tying'' arrangements that
condition the sale of BDS in a non-competitive market on the sale of
such services in a competitive market. The Commission also proposes
prohibiting automatic renewal provisions in tariff pricing plans and
contract tariffs for the provision of TDM-based broadband data services
in non-competitive areas. The Commission proposes to find unreasonable
any provision that enables a provider to increase its rates upon the
[[Page 36066]]
expiration of either a tariff or commercial agreement for TDM-based or
Ethernet-based service in non-competitive areas. Finally, the
Commission seeks comment on tariff or commercial agreements containing
percentage commitments to increase commitments if they reach a
percentage threshold, overage penalties for going over volume
commitments, automatic renewal provisions, undiscounted month-to-month
pricing, and ``evergreen'' provisions that allow a purchaser to
continue under same terms and conditions as under an expired agreement.
In addition to seeking comment on the new regulatory framework, the
Commission invites comment on alternative frameworks to apply to BDS.
9. Pricing Deregulation. The Commission proposes a set of
deregulatory rules to govern competitive markets, using the Act's
statutory authority to ensure that the provision of telecommunications
services is just and reasonable. The Commission proposes that tariffs
should not be used as part of the regulation of any BDS. The Commission
proposes removing TDM-based BDS determined to be competitive from price
cap regulation and apply a competitive regulatory framework, proposing
a path to detariff time-division multiplexing (TDM)-based services
while maintaining price caps. The Commission proposes forbearing from
tariffing requirements to the extent necessary to implement our
proposed framework, conditioned on the continuing presence of
competition. The Commission proposes a similar finding for BDS in non-
competitive areas, including TDM-based services but continue to require
price cap regulation. The Commission seeks comment on how the
Commission should modify its filing rules if it forbears from tariffing
requirements. The Commission proposes to apply Phase I pricing
flexibility requirements to TDM-based BDS in non-competitive areas and
seeks comment on this proposal and any necessary changes to this
approach.
10. Forbearance Grants and Deemed Grants. In order for the new
regulatory framework be applied in a technology-neutral manner, the
Commission proposes to eliminate the current exemption for certain
Verizon services from the basic provisions of the Act governing just
and reasonable offerings of telecommunications services. The Commission
invites comment on the legal standard we would need to meet to reverse
Verizon's forbearance that has been deemed granted, stating its belief
that this standard is met in a rulemaking proceeding. Additionally, the
Commission proposes extending this decision to reverse forbearance to
Hawaiian Telecom and to the legacy Verizon portions of FairPoint and
Frontier and invites comment on these proposals. At the same time, the
Commission proposes to expand forbearance to the extent necessary to
implement any regulatory changes adopted in this proceeding, many of
which would allow or require carriers to detariff BDS, and invites
comment on this proposal.
B. Legal Basis
11. The legal basis for any action that may be taken pursuant to
the FNPRM is contained in sections 1, 2, 4(i)-(j), 10, 201, 202(a),
203, 204(a), 205, 208, 251, 303(r), and 403 of the Communications Act
of 1934, as amended, 47 U.S.C. 151, 152, 154(i)-(j), 160, 201(b),
202(a), 203, 204(a), 205, 208, 251, 303(r), and 403.
C. Description and Estimate of the Number of Small Entities To Which
the Rules Would Apply
12. The RFA directs agencies to provide a description of, and where
feasible, an estimate of the number of small entities that may be
affected by the proposed rules, if adopted. The RFA generally defines
the term ``small entity'' as having the same meaning as the terms
``small business,'' ``small organization,'' and ``small governmental
jurisdiction.'' In addition, the term ``small business'' has the same
meaning as the term ``small-business concern'' under the Small Business
Act. A small-business concern'' is one which: (1) Is independently
owned and operated; (2) is not dominant in its field of operation; and
(3) satisfies any additional criteria established by the Small Business
Administration (SBA).
1. Total Small Entities
13. Our proposed action, if implemented, may, over time, affect
small entities that are not easily categorized at present. We therefore
describe here, at the outset, three comprehensive, statutory small
entity size standards. First, nationwide, there are a total of
approximately 28.2 million small businesses, according to the SBA,
which represents 99.7% of all businesses in the United States. In
addition, a ``small organization'' is generally ``any not-for-profit
enterprise which is independently owned and operated and is not
dominant in its field.'' Nationwide, as of 2007, there were
approximately 1,621,215 small organizations. Finally, the term ``small
governmental jurisdiction'' is defined generally as ``governments of
cities, towns, townships, villages, school districts, or special
districts, with a population of less than fifty thousand.'' Census
Bureau data for 2011 indicate that there were 90,056 local governmental
jurisdictions in the United States. We estimate that, of this total, as
many as 89,327 entities may qualify as ``small governmental
jurisdictions.'' Thus, we estimate that most governmental jurisdictions
are small.
2. Broadband Internet Access Service Providers
14. The rules adopted in the Order apply to broadband Internet
access service providers. The Economic Census places these firms, whose
services might include Voice over Internet Protocol (VoIP), in either
of two categories, depending on whether the service is provided over
the provider's own telecommunications facilities (e.g., cable and DSL
ISPs), or over client-supplied telecommunications connections (e.g.,
dial-up ISPs). The former are within the category of Wired
Telecommunications Carriers, which has an SBA small business size
standard of 1,500 or fewer employees. These are also labeled
``broadband.'' The latter are within the category of All Other
Telecommunications, which has a size standard of annual receipts of
$32.5 million or less. These are labeled non-broadband. According to
Census Bureau data for 2007, there were 3,188 firms in the first
category, total, that operated for the entire year. Of this total, 3144
firms had employment of 999 or fewer employees, and 44 firms had
employment of 1,000 employees or more. For the second category, the
data show that 2,383 firms operated for the entire year. Of those,
2,346 had annual receipts below $32.5 million per year. Consequently,
we estimate that the majority of broadband Internet access service
provider firms are small entities.
15. The broadband Internet access service provider industry has
changed since this definition was introduced in 2007. The data cited
above may therefore include entities that no longer provide broadband
Internet access service, and may exclude entities that now provide such
service. To ensure that this FRFA describes the universe of small
entities that our action might affect, we discuss in turn several
different types of entities that might be providing broadband Internet
access service. We note that, although we have no specific information
on the number of small entities that provide broadband Internet access
service over unlicensed spectrum, we include these entities in our
Final Regulatory Flexibility Analysis.
[[Page 36067]]
3. Wireline Providers
16. Incumbent Local Exchange Carriers (Incumbent LECs). Neither the
Commission nor the SBA has developed a small business size standard
specifically for incumbent LEC services. The closest applicable size
standard under SBA rules is for the category Wired Telecommunications
Carriers. Under that size standard, such a business is small if it has
1,500 or fewer employees. According to Commission data, 1,307 carriers
reported that they were incumbent LEC providers. Of these 1,307
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have
more than 1,500 employees. Consequently, the Commission estimates that
most providers of incumbent LEC service are small businesses that may
be affected by rules adopted pursuant to the Order.
17. Competitive Local Exchange Carriers (Competitive LECs),
Competitive Access Providers (CAPs), Shared-Tenant Service Providers,
and Other Local Service Providers. Neither the Commission nor the SBA
has developed a small business size standard specifically for these
service providers. The appropriate size standard under SBA rules is for
the category Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 1,442 carriers reported that they were
engaged in the provision of either competitive local exchange services
or competitive access provider services. Of these 1,442 carriers, an
estimated 1,256 have 1,500 or fewer employees and 186 have more than
1,500 employees. In addition, 17 carriers have reported that they are
Shared-Tenant Service Providers, and all 17 are estimated to have 1,500
or fewer employees. In addition, 72 carriers have reported that they
are Other Local Service Providers. Of the 72, seventy have 1,500 or
fewer employees and two have more than 1,500 employees. Consequently,
the Commission estimates that most providers of competitive local
exchange service, competitive access providers, Shared-Tenant Service
Providers, and other local service providers are small entities that
may be affected by rules adopted pursuant to the Order.
18. We have included small incumbent LECs in this present RFA
analysis. As noted above, a ``small business'' under the RFA is one
that, inter alia, meets the pertinent small business size standard
(e.g., a telephone communications business having 1,500 or fewer
employees), and ``is not dominant in its field of operation.'' The
SBA's Office of Advocacy contends that, for RFA purposes, small
incumbent LECs are not dominant in their field of operation because any
such dominance is not ``national'' in scope. We have therefore included
small incumbent LECs in this RFA analysis, although we emphasize that
this RFA action has no effect on Commission analyses and determinations
in other, non-RFA contexts.
19. Interexchange Carriers. Neither the Commission nor the SBA has
developed a small business size standard specifically for providers of
interexchange services. The appropriate size standard under SBA rules
is for the category Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 359 carriers have reported that they are
engaged in the provision of interexchange service. Of these, an
estimated 317 have 1,500 or fewer employees and 42 have more than 1,500
employees. Consequently, the Commission estimates that the majority of
interexchange carriers are small entities that may be affected by rules
adopted pursuant to the Order.
20. Operator Service Providers (OSPs). Neither the Commission nor
the SBA has developed a small business size standard specifically for
operator service providers. The appropriate size standard under SBA
rules is for the category Wired Telecommunications Carriers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 33 carriers have reported that
they are engaged in the provision of operator services. Of these, an
estimated 31 have 1,500 or fewer employees and two have more than 1,500
employees. Consequently, the Commission estimates that the majority of
OSPs are small entities that may be affected by rules adopted pursuant
to the Order.
21. Prepaid Calling Card Providers. Neither the Commission nor the
SBA has developed a small business size standard specifically for
prepaid calling card providers. The appropriate size standard under SBA
rules is for the category Telecommunications Resellers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 193 carriers have reported that they are
engaged in the provision of prepaid calling cards. Of these, an
estimated all 193 have 1,500 or fewer employees and none have more than
1,500 employees. Consequently, the Commission estimates that the
majority of prepaid calling card providers are small entities that may
be affected by rules adopted pursuant to the Order.
22. Local Resellers. The SBA has developed a small business size
standard for the category of Telecommunications Resellers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 213 carriers have reported
that they are engaged in the provision of local resale services. Of
these, an estimated 211 have 1,500 or fewer employees and two have more
than 1,500 employees. Consequently, the Commission estimates that the
majority of local resellers are small entities that may be affected by
rules adopted pursuant to the Order.
23. Toll Resellers. The SBA has developed a small business size
standard for the category of Telecommunications Resellers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 881 carriers have reported
that they are engaged in the provision of toll resale services. Of
these, an estimated 857 have 1,500 or fewer employees and 24 have more
than 1,500 employees. Consequently, the Commission estimates that the
majority of toll resellers are small entities that may be affected by
rules adopted pursuant to the Order.
24. Other Toll Carriers. Neither the Commission nor the SBA has
developed a size standard for small businesses specifically applicable
to Other Toll Carriers. This category includes toll carriers that do
not fall within the categories of interexchange carriers, operator
service providers, prepaid calling card providers, satellite service
carriers, or toll resellers. The closest applicable size standard under
SBA rules is for Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 284 companies reported that their primary
telecommunications service activity was the provision of other toll
carriage. Of these, an estimated 279 have 1,500 or fewer employees and
five have more than 1,500 employees. Consequently, the Commission
estimates that most Other Toll Carriers are small entities that may be
affected by the rules and policies adopted pursuant to the Order.
25. 800 and 800-Like Service Subscribers. Neither the Commission
nor the SBA has developed a small business size standard specifically
for 800 and 800-like service (toll free) subscribers. The appropriate
size standard under SBA rules is for the
[[Page 36068]]
category Telecommunications Resellers. Under that size standard, such a
business is small if it has 1,500 or fewer employees. The most reliable
source of information regarding the number of these service subscribers
appears to be data the Commission collects on the 800, 888, 877, and
866 numbers in use. According to our data, as of September 2009, the
number of 800 numbers assigned was 7,860,000; the number of 888 numbers
assigned was 5,588,687; the number of 877 numbers assigned was
4,721,866; and the number of 866 numbers assigned was 7,867,736. We do
not have data specifying the number of these subscribers that are not
independently owned and operated or have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of toll free subscribers that would qualify as small businesses
under the SBA size standard. Consequently, we estimate that there are
7,860,000 or fewer small entity 800 subscribers; 5,588,687 or fewer
small entity 888 subscribers; 4,721,866 or fewer small entity 877
subscribers; and 7,867,736 or fewer small entity 866 subscribers.
4. Wireless Providers--Fixed and Mobile
26. The broadband Internet access service provider category covered
by this Order may cover multiple wireless firms and categories of
regulated wireless services. Thus, to the extent the wireless services
listed below are used by wireless firms for broadband Internet access
service, the proposed actions may have an impact on those small
businesses as set forth above and further below. In addition, for those
services subject to auctions, we note that, as a general matter, the
number of winning bidders that claim to qualify as small businesses at
the close of an auction does not necessarily represent the number of
small businesses currently in service. Also, the Commission does not
generally track subsequent business size unless, in the context of
assignments and transfers or reportable eligibility events, unjust
enrichment issues are implicated.
27. Wireless Telecommunications Carriers (except Satellite). Since
2007, the Census Bureau has placed wireless firms within this new,
broad, economic census category. Under the present and prior
categories, the SBA has deemed a wireless business to be small if it
has 1,500 or fewer employees. For the category of Wireless
Telecommunications Carriers (except Satellite), census data for 2007
show that there were 1,383 firms that operated for the entire year. Of
this total, 1,368 firms had employment of 999 or fewer employees and 15
had employment of 1,000 employees or more. Since all firms with fewer
than 1,500 employees are considered small, given the total employment
in the sector, we estimate that the vast majority of wireless firms are
small. Wireless Communications Services. This service can be used for
fixed, mobile, radiolocation, and digital audio broadcasting satellite
uses. The Commission defined ``small business'' for the wireless
communications services (WCS) auction as an entity with average gross
revenues of $40 million for each of the three preceding years, and a
``very small business'' as an entity with average gross revenues of $15
million for each of the three preceding years. The SBA has approved
these definitions. 218-219 MHz Service. The first auction of 218-219
MHz spectrum resulted in 170 entities winning licenses for 594
Metropolitan Statistical Area (MSA) licenses. Of the 594 licenses, 557
were won by entities qualifying as a small business. For that auction,
the small business size standard was an entity that, together with its
affiliates, has no more than a $6 million net worth and, after federal
income taxes (excluding any carry over losses), has no more than $2
million in annual profits each year for the previous two years. In the
218-219 MHz Report and Order and Memorandum Opinion and Order, we
established a small business size standard for a ``small business'' as
an entity that, together with its affiliates and persons or entities
that hold interests in such an entity and their affiliates, has average
annual gross revenues not to exceed $15 million for the preceding three
years. A ``very small business'' is defined as an entity that, together
with its affiliates and persons or entities that hold interests in such
an entity and its affiliates, has average annual gross revenues not to
exceed $3 million for the preceding three years. These size standards
will be used in future auctions of 218-219 MHz spectrum.
28. 2.3 GHz Wireless Communications Services. This service can be
used for fixed, mobile, radiolocation, and digital audio broadcasting
satellite uses. The Commission defined ``small business'' for the
wireless communications services (``WCS'') auction as an entity with
average gross revenues of $40 million for each of the three preceding
years, and a ``very small business'' as an entity with average gross
revenues of $15 million for each of the three preceding years. The SBA
has approved these definitions. The Commission auctioned geographic
area licenses in the WCS service. In the auction, which was conducted
in 1997, there were seven bidders that won 31 licenses that qualified
as very small business entities, and one bidder that won one license
that qualified as a small business entity.
29. 1670-1675 MHz Services. This service can be used for fixed and
mobile uses, except aeronautical mobile. An auction for one license in
the 1670-1675 MHz band was conducted in 2003. One license was awarded.
The winning bidder was not a small entity.
30. Wireless Telephony. Wireless telephony includes cellular,
personal communications services, and specialized mobile radio
telephony carriers. As noted, the SBA has developed a small business
size standard for Wireless Telecommunications Carriers (except
Satellite). Under the SBA small business size standard, a business is
small if it has 1,500 or fewer employees. According to Commission data,
413 carriers reported that they were engaged in wireless telephony. Of
these, an estimated 261 have 1,500 or fewer employees and 152 have more
than 1,500 employees. Therefore, a little less than one third of these
entities can be considered small.
31. Broadband Personal Communications Service. The broadband
personal communications services (PCS) spectrum is divided into six
frequency blocks designated A through F, and the Commission has held
auctions for each block. The Commission initially defined a ``small
business'' for C- and F-Block licenses as an entity that has average
gross revenues of $40 million or less in the three previous calendar
years. For F-Block licenses, an additional small business size standard
for ``very small business'' was added and is defined as an entity that,
together with its affiliates, has average gross revenues of not more
than $15 million for the preceding three calendar years. These small
business size standards, in the context of broadband PCS auctions, have
been approved by the SBA. No small businesses within the SBA-approved
small business size standards bid successfully for licenses in Blocks A
and B. There were 90 winning bidders that claimed small business status
in the first two C-Block auctions. A total of 93 bidders that claimed
small business status won approximately 40 percent of the 1,479
licenses in the first auction for the D, E, and F Blocks. On April 15,
1999, the Commission completed the reauction of 347 C-, D-, E-, and F-
Block licenses in Auction No. 22. Of the 57 winning bidders in that
auction, 48
[[Page 36069]]
claimed small business status and won 277 licenses.
32. On January 26, 2001, the Commission completed the auction of
422 C and F Block Broadband PCS licenses in Auction No. 35. Of the 35
winning bidders in that auction, 29 claimed small business status.
Subsequent events concerning Auction 35, including judicial and agency
determinations, resulted in a total of 163 C and F Block licenses being
available for grant. On February 15, 2005, the Commission completed an
auction of 242 C-, D-, E-, and F-Block licenses in Auction No. 58. Of
the 24 winning bidders in that auction, 16 claimed small business
status and won 156 licenses. On May 21, 2007, the Commission completed
an auction of 33 licenses in the A, C, and F Blocks in Auction No. 71.
Of the 12 winning bidders in that auction, five claimed small business
status and won 18 licenses. On August 20, 2008, the Commission
completed the auction of 20 C-, D-, E-, and F-Block Broadband PCS
licenses in Auction No. 78. Of the eight winning bidders for Broadband
PCS licenses in that auction, six claimed small business status and won
14 licenses.
33. Specialized Mobile Radio Licenses. The Commission awards
``small entity'' bidding credits in auctions for Specialized Mobile
Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz bands
to firms that had revenues of no more than $15 million in each of the
three previous calendar years. The Commission awards ``very small
entity'' bidding credits to firms that had revenues of no more than $3
million in each of the three previous calendar years. The SBA has
approved these small business size standards for the 900 MHz Service.
The Commission has held auctions for geographic area licenses in the
800 MHz and 900 MHz bands. The 900 MHz SMR auction began on December 5,
1995, and closed on April 15, 1996. Sixty bidders claiming that they
qualified as small businesses under the $15 million size standard won
263 geographic area licenses in the 900 MHz SMR band. The 800 MHz SMR
auction for the upper 200 channels began on October 28, 1997, and was
completed on December 8, 1997. Ten bidders claiming that they qualified
as small businesses under the $15 million size standard won 38
geographic area licenses for the upper 200 channels in the 800 MHz SMR
band. A second auction for the 800 MHz band was held on January 10,
2002 and closed on January 17, 2002 and included 23 BEA licenses. One
bidder claiming small business status won five licenses.
34. The auction of the 1,053 800 MHz SMR geographic area licenses
for the General Category channels began on August 16, 2000, and was
completed on September 1, 2000. Eleven bidders won 108 geographic area
licenses for the General Category channels in the 800 MHz SMR band and
qualified as small businesses under the $15 million size standard. In
an auction completed on December 5, 2000, a total of 2,800 Economic
Area licenses in the lower 80 channels of the 800 MHz SMR service were
awarded. Of the 22 winning bidders, 19 claimed small business status
and won 129 licenses. Thus, combining all four auctions, 41 winning
bidders for geographic licenses in the 800 MHz SMR band claimed status
as small businesses.
35. In addition, there are numerous incumbent site-by-site SMR
licenses and licensees with extended implementation authorizations in
the 800 and 900 MHz bands. We do not know how many firms provide 800
MHz or 900 MHz geographic area SMR service pursuant to extended
implementation authorizations, nor how many of these providers have
annual revenues of no more than $15 million. One firm has over $15
million in revenues. In addition, we do not know how many of these
firms have 1,500 or fewer employees, which is the SBA-determined size
standard. We assume, for purposes of this analysis, that all of the
remaining extended implementation authorizations are held by small
entities, as defined by the SBA.
36. Lower 700 MHz Band Licenses. The Commission previously adopted
criteria for defining three groups of small businesses for purposes of
determining their eligibility for special provisions such as bidding
credits. The Commission defined a ``small business'' as an entity that,
together with its affiliates and controlling principals, has average
gross revenues not exceeding $40 million for the preceding three years.
A ``very small business'' is defined as an entity that, together with
its affiliates and controlling principals, has average gross revenues
that are not more than $15 million for the preceding three years.
Additionally, the lower 700 MHz Service had a third category of small
business status for Metropolitan/Rural Service Area (MSA/RSA)
licenses--``entrepreneur''--which is defined as an entity that,
together with its affiliates and controlling principals, has average
gross revenues that are not more than $3 million for the preceding
three years. The SBA approved these small size standards. An auction of
740 licenses (one license in each of the 734 MSAs/RSAs and one license
in each of the six Economic Area Groupings (EAGs)) commenced on August
27, 2002, and closed on September 18, 2002. Of the 740 licenses
available for auction, 484 licenses were won by 102 winning bidders.
Seventy-two of the winning bidders claimed small business, very small
business or entrepreneur status and won a total of 329 licenses. A
second auction commenced on May 28, 2003, closed on June 13, 2003, and
included 256 licenses: 5 EAG licenses and 476 Cellular Market Area
licenses. Seventeen winning bidders claimed small or very small
business status and won 60 licenses, and nine winning bidders claimed
entrepreneur status and won 154 licenses. On July 26, 2005, the
Commission completed an auction of 5 licenses in the Lower 700 MHz band
(Auction No. 60). There were three winning bidders for five licenses.
All three winning bidders claimed small business status.
37. In 2007, the Commission reexamined its rules governing the 700
MHz band in the 700 MHz Second Report and Order. An auction of 700 MHz
licenses commenced January 24, 2008 and closed on March 18, 2008, which
included, 176 Economic Area licenses in the A Block, 734 Cellular
Market Area licenses in the B Block, and 176 EA licenses in the E
Block. Twenty winning bidders, claiming small business status (those
with attributable average annual gross revenues that exceed $15 million
and do not exceed $40 million for the preceding three years) won 49
licenses. Thirty three winning bidders claiming very small business
status (those with attributable average annual gross revenues that do
not exceed $15 million for the preceding three years) won 325 licenses.
38. Upper 700 MHz Band Licenses. In the 700 MHz Second Report and
Order, the Commission revised its rules regarding Upper 700 MHz
licenses. On January 24, 2008, the Commission commenced Auction 73 in
which several licenses in the Upper 700 MHz band were available for
licensing: 12 Regional Economic Area Grouping licenses in the C Block,
and one nationwide license in the D Block. The auction concluded on
March 18, 2008, with 3 winning bidders claiming very small business
status (those with attributable average annual gross revenues that do
not exceed $15 million for the preceding three years) and winning five
licenses.
39. 700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard
Band Order, the Commission adopted size standards for ``small
businesses'' and ``very small businesses'' for purposes of
[[Page 36070]]
determining their eligibility for special provisions such as bidding
credits and installment payments. A small business in this service is
an entity that, together with its affiliates and controlling
principals, has average gross revenues not exceeding $40 million for
the preceding three years. Additionally, a very small business is an
entity that, together with its affiliates and controlling principals,
has average gross revenues that are not more than $15 million for the
preceding three years. SBA approval of these definitions is not
required. An auction of 52 Major Economic Area licenses commenced on
September 6, 2000, and closed on September 21, 2000. Of the 104
licenses auctioned, 96 licenses were sold to nine bidders. Five of
these bidders were small businesses that won a total of 26 licenses. A
second auction of 700 MHz Guard Band licenses commenced on February 13,
2001, and closed on February 21, 2001. All eight of the licenses
auctioned were sold to three bidders. One of these bidders was a small
business that won a total of two licenses.
40. Cellular Radiotelephone Service. Auction 77 was held to resolve
one group of mutually exclusive applications for Cellular
Radiotelephone Service licenses for unserved areas in New Mexico.
Bidding credits for designated entities were not available in Auction
77. In 2008, the Commission completed the closed auction of one
unserved service area in the Cellular Radiotelephone Service,
designated as Auction 77. Auction 77 concluded with one provisionally
winning bid for the unserved area totaling $25,002.
41. Private Land Mobile Radio (``PLMR''). PLMR systems serve an
essential role in a range of industrial, business, land transportation,
and public safety activities. These radios are used by companies of all
sizes operating in all U.S. business categories, and are often used in
support of the licensee's primary (non-telecommunications) business
operations. For the purpose of determining whether a licensee of a PLMR
system is a small business as defined by the SBA, we use the broad
census category, Wireless Telecommunications Carriers (except
Satellite). This definition provides that a small entity is any such
entity employing no more than 1,500 persons. The Commission does not
require PLMR licensees to disclose information about number of
employees, so the Commission does not have information that could be
used to determine how many PLMR licensees constitute small entities
under this definition. We note that PLMR licensees generally use the
licensed facilities in support of other business activities, and
therefore, it would also be helpful to assess PLMR licensees under the
standards applied to the particular industry subsector to which the
licensee belongs.
42. As of March 2010, there were 424,162 PLMR licensees operating
921,909 transmitters in the PLMR bands below 512 MHz. We note that any
entity engaged in a commercial activity is eligible to hold a PLMR
license, and that any revised rules in this context could therefore
potentially impact small entities covering a great variety of
industries.
43. Rural Radiotelephone Service. The Commission has not adopted a
size standard for small businesses specific to the Rural Radiotelephone
Service. A significant subset of the Rural Radiotelephone Service is
the Basic Exchange Telephone Radio System (BETRS). In the present
context, we will use the SBA's small business size standard applicable
to Wireless Telecommunications Carriers (except Satellite), i.e., an
entity employing no more than 1,500 persons. There are approximately
1,000 licensees in the Rural Radiotelephone Service, and the Commission
estimates that there are 1,000 or fewer small entity licensees in the
Rural Radiotelephone Service that may be affected by the rules and
policies proposed herein.
44. Air-Ground Radiotelephone Service. The Commission has
previously used the SBA's small business size standard applicable to
Wireless Telecommunications Carriers (except Satellite), i.e., an
entity employing no more than 1,500 persons. There are approximately
100 licensees in the Air-Ground Radiotelephone Service, and under that
definition, we estimate that almost all of them qualify as small
entities under the SBA definition. For purposes of assigning Air-Ground
Radiotelephone Service licenses through competitive bidding, the
Commission has defined ``small business'' as an entity that, together
with controlling interests and affiliates, has average annual gross
revenues for the preceding three years not exceeding $40 million. A
``very small business'' is defined as an entity that, together with
controlling interests and affiliates, has average annual gross revenues
for the preceding three years not exceeding $15 million. These
definitions were approved by the SBA. In May 2006, the Commission
completed an auction of nationwide commercial Air-Ground Radiotelephone
Service licenses in the 800 MHz band (Auction No. 65). On June 2, 2006,
the auction closed with two winning bidders winning two Air-Ground
Radiotelephone Services licenses. Neither of the winning bidders
claimed small business status.
45. Aviation and Marine Radio Services. Small businesses in the
aviation and marine radio services use a very high frequency (VHF)
marine or aircraft radio and, as appropriate, an emergency position-
indicating radio beacon (and/or radar) or an emergency locator
transmitter. The Commission has not developed a small business size
standard specifically applicable to these small businesses. For
purposes of this analysis, the Commission uses the SBA small business
size standard for the category Wireless Telecommunications Carriers
(except Satellite), which is 1,500 or fewer employees. Census data for
2007, which supersede data contained in the 2002 Census, show that
there were 1,383 firms that operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15 firms had more than 100 employees.
Most applicants for recreational licenses are individuals.
Approximately 581,000 ship station licensees and 131,000 aircraft
station licensees operate domestically and are not subject to the radio
carriage requirements of any statute or treaty. For purposes of our
evaluations in this analysis, we estimate that there are up to
approximately 712,000 licensees that are small businesses (or
individuals) under the SBA standard. In addition, between December 3,
1998 and December 14, 1998, the Commission held an auction of 42 VHF
Public Coast licenses in the 157.1875-157.4500 MHz (ship transmit) and
161.775-162.0125 MHz (coast transmit) bands. For purposes of the
auction, the Commission defined a ``small'' business as an entity that,
together with controlling interests and affiliates, has average gross
revenues for the preceding three years not to exceed $15 million
dollars. In addition, a ``very small'' business is one that, together
with controlling interests and affiliates, has average gross revenues
for the preceding three years not to exceed $3 million dollars. There
are approximately 10,672 licensees in the Marine Coast Service, and the
Commission estimates that almost all of them qualify as ``small''
businesses under the above special small business size standards and
may be affected by rules adopted pursuant to the Order.
46. Advanced Wireless Services (AWS) (1710-1755 MHz and 2110-2155
MHz bands (AWS-1); 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and
2175-2180 MHz bands (AWS-2); 2155-2175 MHz band (AWS-3)). For the AWS-1
bands, the Commission has defined a ``small business'' as an entity
[[Page 36071]]
with average annual gross revenues for the preceding three years not
exceeding $40 million, and a ``very small business'' as an entity with
average annual gross revenues for the preceding three years not
exceeding $15 million. For AWS-2 and AWS-3, although we do not know for
certain which entities are likely to apply for these frequencies, we
note that the AWS-1 bands are comparable to those used for cellular
service and personal communications service. The Commission has not yet
adopted size standards for the AWS-2 or AWS-3 bands but proposes to
treat both AWS-2 and AWS-3 similarly to broadband PCS service and AWS-1
service due to the comparable capital requirements and other factors,
such as issues involved in relocating incumbents and developing
markets, technologies, and services.
47. 3650-3700 MHz band. In March 2005, the Commission released a
Report and Order and Memorandum Opinion and Order that provides for
nationwide, non-exclusive licensing of terrestrial operations,
utilizing contention-based technologies, in the 3650 MHz band (i.e.,
3650-3700 MHz). As of April 2010, more than 1270 licenses have been
granted and more than 7433 sites have been registered. The Commission
has not developed a definition of small entities applicable to 3650-
3700 MHz band nationwide, non-exclusive licensees. However, we estimate
that the majority of these licensees are Internet Access Service
Providers (ISPs) and that most of those licensees are small businesses.
48. Fixed Microwave Services. Microwave services include common
carrier, private-operational fixed, and broadcast auxiliary radio
services. They also include the Local Multipoint Distribution Service
(LMDS), the Digital Electronic Message Service (DEMS), and the 24 GHz
Service, where licensees can choose between common carrier and non-
common carrier status. At present, there are approximately 36,708
common carrier fixed licensees and 59,291 private operational-fixed
licensees and broadcast auxiliary radio licensees in the microwave
services. There are approximately 135 LMDS licensees, three DEMS
licensees, and three 24 GHz licensees. The Commission has not yet
defined a small business with respect to microwave services. For
purposes of the FRFA, we will use the SBA's definition applicable to
Wireless Telecommunications Carriers (except satellite)--i.e., an
entity with no more than 1,500 persons. Under the present and prior
categories, the SBA has deemed a wireless business to be small if it
has 1,500 or fewer employees. The Commission does not have data
specifying the number of these licensees that have more than 1,500
employees, and thus is unable at this time to estimate with greater
precision the number of fixed microwave service licensees that would
qualify as small business concerns under the SBA's small business size
standard. Consequently, the Commission estimates that there are up to
36,708 common carrier fixed licensees and up to 59,291 private
operational-fixed licensees and broadcast auxiliary radio licensees in
the microwave services that may be small and may be affected by the
rules and policies adopted herein. We note, however, that the common
carrier microwave fixed licensee category includes some large entities.
49. Offshore Radiotelephone Service. This service operates on
several UHF television broadcast channels that are not used for
television broadcasting in the coastal areas of states bordering the
Gulf of Mexico. There are presently approximately 55 licensees in this
service. The Commission is unable to estimate at this time the number
of licensees that would qualify as small under the SBA's small business
size standard for the category of Wireless Telecommunications Carriers
(except Satellite). Under that SBA small business size standard, a
business is small if it has 1,500 or fewer employees. Census data for
2007, which supersede data contained in the 2002 Census, show that
there were 1,383 firms that operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15 firms had more than 100 employees.
Thus, under this category and the associated small business size
standard, the majority of firms can be considered small.
50. 39 GHz Service. The Commission created a special small business
size standard for 39 GHz licenses--an entity that has average gross
revenues of $40 million or less in the three previous calendar years.
An additional size standard for ``very small business'' is: An entity
that, together with affiliates, has average gross revenues of not more
than $15 million for the preceding three calendar years. The SBA has
approved these small business size standards. The auction of the 2,173
39 GHz licenses began on April 12, 2000 and closed on May 8, 2000. The
18 bidders who claimed small business status won 849 licenses.
Consequently, the Commission estimates that 18 or fewer 39 GHz
licensees are small entities that may be affected by rules adopted
pursuant to the Order.
51. Broadband Radio Service and Educational Broadband Service.
Broadband Radio Service systems, previously referred to as Multipoint
Distribution Service (MDS) and Multichannel Multipoint Distribution
Service (MMDS) systems, and ``wireless cable,'' transmit video
programming to subscribers and provide two-way high speed data
operations using the microwave frequencies of the Broadband Radio
Service (BRS) and Educational Broadband Service (EBS) (previously
referred to as the Instructional Television Fixed Service (ITFS)). In
connection with the 1996 BRS auction, the Commission established a
small business size standard as an entity that had annual average gross
revenues of no more than $40 million in the previous three calendar
years. The BRS auctions resulted in 67 successful bidders obtaining
licensing opportunities for 493 Basic Trading Areas (BTAs). Of the 67
auction winners, 61 met the definition of a small business. BRS also
includes licensees of stations authorized prior to the auction. At this
time, we estimate that of the 61 small business BRS auction winners, 48
remain small business licensees. In addition to the 48 small businesses
that hold BTA authorizations, there are approximately 392 incumbent BRS
licensees that are considered small entities. After adding the number
of small business auction licensees to the number of incumbent
licensees not already counted, we find that there are currently
approximately 440 BRS licensees that are defined as small businesses
under either the SBA or the Commission's rules.
52. In 2009, the Commission conducted Auction 86, the sale of 78
licenses in the BRS areas. The Commission offered three levels of
bidding credits: (i) A bidder with attributed average annual gross
revenues that exceed $15 million and do not exceed $40 million for the
preceding three years (small business) received a 15 percent discount
on its winning bid; (ii) a bidder with attributed average annual gross
revenues that exceed $3 million and do not exceed $15 million for the
preceding three years (very small business) received a 25 percent
discount on its winning bid; and (iii) a bidder with attributed average
annual gross revenues that do not exceed $3 million for the preceding
three years (entrepreneur) received a 35 percent discount on its
winning bid. Auction 86 concluded in 2009 with the sale of 61 licenses.
Of the ten winning bidders, two bidders that claimed small business
status won 4 licenses; one bidder that claimed very small business
status won three licenses; and two bidders that
[[Page 36072]]
claimed entrepreneur status won six licenses.
53. In addition, the SBA's Cable Television Distribution Services
small business size standard is applicable to EBS. There are presently
2,436 EBS licensees. All but 100 of these licenses are held by
educational institutions. Educational institutions are included in this
analysis as small entities. Thus, we estimate that at least 2,336
licensees are small businesses. Since 2007, Cable Television
Distribution Services have been defined within the broad economic
census category of Wired Telecommunications Carriers; that category is
defined as follows: ``This industry comprises establishments primarily
engaged in operating and/or providing access to transmission facilities
and infrastructure that they own and/or lease for the transmission of
voice, data, text, sound, and video using wired telecommunications
networks. Transmission facilities may be based on a single technology
or a combination of technologies.'' The SBA has developed a small
business size standard for this category, which is: All such firms
having 1,500 or fewer employees. To gauge small business prevalence for
these cable services we must, however, use the most current census data
that are based on the previous category of Cable and Other Program
Distribution and its associated size standard; that size standard was:
All such firms having $13.5 million or less in annual receipts.
According to Census Bureau data for 2007, there were a total of 996
firms in this category that operated for the entire year. Of this
total, 948 firms had annual receipts of under $10 million, and 48 firms
had receipts of $10 million or more but less than $25 million. Thus,
the majority of these firms can be considered small.
54. Narrowband Personal Communications Services. In 1994, the
Commission conducted an auction for Narrowband PCS licenses. A second
auction was also conducted later in 1994. For purposes of the first two
Narrowband PCS auctions, ``small businesses'' were entities with
average gross revenues for the prior three calendar years of $40
million or less. Through these auctions, the Commission awarded a total
of 41 licenses, 11 of which were obtained by four small businesses. To
ensure meaningful participation by small business entities in future
auctions, the Commission adopted a two-tiered small business size
standard in the Narrowband PCS Second Report and Order. A ``small
business'' is an entity that, together with affiliates and controlling
interests, has average gross revenues for the three preceding years of
not more than $40 million. A ``very small business'' is an entity that,
together with affiliates and controlling interests, has average gross
revenues for the three preceding years of not more than $15 million.
The SBA has approved these small business size standards. A third
auction was conducted in 2001. Here, five bidders won 317 (Metropolitan
Trading Areas and nationwide) licenses. Three of these claimed status
as a small or very small entity and won 311 licenses.
55. Paging (Private and Common Carrier). In the Paging Third Report
and Order, we developed a small business size standard for ``small
businesses'' and ``very small businesses'' for purposes of determining
their eligibility for special provisions such as bidding credits and
installment payments. A ``small business'' is an entity that, together
with its affiliates and controlling principals, has average gross
revenues not exceeding $15 million for the preceding three years.
Additionally, a ``very small business'' is an entity that, together
with its affiliates and controlling principals, has average gross
revenues that are not more than $3 million for the preceding three
years. The SBA has approved these small business size standards.
According to Commission data, 291 carriers have reported that they are
engaged in Paging or Messaging Service. Of these, an estimated 289 have
1,500 or fewer employees, and two have more than 1,500 employees.
Consequently, the Commission estimates that the majority of paging
providers are small entities that may be affected by our action. An
auction of Metropolitan Economic Area licenses commenced on February
24, 2000, and closed on March 2, 2000. Of the 2,499 licenses auctioned,
985 were sold. Fifty-seven companies claiming small business status won
440 licenses. A subsequent auction of MEA and Economic Area (``EA'')
licenses was held in the year 2001. Of the 15,514 licenses auctioned,
5,323 were sold. One hundred thirty-two companies claiming small
business status purchased 3,724 licenses. A third auction, consisting
of 8,874 licenses in each of 175 EAs and 1,328 licenses in all but
three of the 51 MEAs, was held in 2003. Seventy-seven bidders claiming
small or very small business status won 2,093 licenses. A fourth
auction, consisting of 9,603 lower and upper paging band licenses was
held in the year 2010. Twenty-nine bidders claiming small or very small
business status won 3,016 licenses.
56. 220 MHz Radio Service--Phase I Licensees. The 220 MHz service
has both Phase I and Phase II licenses. Phase I licensing was conducted
by lotteries in 1992 and 1993. There are approximately 1,515 such non-
nationwide licensees and four nationwide licensees currently authorized
to operate in the 220 MHz band. The Commission has not developed a
small business size standard for small entities specifically applicable
to such incumbent 220 MHz Phase I licensees. To estimate the number of
such licensees that are small businesses, we apply the small business
size standard under the SBA rules applicable to Wireless
Telecommunications Carriers (except Satellite). Under this category,
the SBA deems a wireless business to be small if it has 1,500 or fewer
employees. The Commission estimates that nearly all such licensees are
small businesses under the SBA's small business size standard that may
be affected by rules adopted pursuant to the Order.
57. 220 MHz Radio Service--Phase II Licensees. The 220 MHz service
has both Phase I and Phase II licenses. The Phase II 220 MHz service is
subject to spectrum auctions. In the 220 MHz Third Report and Order, we
adopted a small business size standard for ``small'' and ``very small''
businesses for purposes of determining their eligibility for special
provisions such as bidding credits and installment payments. This small
business size standard indicates that a ``small business'' is an entity
that, together with its affiliates and controlling principals, has
average gross revenues not exceeding $15 million for the preceding
three years. A ``very small business'' is an entity that, together with
its affiliates and controlling principals, has average gross revenues
that do not exceed $3 million for the preceding three years. The SBA
has approved these small business size standards. Auctions of Phase II
licenses commenced on September 15, 1998, and closed on October 22,
1998. In the first auction, 908 licenses were auctioned in three
different-sized geographic areas: Three nationwide licenses, 30
Regional Economic Area Group (EAG) Licenses, and 875 Economic Area (EA)
Licenses. Of the 908 licenses auctioned, 693 were sold. Thirty-nine
small businesses won licenses in the first 220 MHz auction. The second
auction included 225 licenses: 216 EA licenses and 9 EAG licenses.
Fourteen companies claiming small business status won 158 licenses.
5. Satellite Service Providers
58. Satellite Telecommunications Providers. Two economic census
categories address the satellite industry. The first category has a
small business size standard of $30 million or less in average annual
receipts, under SBA
[[Page 36073]]
rules. The second has a size standard of $30 million or less in annual
receipts.
59. The category of Satellite Telecommunications ``comprises
establishments primarily engaged in providing telecommunications
services to other establishments in the telecommunications and
broadcasting industries by forwarding and receiving communications
signals via a system of satellites or reselling satellite
telecommunications.'' For this category, Census Bureau data for 2007
show that there were a total of 570 firms that operated for the entire
year. Of this total, 530 firms had annual receipts of under $30
million, and 40 firms had receipts of over $30 million. Consequently,
we estimate that the majority of Satellite Telecommunications firms are
small entities that might be affected by our action.
60. The second category of Other Telecommunications comprises,
inter alia, ``establishments primarily engaged in providing specialized
telecommunications services, such as satellite tracking, communications
telemetry, and radar station operation. This industry also includes
establishments primarily engaged in providing satellite terminal
stations and associated facilities connected with one or more
terrestrial systems and capable of transmitting telecommunications to,
and receiving telecommunications from, satellite systems.'' For this
category, Census Bureau data for 2007 show that there were a total of
1,274 firms that operated for the entire year. Of this total, 1,252 had
annual receipts below $25 million per year. Consequently, we estimate
that the majority of All Other Telecommunications firms are small
entities that might be affected by our action.
6. Cable Service Providers
61. Because section 706 requires us to monitor the deployment of
broadband using any technology, we anticipate that some broadband
service providers may not provide telephone service. Accordingly, we
describe below other types of firms that may provide broadband
services, including cable companies, MDS providers, and utilities,
among others.
62. Cable and Other Program Distributors. Since 2007, these
services have been defined within the broad economic census category of
Wired Telecommunications Carriers; that category is defined as follows:
``This industry comprises establishments primarily engaged in operating
and/or providing access to transmission facilities and infrastructure
that they own and/or lease for the transmission of voice, data, text,
sound, and video using wired telecommunications networks. Transmission
facilities may be based on a single technology or a combination of
technologies.'' The SBA has developed a small business size standard
for this category, which is: All such firms having 1,500 or fewer
employees. To gauge small business prevalence for these cable services
we must, however, use current census data that are based on the
previous category of Cable and Other Program Distribution and its
associated size standard; that size standard was: All such firms having
$13.5 million or less in annual receipts. According to Census Bureau
data for 2007, there were a total of 2,048 firms in this category that
operated for the entire year. Of this total, 1,393 firms had annual
receipts of under $10 million, and 655 firms had receipts of $10
million or more. Thus, the majority of these firms can be considered
small.
63. Cable Companies and Systems. The Commission has also developed
its own small business size standards, for the purpose of cable rate
regulation. Under the Commission's rules, a ``small cable company'' is
one serving 400,000 or fewer subscribers, nationwide. Industry data
that there are currently 4,600 active cable systems in the United
States. Of this total, all but nine cable operators are small under the
400,000 subscriber size standard. In addition, under the Commission's
rules, a ``small system'' is a cable system serving 15,000 or fewer
subscribers. Current Commission records show 4,945 cable systems
nationwide. Of this total, 4,380 cable systems have less than 20,000
subscribers, and 565 systems have 20,000 or more subscribers, based on
the same records. Thus, under this standard, we estimate that most
cable systems are small entities.
64. Cable System Operators. The Communications Act of 1934, as
amended, also contains a size standard for small cable system
operators, which is ``a cable operator that, directly or through an
affiliate, serves in the aggregate fewer than 1 percent of all
subscribers in the United States and is not affiliated with any entity
or entities whose gross annual revenues in the aggregate exceed
$250,000,000.'' The Commission has determined that an operator serving
fewer than 677,000 subscribers shall be deemed a small operator, if its
annual revenues, when combined with the total annual revenues of all
its affiliates, do not exceed $250 million in the aggregate. Based on
available data, we find that all but ten incumbent cable operators are
small entities under this size standard. We note that the Commission
neither requests nor collects information on whether cable system
operators are affiliated with entities whose gross annual revenues
exceed $250 million, and therefore we are unable to estimate more
accurately the number of cable system operators that would qualify as
small under this size standard.
65. The open video system (OVS) framework was established in 1996,
and is one of four statutorily recognized options for the provision of
video programming services by local exchange carriers. The OVS
framework provides opportunities for the distribution of video
programming other than through cable systems. Because OVS operators
provide subscription services, OVS falls within the SBA small business
size standard covering cable services, which is ``Wired
Telecommunications Carriers.'' The SBA has developed a small business
size standard for this category, which is: All such firms having 1,500
or fewer employees. According to Census Bureau data for 2007, there
were a total of 955 firms in this previous category that operated for
the entire year. Of this total, 939 firms had employment of 999 or
fewer employees, and 16 firms had employment of 1,000 employees or
more. Thus, under this second size standard, most cable systems are
small and may be affected by rules adopted pursuant to the Order. In
addition, we note that the Commission has certified some OVS operators,
with some now providing service. Broadband service providers (BSPs) are
currently the only significant holders of OVS certifications or local
OVS franchises. The Commission does not have financial or employment
information regarding the entities authorized to provide OVS, some of
which may not yet be operational. Thus, again, at least some of the OVS
operators may qualify as small entities.
7. Electric Power Generators, Transmitters, and Distributors
66. Electric Power Generators, Transmitters, and Distributors. The
Census Bureau defines an industry group comprised of ``establishments,
primarily engaged in generating, transmitting, and/or distributing
electric power. Establishments in this industry group may perform one
or more of the following activities: (1) Operate generation facilities
that produce electric energy; (2) operate transmission systems that
convey the electricity from the generation facility to the distribution
system; and (3) operate distribution systems that convey electric power
received from the generation facility or
[[Page 36074]]
the transmission system to the final consumer.'' The SBA has developed
a small business size standard for firms in this category: ``A firm is
small if, including its affiliates, it is primarily engaged in the
generation, transmission, and/or distribution of electric energy for
sale and its total electric output for the preceding fiscal year did
not exceed 4 million megawatt hours.'' Census Bureau data for 2007 show
that there were 1,174 firms that operated for the entire year in this
category. Of these firms, 50 had 1,000 employees or more, and 1,124 had
fewer than 1,000 employees. Based on this data, a majority of these
firms can be considered small.
D. Description of Projected Reporting, Recordkeeping, and Other
Compliance Requirements for Small Entities
67. The Commission proposes to prohibit the use of non-disclosure
agreements that restrict parties to a BDS tariff or commercial
agreement from sharing the terms of such agreements with the
Commission. In the event of detariffing, the Commission proposes on
requiring price cap incumbent LECs to publicly disclose the rates,
terms and conditions for services currently subject to tariffing
requirements and seeks comment on this proposal.
68. In order to calculate a productivity X-factor, the Commission
invites comment on whether we should require price cap LECs to submit
their expense matrix data from 2005 to 2015 and, if so, whether should
we require that these data be reported using the categories previously
required under the Commission's rules and, if not, what categories
should we specify, and whether the benefits from these data outweigh
the burdens. The Commission asks whether we should require the price
cap LECs to submit cost studies to help us determine business data
services productivity growth and if so, what methodology should we
specify for those costs studies. The Commission asks whether the
benefits from relying on company-specific data from these cost studies,
as opposed to economy-wide or industry-wide data, outweigh the burdens.
Furthermore, the Commission proposes that if it adopts a new X-factor
or otherwise requires adjustments to the price cap indices, price cap
carriers would implement the associated rate decreases by submitting
Tariff Review Plans (TRPs) and special access tariff revisions for all
rate elements associated with special access and seeks comment on this
proposal.
69. In the FNPRM, the Commission proposes to require providers of
BDS subject to anchor pricing or benchmarking to publically disclose
generally available terms and conditions. The Commission seeks comment
on whether any requirements should be imposed to ensure compliance with
our proposed rules and, if so, what form they should take. The
Commission seeks comment on whether we should require compliance
certification from providers as well as any other requirements we
should consider and the costs and benefits.
70. The Commission also proposes a future periodic data collection
that will allow the Commission to update periodically its
identification of competitive and non-competitive markets. Beginning in
2018 (i.e., year-end 2017 data), the Commission proposes collecting
data every three years from incumbent LEC providers to update the
Commission's competitive analysis and monitor the BDS marketplace. The
Commission proposes essentially a paired-down version of the 2015
Collection. Specifically, the Commission proposes collecting data on
locations with connections, fiber routes, and monthly billing
information, revenues, requests for proposals, and wire center
locations by regulatory type as well as new categories of information
for collection, e.g., churn data, data on managed services, internal
documents showing competitive pressure assessments and operational
responses. Meanwhile, the Commission proposes omitting purchasers of
BDS from the mandatory collection, instead proposing to hire a third-
party to voluntarily survey purchaser customer classes.
E. Steps Taken To Minimize the Significant Economic Impact on Small
Entities and Significant Alternatives Considered
71. The RFA requires an agency to describe any significant
alternatives that it has considered in reaching its proposed approach,
which may include (among others) the following four alternatives: (1)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) the clarification, consolidation, or simplification of
compliance or reporting requirements under the rule for small entities;
(3) the use of performance, rather than design, standards; and (4) an
exemption from coverage of the rule, or any part thereof, for small
entities. We expect to consider all of these factors when we have
received substantive comment from the public and potentially affected
entities.
72. The Commission proposes to apply a Competitive Market Test to
determine whether there is sufficient competition to constrain prices
for BDS. The Commission proposes two alternatives for applying the
Competitive Market Test, favoring one based on bright-line triggers--
business density and the number of competitors--which will offer
clearer rules and be administratively less burdensome for providers to
present the case.
73. The Commission seeks comment on whether data from various
sources proposed in a staff study provide a reasonable basis for
calculating a productivity-based X factor but seeks comment on
alternative sources of data that would more precisely calculate
productivity increases in the provision of business data services. The
Commission seeks comment on whether the additional precision associated
with obtaining those data and using them to calculate a productivity-
based X-factor outweigh the associated burdens. In particular, the
Commission proposes calculating the X-factor using economy-wide and
industry-wide data as opposed to company-specific data from cost
studies, but asks whether the added precision from company-wide data
outweighs the burdens.
74. For competitive areas, the Commission proposes removing
significant regulatory burdens imposed on BDS providers. Specifically,
the Commission proposes removing TDM-based BDS determined to be
competitive under the Competitive Market Test from price cap regulation
and apply a competitive regulatory framework--proposing a path to
detariff TDM-based services while maintaining price caps on a
detariffed basis. The Commission also seeks comment on a voluntary
mechanism that would provide carriers with flexibility to adjust price
cap rates for TDM-based services when replacement packet-based services
are available.
75. The Commission recognizes that applying heightened regulation
to services largely unregulated previously may impose burdens on
providers and purchasers. The Commission, therefore, asks commenters
whether there should be an implementation period to give providers
sufficient time to bring markets into compliance with the applicable
regulatory obligations, and seek comment on the length of any
implementation period.
76. As noted above, in the FNPRM, the Commission seeks comment on
whether we should extend the Tariff Investigation Order's prohibition
on all-or-nothing provisions a general prohibition for business data
services, including both tariffed offerings and commercial agreements
and whether
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such a prohibition should be imposed in noncompetitive markets or in
all markets. The Commission asks what additional management or tracking
burdens would this impose on incumbent LECs and how significant would
they be, whether such costs or burdens can be quantified, and how such
administrative burdens compare with the benefits of added flexibility
for customers in the business data services market. The Commission also
asks about whether allowing customers to treat their purchases under
one Ethernet commercial agreement as separate purchases impose any
burdens on providers of business data services and whether the benefits
of increase flexibility outweigh any such burdens.
77. In the FNPRM, the Commission proposes to periodically collect
data from incumbent LEC providers going forward to update the
Commission's analysis and monitor the marketplace for BDS. The
Commission took several steps to minimize the economic impact on small
providers and proposes exempting purchasers from the collection
requirements. The Commission proposes narrowing the scope of the
collection to minimize burdens on smaller providers while providing the
Commission with the data necessary to periodically update its analysis.
The Commission seeks comment on whether it is possible to exclude
smaller competitive LECs from the collection without adversely
affecting the Commission's analysis of the BDS market. The Commission
is considering excluding competitive providers below a set threshold
based on either locations with connections, number of customers, or
revenues and ask commenters to suggest appropriate thresholds and to
quantify the potential impact of any exclusion on the Commission's
analysis. The Commission proposes a collection that is significantly
less burdensome then the 2015 Collection, largely omitting questions on
terms and conditions and narrative responses. The Commission proposes
to omit purchasers, largely smaller entities, from the mandatory
periodic collection, instead proposing to hire a third party to conduct
a voluntary survey of customer classes. Furthermore, the proposed three
year periodic collection period, as opposed to annual or quarterly,
would minimize the burden on filers.
78. As SBA observed, changes in special access (BDS) prices may
have an impact on small carriers including small competitive carriers.
In the FNPRM, the Commission proposes modifying the existing regulatory
regime applicable to BDS. Any such actions will accrue to the benefit
of all carriers, including small competitive carriers, as it will
ensure the availability of business data services at just and
reasonable rates.
F. Federal Rules That May Duplicate, Overlap, or Conflict With the
Proposed Rules
79. None.
Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 2016-12058 Filed 6-2-16; 8:45 am]
BILLING CODE 6712-01-P