Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking To Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, 25660-25713 [2017-10713]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 82, Number 105 (Friday, June 2, 2017)]
[Rules and Regulations]
[Pages 25660-25713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10713]



[[Page 25659]]

Vol. 82

Friday,

No. 105

June 2, 2017

Part II





 Federal Communications Commission





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47 CFR Parts 0, 1, et al.





 Business Data Services in an Internet Protocol Environment; Technology 
Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T 
Corporation Petition for Rulemaking to Reform Regulation of Incumbent 
Local Exchange Carrier Rates for Interstate Special Access Services; 
Final Rule

Federal Register / Vol. 82 , No. 105 / Friday, June 2, 2017 / Rules 
and Regulations

[[Page 25660]]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 0, 1, 61, 63, and 69

[WC Docket Nos. 16-143, 05-25, GN Docket No. 13-5, and RM-10593; FCC 
17-43]


Business Data Services in an Internet Protocol Environment; 
Technology Transitions; Special Access for Price Cap Local Exchange 
Carriers; AT&T Corporation Petition for Rulemaking To Reform Regulation 
of Incumbent Local Exchange Carrier Rates for Interstate Special Access 
Services

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this document, a Report and Order provides a new framework 
for deregulating Business Data Services in areas where competitive 
forces are able to ensure just and reasonable rates. Acknowledging the 
presence of increased competition evidenced by the record in this 
proceeding, the Federal Communications Commission amends its rules to 
reflect changes in the business data services marketplace. By adopting 
this framework the Commission acts to further bolster competition and 
investment in business data services, and takes further steps to 
decrease the cost of broadband infrastructure deployment.

DATES: Effective August 1, 2017, except for the amendments to 
Sec. Sec.  1.776, 61.45, 61.201, 61.203, and 69.701, which shall become 
effective after OMB approval of those amendments. The Federal 
Communications Commission will publish documents in the Federal 
Register announcing the effective dates.

FOR FURTHER INFORMATION CONTACT: Joseph Price, Wireline Competition 
Bureau, Pricing Policy Division at (202) 418-1423 or 
Joseph.Price@fcc.gov.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order, FCC 17-43, adopted April 20, 2017, and released April 28, 
2017. The summary is based on the public redacted version of the 
document, the full text of which can be found at the following internet 
address: https://apps.fcc.gov/edocs_public/attachmatch/FCC-17-43A1.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 (voice) or 202-418-0432 
(TTY).

Synopsis

I. Introduction

    1. After more than ten years of studying the business data services 
(also referred to as BDS) market, numerous requests for comment, and a 
massive data collection, we at long last recognize the intense 
competition present in this market and adjust our regulatory structure 
accordingly. The record in this proceeding demonstrates substantial and 
growing competition in the provision of business data services in areas 
served by incumbent local exchange carriers (LECs) subject to price cap 
regulation. By adopting a framework which accounts for these dynamic 
competitive realities, we will create a regulatory environment that 
promotes long-term innovation and investment by incumbent and 
competitive providers alike which well-serves business data services 
customers.
    2. The record indicates the market for business data services is 
dynamic with a large number of firms building fiber and competing for 
this business. The 2015 Collection identified 491 facilities-based 
companies providing business data services in the enterprise market. 
Competitive LECs such as Zayo and Birch continue to invest and expand 
their competitive fiber networks with very successful results. 
Competitive LECs earned $23 billion of the $45 billion in business data 
services revenue in 2013. Cable providers have also emerged as 
formidable competitors in this market. Cable business data services are 
reported to have grown at approximately 20 percent annually for the 
past several years and, increasingly, they have emphasized Internet 
access and managed services, which directly compete with the products 
being offered by the incumbent and other competitive LECs.
    3. Although incumbent LECs once dominated the business data 
services market selling circuit-based DS1s and DS3s, such technology is 
becoming obsolete. Significant increases in bandwidth demand are being 
driven by bandwidth-hungry applications, mainly video services 
(teleconferencing, training, etc.) as well as by web and cloud-based 
services. These rapidly increasing bandwidth demands will place an ever 
increasing demand for services such as Ethernet, especially over fiber, 
which can scale bandwidth to meet these requirements more effectively 
than can the old legacy services. Packet-based services, which include 
Ethernet, already make up a large part of the business data services 
marketplace. In 2013, more than 40 percent of the approximately $45 
billion in dedicated service revenues were for packet-based services. 
Based on provider and analyst forecasts, we expect this shift from 
circuit-based to packet-based services to continue at a rapid pace.
    4. Against this competitive backdrop, we now move away from the 
traditional model of intrusive pricing regulation for incumbent LECs, 
recognizing that ex ante pricing regulation is of limited use--and 
often harmful--in a dynamic and increasingly competitive marketplace. 
Indeed, there is a significant likelihood ex ante pricing regulation 
will inhibit growth and investment in many cases. In such 
circumstances, we should not continue unnecessary regulations, much 
less extend them to new services or providers. Instead, we adopt a 
framework based on our market analysis and a careful balancing of the 
costs and benefits of ex ante pricing regulation that deregulates 
counties where the provision of price cap incumbent LECs' business data 
services is deemed sufficiently competitive.
    5. This Report and Order (Order), therefore, provides a new 
framework for business data services that minimizes unnecessary 
government intervention and allows market forces to continue working to 
spur entry, innovation, and competition. Our decisions stem from 
careful consideration of the data submitted in the proceeding and the 
thoughtful comments and ex parte communications submitted into the 
record. Our thinking on how to evaluate competition and design pricing 
regulation evolved as we engaged with economists, advocates, and others 
to develop an administrable approach to deregulate in areas where 
competitive forces are able to ensure just and reasonable rates. To a 
large extent in the business data services market, the competition 
envisioned in the Telecommunications Act of 1996 (1996 Act) has been 
realized, and this Order is an important step in updating our rules to 
adequately reflect such market developments. We reach these conclusions 
aware of the increased investment in facilities and service deployment 
that has occurred in response to similar deregulatory action by the 
Commission. In tandem with adoption of this new, more appropriate 
framework designed to maximize competition and investment in business 
data services, we are also taking further steps to decrease the costs 
of deploying our nation's broadband infrastructure.

II. Background

    6. Business data services refers to the dedicated point-to-point 
transmission of

[[Page 25661]]

data at certain guaranteed speeds and service levels using high-
capacity connections. Henceforth, we refer to special access services 
as a subset of business data services that we continue in some 
circumstances to subject to ex ante pricing regulation. Specifically, 
special access services include DS1 and DS3 interoffice facilities and 
channel terminations between an incumbent LEC's serving wire center and 
an interexchange carrier (IXC), and end user channel terminations, 
although ex ante pricing regulation would only apply to certain end 
user channel terminations. Businesses, non-profits, and government 
institutions use business data services to enable secure and reliable 
transfer of data, for example, as a means of connecting to the Internet 
or the cloud, and to create private or virtual private networks. 
Business data services support applications that require symmetrical 
bandwidth, substantial reliability, security, and connected service to 
more than one location. Business data services are significant to our 
nation's economy--revenues reported by providers in response to the 
2015 Collection total almost $45 billion for 2013, and revenues for the 
broader market for enterprise services, which include voice, Internet, 
private network, web-security, cloud connection, and other digital 
services, could exceed $75 billion annually. Moreover, these numbers do 
not capture the indirect contribution of business data services to the 
nation's economy as business customers rely on these services for their 
commercial operations.
    7. The Commission has historically subjected the provision of 
business data services by incumbent LECs to dominant carrier 
safeguards. The focus of this proceeding is on areas where incumbent 
LECs are subject to price cap regulation in setting their business data 
services rates. Beginning in 1999, through a series of Commission 
actions, the Commission: (1) Began granting price cap incumbent LECs 
pricing flexibility by establishing both Phase I relief (which 
permitted the provision of volume and term agreements and contract 
tariffs) and Phase II relief (which relieved the carrier of price cap 
regulation) through ``triggers'' using collocation as a proxy for 
competition; (2) adopted the ``CALLS plan,'' which separated business 
data services into its own basket and applied separate ``X-factors;'' 
(3) initiated a rulemaking to examine a number of aspects of the 
business data services market, including whether to apply and how to 
calculate a productivity-based X-factor and whether to maintain or 
modify the pricing flexibility rules; and (4) granted a number of price 
cap incumbent LECs forbearance from dominant carrier regulation, 
including tariffing and price cap regulation for their newer packet-
based and higher bandwidth optical transmission broadband services, 
including a ``deemed grant'' for Verizon from application of Title II 
to these services.
    8. In August 2012, the Commission suspended its pricing flexibility 
rules because they were ``not working as predicted, and . . . fail[ed] 
to accurately reflect competition in today's special access markets.'' 
In December 2012, the Commission released the Data Collection Order and 
FNPRM, to collect data, analyze how competition, ``whether actual or 
potential, affects prices, controlling for all other factors that 
affect prices,'' and ``determine what barriers inhibit investment and 
delay competition, including regulatory barriers, . . . and what steps 
the Commission could take to remove such barriers to promote a robust 
competitive market and permit the competitive determination of price 
levels.'' The Commission planned to use the results of its analysis to 
evaluate whether to change its existing pricing flexibility rules ``to 
better target regulatory relief in competitive areas'' and evaluate 
remedies to address potentially unreasonable terms and conditions. The 
Bureau released the Data Collection Implementation Order on September 
18, 2013, clarifying the scope of the collection. Pursuant to the 
Paperwork Reduction Act (PRA), the Office of Management and Budget 
(OMB) approved the data collection subject to modifications which the 
Bureau implemented in an order released on September 15, 2014. By 
February 27, 2015, the last group of filers were required to respond to 
the 2015 Collection.
    9. Most recently, the Commission released the Tariff Investigation 
Order and Further Notice on May 2, 2016. The Order and Further Notice 
declared certain terms and conditions in the tariffs of the four 
largest incumbent LECs unlawful, proposed to replace the existing 
business data services regulatory structure with a new framework, and 
sought comprehensive comments on the proposed new framework.

III. Competitive Conditions for Business Data Services

    10. In this section we consider competition among traditional and 
non-traditional providers of end-to-end business data services and the 
circumstances under which market conditions warrant a deregulatory 
approach for certain business data services consistent with our 
obligation to ensure that the rates for services offered by common 
carriers are just and reasonable. In the present rulemaking, the 
Commission has already determined that significant aspects of the 
pricing flexibility regulatory regime have failed. Thus, we must now 
decide whether to allow that failure to continue or to implement 
changes. As is often the case with complex problems, there is no ideal 
dataset available or which we could collect in a reasonable timeframe 
or expense, which would answer all doubts. Although the 2015 Collection 
was critical to our analysis of competition in BDS markets, it was not 
the only data, or data analysis, relied upon to reach the conclusions 
here. Analysis of varying data and market realities in the record also 
are relied upon as part of the determination of where competitive 
pricing pressure exists, and the fuller analysis is considered within 
the context of our commitment to implement administrable regulatory 
changes. As such, we have carefully parsed the available evidence and 
apply reasoned judgment to decide the questions before us.
    11. The Commission is charged with ensuring that the rates, terms, 
and conditions for services offered by common carriers are just and 
reasonable and that services are not offered on an unreasonably 
discriminatory basis pursuant to sections 201(b) and 202(a) of the 
Communications Act. We ``may prescribe such rules and regulations as 
may be necessary in the public interest to carry out the provisions of 
this Act.'' In addition, section 706(a) of the 1996 Act states 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.

    12. Our public interest evaluation ``necessarily encompasses . . . 
among other things, a deeply rooted preference for preserving and 
enhancing competition in relevant markets [and] accelerat[ing] private 
sector deployment of advanced services.'' A competition analysis is 
critical to our public interest evaluation and is informed by, but not

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limited to, traditional antitrust principles designed to protect 
competition. The Commission, in conducting an analysis, may ``consider 
technological and market changes as well as trends within the 
communications industry, including the nature and rate of change.'' 
Analyzing the competitive nature of the market for business data 
services will allow us to make a determination about the appropriate 
way to balance the costs and benefits of applying ongoing regulation to 
particular business data services.
    13. For business data services provided over DS1s and DS3s supplied 
by the incumbent LEC we find that a nearby potential business data 
services supplier, in the form of a wired communication network 
provider, generally tempers prices in the short term and results in 
reasonably competitive outcomes over three to five years (the medium 
term). For example, a cable company that has fiber nodes nearby, and 
hence the ability to provide both Ethernet-over-fiber and, even more 
readily Ethernet-over-Hybrid Fiber Coax (EoHFC), if a profitable 
opportunity arises, is particularly relevant to pricing decisions of a 
business data services provider wishing to retain a customer.
    14. Our conclusion is based in part on record evidence indicating a 
cost structure for business data services that incentivizes suppliers 
with existing networks to compete vigorously for customers. We also 
base our conclusion on findings that the impact of the first entrant on 
price will be substantially higher than the impact of subsequent 
entrants and business data services pricing is often determined by a 
customer bidding or request for proposal (RFP) process in which even an 
uncommitted, though usually nearby, entrant can compete for the 
customer's business, and then build out to the customer. Consequently, 
the presence of nearby competitive facilities tempers pricing as 
competitors are generally aware of competitive facilities that can be 
expanded to reach an additional customer with reasonable costs should 
the incumbent's pricing exceed competitive levels (supracompetitive 
prices). Furthermore, where an incumbent sets supracompetitive prices 
it is vulnerable to competitors vying for customers.
    15. Together the evidence demonstrates how even a single competitor 
exerts competitive pressure which results in just and reasonable rates. 
This evidence demonstrates that the significant network investment 
required to provide business data services to end users is increasingly 
being leveraged in ways that prevent substantial abuses of market 
power. Given such incentives, the presence of two current competitors 
or providers with their own fiber nodes within a half mile, hereafter 
referred to as medium-term entrants, or that will serve over the medium 
term, are sufficient to provide competitive pressure to adequately 
discipline prices. Our finding is also based on evidence of competition 
that is currently in place or likely to arise over the medium term.
    16. In addition, we find that business data services with 
bandwidths in excess of the level of a DS3 generally experience 
reasonably competitive outcomes, and to the extent they do not today, 
will do so over the medium term even where a facility-based competitor 
has no nearby facilities. We come to this conclusion based on a record 
that shows almost no evidence of competitive problems in the supply of 
these higher bandwidth services, and which shows higher bandwidth 
opportunities are particularly attractive to competitive LECs. We make 
a similar finding for transport services, where the record presents 
little evidence of competitive problems, and where low bandwidth demand 
is quickly turning into high bandwidth demand. We make a similar 
finding for lower bandwidth packet-based services. We reach these 
conclusions because, compared with time division multiplex (TDM) 
services, competitive LECs are considerably more active in the supply 
of packet-based services, are on a considerably more level playing 
field in supplying these new services against incumbent LECs, and have 
better incentives to supply such future-proof services where demand is 
growing rapidly.

A. Introduction

    17. We analyze the 2015 Collection, and look to analyses and other 
evidence submitted in this proceeding, to reach findings concerning 
competiveness in the business data services industry. In conducting our 
analysis, we consider market concentration as highly relevant, but do 
not find it determinative absent consideration of market dynamics. We 
also look at specific market-based circumstances when considering 
actual and potential sources of competition.
    18. In this section, we review the competitiveness of business data 
services, in general, as well as issues raised by commenters. We reach 
findings as to the degree of competitiveness in the business data 
services industry and consider industry trends on competitive entry. We 
look to see if services are reasonably substitutable to determine an 
appropriate product market, and, in the case of geographic markets, we 
look to areas ``in which the seller operates and to which the purchaser 
can practicably turn for supplies.'' As part of that analysis we 
observe high barriers to entry, but also observe a significant 
penetration of competitive business data services facilities being 
deployed and upgraded with a number of technologies throughout the 
country, particularly in areas with significant customer demand. 
Moreover, we observe a strong willingness on the part of providers to 
extend their networks half a mile to meet demand, especially over the 
medium term.
    19. Consistent with antitrust principles, we distinguish product 
markets by generally looking at whether various services are reasonably 
interchangeable, with differences in price, quality, and service 
capability being relevant. In the case of geographic markets, we look 
at both supply and demand substitution. For both product and geographic 
markets, it is conventional to undertake a hypothetical monopolist test 
to determine market definitions. That approach begins with the smallest 
plausible market definition and considers likely consumer substitution 
if a hypothetical monopolist in that market imposed a small but 
significant and non-transitory increase in price (SSNIP). We do not 
have data that would enable a more formal application of such a test, 
but our market analysis considers purchasers' willingness and ability 
to substitute services, suppliers, and geographies. The extent to which 
supply is broadly competitive wherever the incumbent LEC also faces a 
facility-based rival is strengthened by our findings as to specific 
product markets, and refined by our analysis of geographic markets.

B. Product Market

    20. When defining a product market, to ensure our action affects an 
appropriate group of services, we look to which services are 
sufficiently similar to reasonably be considered substitutes. We 
consider a number of factors, including the ``practical indicia'' 
identified by the Supreme Court, such as ``industry or public 
recognition of the submarket as a separate economic entity, the 
product's peculiar characteristics and uses, unique production 
facilities, distinct customers, distinct prices, sensitivity to price 
changes, and specialized vendors.'' Not all of these factors must be 
present to define the relevant product market. Perfect substitutability 
is not required as part of our broad review of business

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data services markets and our narrow consideration of certain special 
access service inputs that comprise a full business data services 
customer circuit.
    21. A product that substitutes for another demonstrates a 
possibility that consumers will purchase the competing service of a 
competitor, including a potential entrant. Consequently, we consider 
providers with facilities used to supply one service that could be used 
to provide another. For example, we see not only substitution between 
circuit- and packet-based business data services, but the capacity to 
supply both services over the same underlying facilities, indicating 
the two services are likely in the same market, and more importantly, 
that suppliers of either service are in the same market, as they could 
readily provide the other service over their facilities. Similarly, 
while best-efforts services do not generally appear to be a good 
substitute for business data services (and vice versa), legacy hybrid-
fiber-coaxial (HFC) and copper (in fact, generally hybrid-fiber-copper) 
facilities are commercially used to provide low bandwidth business data 
services (if not always at the highest commercially available quality 
standards). Unbundled network elements (UNEs), dark fiber, and fixed 
wireless services and facilities used to provision business data 
services also play competitive roles in business data services markets.
1. Circuit- and Packet-Based Business Data Services
    22. The legacy technology for providing business data services is 
circuit-based using TDM. Incumbent LECs are the primary facilities-
based suppliers of TDM-based services, including DS1s and DS3s with 
symmetrical capacities of 1.5 Mbps and 45 Mbps, respectively. For 
decades, these workhorses were the only options available to meet the 
high-capacity needs of users. TDM circuits provide dedicated, secure, 
reliable and low-delay transmission service for moving voice, data, and 
video traffic, but do not effectively scale for data intensive 
applications. To increase bandwidth for DS1s/DS3s, providers must bond 
multiple circuits together. For example, providers can bond up to eight 
DS1s to achieve a maximum bandwidth of 12 Mbps. DS3s are rarely bonded, 
however, because with the increased cost, the more logical option is to 
use a newer technology, such as a packet-based service. In contrast, 
packet-based services have bandwidth options ranging from 2 Mbps up to 
100 Gbps, depending on the connection medium, and are easily scaled 
over fiber to meet increasing data demands.
    23. Because packet-based networks move packets over a shared 
transport channel, they are more efficient than a circuit-based network 
where transmission capacity is reserved even when not used. The routing 
and reassembling of data packets, however, can lead to packet loss, 
jitter, and latency, affecting the quality of service needed to support 
certain applications desired by users, e.g., real-time and mission 
critical applications. Providers can mitigate these delays through 
packet prioritization and setting performance parameters, like 
assigning different classes of service and quality of service levels 
(with, for example, Service Level Agreements (SLAs)). In this way, 
providers can shape and differentiate networks to improve performance 
to meet the specific needs of users. Backed by performance guarantees, 
packet-based business data services can provide the same, if not 
better, level of security, reliability, and symmetrical speeds as a DS1 
or DS3 service. Packet-based business data services can also accomplish 
this with greater efficiency and scalability to satisfy a user's 
growing bandwidth demands.
    24. Functionally, TDM and packet-based services are broadly 
interchangeable in the business data services realm as both are used to 
provide connectivity for data network and point-to-point transmissions 
and both services can be delivered over the same network 
infrastructure. Incumbent and competitive LEC providers offer both 
types of services to similar types of customers and their marketing 
materials juxtapose these two technologies against each other. 
Customers of TDM-based services are also switching to packet-based 
services. And commenters representing suppliers agree, with limited 
exception, the services, whether circuit-based or packet-based, are 
substitutes and in the same product market.
    25. Substitution between these two services, however, is generally 
one directional. New customers, more likely than not, are choosing to 
purchase Ethernet services, subject to their availability and pricing, 
and existing customers of TDM-based service are switching to Ethernet. 
There is no evidence suggesting Ethernet customers are switching to 
DS1s and DS3s. Nor as a policy matter would we want that to occur as 
the technology transition is moving towards the eventual termination of 
TDM service offerings altogether. We want to encourage that migration, 
while mitigating disruptions to existing customers, to help unleash the 
benefits of network innovation for American businesses and consumers. 
We note, however, that adopting a framework that promotes deployment of 
competitive services, as we do here, benefits even those customers who 
maintain TDM services due to static needs--or for whatever reason--
because increased competition for these services is likely to place 
downward pressure on prices.
    26. We find circuit- and packet-switched business data services 
that offer similar speed, functionality, and quality of service 
characteristics fall within the same product markets for the purposes 
of action taken here, even though there is evidence suggesting the two 
technologies have important distinctions. Indeed, the Commission has 
long considered TDM and packet-based business data services as 
functionally interchangeable at comparable capacities and has 
consistently included both types of business data services in its 
orders and forbearance decisions. Courts, in turn, have upheld the 
Commission's view. Although commenters have pointed out some 
differences between these technologies, there is considerable evidence 
in the record indicating that the Commission's view on sufficient 
substitutability of circuit and packet business data services still 
holds. We believe that legacy TDM business data services suppliers 
would be constrained by the threat of potential customer loss to 
packet-based business data services suppliers.
2. Ethernet Over Hybrid-Fiber Coax
    27. Packet-based business data services over fiber are the gold 
standard for the industry because they provide the greatest flexibility 
to efficiently scale bandwidth to the highest speeds at the highest 
performance levels. There is debate in the record, however, on whether 
we should include the packet-based Ethernet services provided by cable 
companies using their HFC networks in the product market for business 
data services. Our review of the record now confirms that competitive 
pressure on low bandwidth packet-based services carried on fiber and 
legacy TDM services is significant, and should be taken into account as 
part of any competitive market test.
    28. In many ways, EoHFC is much like other modes of business data 
services. Ethernet-over-HFC technology provides point-to-point wireline 
connection at symmetrical speeds, albeit limited to 10 Mbps. Although 
EoHFC is not as reliable as circuit-switched or fiber connections, some 
cable companies are able to guarantee 99.9 percent availability (as 
compared to fiber's 99.99 percent). In addition to

[[Page 25664]]

availability, some cable companies offer further performance 
guarantees, addressing jitter, latency, packet loss, availability, and 
mean time to repair their Ethernet over Data over Cable Service 
Interface Specification (DOCSIS) service. Comcast targets its EoHFC 
service to ``[c]ustomers with low to medium bandwidth requirements that 
need enterprise features.'' Wholesalers, for instance, are increasingly 
leaning on the cable industry's vast EoHFC network to address the needs 
of their multi-regional customers. AT&T ``has certified both fiber-
based and HFC-based Ethernet offerings from cable companies for use in 
[its business data] services, as well as for use in [its] backhaul 
services.'' Similarly, Sprint has announced that it now provides 
business data services over cable company facilities, including EoHFC.
    29. Cable network architecture is constantly evolving to meet 
bandwidth needs. Yet, some cable providers contend that their EoHFC 
business data services are not substitutable with fiber business data 
services because they do not offer SLAs, or where they do so, they are 
limited, for example, guaranteeing only repair intervals and 
availability for their Ethernet over DOCSIS service. Some wholesalers 
echo this view, reporting that they do not consider EoHFC (DOCSIS 3.0) 
as competitive with their services mainly because of limited 
availability, performance issues, and inadequate SLA guarantees. 
However, the record shows that while these performance levels may be 
undesirable for some customers, many others readily accept lower 
performance guarantees in exchange for lower prices. We believe that a 
significant tipping point has been reached in the evolution of these 
services when even incumbent LECs such as Verizon and AT&T are using 
these services for their own business customers out-of-region.
3. ``Best-Efforts'' Internet Access Services
    30. Best-efforts Internet access services describe basic Internet 
access as generally marketed to residential and small business 
subscribers. At the most-basic level, best-efforts and dedicated 
business data services appear to be interchangeable: End users can use 
both services to access the Internet or create virtual private 
networks. However, best-efforts Internet access is provided with 
asymmetrical speeds and without service performance guarantees. Whereas 
dedicated packet-based business data services allow for packet 
prioritization and quality of service priority tiers, best-efforts 
services do not. Also, while dedicated business data services commonly 
provide at least 99.9 percent network reliability, with higher 
guarantees being available for fiber services, and guarantees for 
latency and jitter, best-efforts services generally do not offer any 
reliability guarantees, although some cable providers offer some non-
binding performance ``assurances.''
    31. In the Further Notice, the Commission stated that ``it is 
likely that best effort services may not be in the same product market 
or markets as BDS,'' and sought comment on its analysis. However, the 
record includes evidence of incumbent LECs losing small- and medium-
sized customers to cable's best-efforts offerings, despite noticeable 
differences in performance and prices between business data and best-
efforts services. In many circumstances, customers are willing to trade 
guaranteed service levels for higher bandwidth and better prices while 
receiving some symmetricity. Cable providers routinely pitch their 
best-efforts business broadband services to customers as substitutable 
for legacy TDM services. Charter, for example, markets its Business 
Internet Essentials16 services as ``more than 13 times faster than 
T1.'' And the record shows cable has been largely successful in growing 
its best-efforts business broadband services: ``Comcast reports a 
[REDACTED] increase for best efforts business broadband services from 
2014-2015'' and ``TWT reports a [REDACTED] from 2014 to 2015 increase 
in its BIA (its best-efforts HFC service).'' Incumbent LECs are 
noticing this competition. For example, AT&T explains that its sales 
team has discovered that ``for the thirteen-month period from November 
2014 through November 2015, a very substantial portion of AT&T's 
competitive losses were to cable companies and a significant portion of 
those losses were to best efforts cable services.'' We, therefore, 
observe substitution and best-efforts networks supporting business data 
services for certain customers, but we do not observe broad 
substitution or substantial performance similarities with fiber-based 
business data services sufficient to determine that best-efforts 
service and its underlying facilities are in the same product market. 
In that manner, best-efforts services can be distinguished from other 
business data services. Despite this, the underlying facilities used to 
provision best-efforts services, even over legacy media such as HFC, 
can be and are being repurposed to provide business data services.
4. Unbundled Network Elements
    32. We find that the use of UNEs, where available, allow 
competitive providers to effectively compete in lower bandwidth 
services, and are particularly close substitutes for DS1s and DS3s. 
However, use and availability of UNEs is diminishing.
    33. Incumbent LECs are required by section 251(c)(3) of the Act and 
section 51.319 of the Commission's rules to provide requesting common 
carriers with DS1s, DS3s, and bare copper loops as UNEs. UNE rates, as 
determined by the state public utility commissions, are based on 
forward-looking costs not on the incumbent LECs' historical costs, and 
are thus typically lower than the incumbent LEC rates for regulated DS1 
and DS3 services. UNEs are intended to facilitate competition by 
lowering barriers to stimulate facilities-based entry into local 
markets, and the Commission has imposed unbundling obligations ``in 
those situations where [it] find[s] that carriers genuinely are 
impaired without access to particular network elements and where 
unbundling does not frustrate sustainable, facilities-based 
competition.''
    34. The availability of UNEs from incumbent LECs is limited based 
on the ``impair'' standard. DS1 and DS3 UNE loops are allowed only in 
those buildings located within the service area of an incumbent LEC 
wire center that falls below a certain business density line and fiber 
collocation threshold. As a practical matter, competitive LECs cannot 
rely on UNEs at a wire center in which the competitive LEC is not 
collocated. Moreover, with incumbent LECs increasingly retiring their 
copper-based infrastructure, the question also arises as to the extent 
to which UNEs will remain available in the future.
5. Dark Fiber
    35. Dark fiber is a physical connection with no transmission 
functionality. As the Commission explained in the Further Notice, ``the 
supply of BDS over dark fiber takes on significant aspects of facility-
based competition'' and ``is particularly attractive for competitive 
LECs seeking to expand their network reach and mobile carriers needing 
cell site backhaul.'' Also, the record indicates that mobile wireless 
service providers are purchasing and then self-equipping dark fiber as 
a substitute for a fiber-based Ethernet service. Accordingly, we find 
dark fiber is a substitute for special access services purchased for 
wireless backhaul. Similarly, dark fiber is a substitute outside of 
backhaul, e.g., serving the

[[Page 25665]]

needs of retail business customers. The 2015 Collection includes all 
competitive provider locations serviced over dark fiber, and staff and 
key economists that used that data considered competition over it as 
essentially equivalent to facility-based competition.
6. Satellite Services
    36. Satellite providers also offer business data services that are 
currently relied upon by many end users as acceptable substitutes for 
all or part of their broadband demand requirements, particularly for 
those that find best efforts provisioning from competitors acceptable. 
General Communications (GCI), for example, reports that its ``satellite 
network provides communications services to small towns and communities 
throughout rural Alaska.'' Hughes Network Systems, LLC ``provides 
advanced broadband satellite service throughout the United States, 
including high-speed internet and voice over internet protocol 
(`VoIP').'' The record indicates that ``Globalstar, a low Earth orbit 
satellite constellation for satellite phone and low-speed data 
communications, has proposed a service that could help to relieve some 
Wi-Fi congestion in anchor institutions.'' And there is evidence that 
satellite service providers are increasingly competing for lower 
bandwidth business data service customers, which is a trend we 
anticipate will continue in the future. We do not find BDS provided by 
satellite currently to be in the relevant product market but note that 
its presence underscores the conservative nature of our approach. In 
that manner, we believe satellite broadband offerings have the 
potential to add competitive pressure to the BDS market, especially for 
customers that do not require high bandwidth or symmetrical service 
with significant service level or uptime guarantees.
7. Fixed Wireless Services
    37. We find fixed wireless services are a substitute for cell site 
backhaul but are, at most, a gap filler for special access services 
providing last-mile access to buildings. While mobile wireless carriers 
have relied substantially on fixed wireless, i.e., often self-
provisioning microwave point-to-point links to backhaul traffic from 
their macro cell sites, the record on providers viably using fixed 
wireless to provide last-mile access to buildings is not as clear. In 
the Further Notice, the Commission found the record somewhat mixed on 
the use of fixed wireless technology to provide business data services. 
But the Commission also noted that the 2015 Collection included 
locations served by fixed wireless technology and mobile providers 
``reported that about 40 percent of their cell sites have self-
provisioned wireless backhaul facilities.'' In response, commenters 
discussed at a high level, whether or not to include fixed wireless in 
the business data services product market, or for a competitive market 
test with few additional facts provided on the subject of 
substitutability. The record also indicates that XO and Windstream use 
fixed wireless service in their networks.
    38. We continue to find fixed microwave is a competitive backhaul 
alternative for wireless providers. The record, however, on using fixed 
wireless to provide reliable last-mile access to end users is mixed, 
especially in urban areas where line-of-sight can be more of a concern 
than in rural areas. We do note the promise of 5G technology to provide 
quality high-bandwidth fixed wireless services to businesses in urban 
areas. AT&T and Verizon are currently engaged in 5G trials, but 
commercial service is not expected to launch until 2020. That said, 
given the very high capacity of 5G networks, they have the potential to 
represent a significant additional source of competition for the 
provision of business data services. We will continue to monitor these 
developments. For now, at a minimum, we consider fixed wireless an 
option for last-mile building access when wireline facilities are 
unavailable. Fixed wireless can also serve as a viable backup 
transmission option for business data services purchasers to increase 
network diversity. As such, for purposes of the relevant business data 
services product market, we find that fixed wireless services should be 
included in the product market discussion because they may have a 
competitive effect on the market.

C. Geographic Market

    39. To determine an appropriate geographic market for competitive 
analysis purposes, we consider the area to which consumers can 
``practically turn for alternative sources,'' and within which 
providers can reasonably compete. The geographic market ``must . . . 
both correspond to the commercial realities of the industry and be 
economically significant.'' Yet, as with product market delineation, a 
geographic market ``cannot . . . be defined with scientific 
precision.'' In this section we conclude that a half mile is the 
relevant geographic market for the analysis of competition in the 
business data services market.
    40. In the Further Notice, the Commission described the relevant 
geographic market in the business data services industry as likely 
being larger than the average census block and sought comment on its 
analysis. Considering varying buildout distances in the record, the 
Commission observed in the Further Notice that competitors are willing 
to extend their facilities to reach potential customers ``typically 
rang[ing] from [REDACTED] to [REDACTED] Commenters indicate that 
incumbent LECs and competitive providers have similar buildout 
criteria. For larger competitive LECs, the majority of buildouts are 
within [REDACTED] from a splice point and less commonly exceed 
[REDACTED] away from the nearest splice point on their fiber network. 
Accordingly, the Commission suggested that the relevant ``geographic 
market definition for lower bandwidth BDS lies somewhere above the 
average area of the Census block with BDS demand and below'' the 
Metropolitan Statistical Area (MSA).
    41. While buildouts are common within a half mile from a 
competitor's facilities, the subsequent record shows buildouts of half 
mile and farther often occur. However, such buildouts become much less 
likely as the distance from a cost-effective and viable fiber junction 
point increases as well as due to variation in entry barriers. Some 
providers may be more risk tolerant and will build out farther than 
others, as they weigh location-specific factors, including the 
identities of the nearby competitors, the specifics of competing local 
networks, local geographic features (such as traversing rivers or 
highways), local building codes, the density of local demand, and 
bandwidth demanded. However, we find risk tolerant businesses and 
buildouts farther than a half mile to be the exception.
    42. The nature of the customer's demand is particularly relevant to 
competitors' build decisions. As the Commission recognized recently 
when considering the likelihood of a competitor entering a building to 
provide business data services, ``[t]he lower the demand in the 
building, the closer another competitive fiber provider must be to that 
building for entry to be profitable and thus likely.'' Nevertheless, 
even when demand is too low to justify the buildout, competitive 
providers often consider whether there are any potential customers 
nearby and may even take a more circuitous route in anticipation of 
additional demand from businesses along the route. The 2015 Collection 
indicates that in many areas of the country competitive facilities are 
sufficiently close to make deployment to buildings with low demand 
justifiable. In 2013, there was at

[[Page 25666]]

least one competitive provider in ``more than 95 percent of MSA census 
blocks with BDS demand, and . . . those census blocks represented about 
97 percent of the total BDS connections and 99 percent of business 
establishments.'' The average distance between buildings with incumbent 
LEC business data services customers and competitive fiber was just 364 
feet. About half of these buildings were within 88 feet of competitive 
fiber facilities and 75 percent were within 456 feet.
    43. We tested the sensitivity of our finding that a location 
currently faces or likely will face competitive choices over the medium 
term if it is within a half mile of a location served over the 
facilities of at least one competitive provider. For example, based on 
the 2015 Collection, 64.1 percent of all locations with business data 
services demand in price cap areas were within a quarter mile of at 
least one competitive provider, as compared to 79.5 percent that were 
within a half mile, and 89.4 percent that were within a mile. Thus, our 
approach lies somewhat above the middle of these two extremes, each of 
which had limited record support. We also found 45.8 percent of 
locations with business data services demand to be within a half mile 
of at least two competitive providers, and 64.6 percent of all 
locations with business data services demand to be within a mile of at 
least two competitive providers. In addition, as discussed, cable 
competition is considerably more developed than it was in 2013. Given 
the nature of cable networks, we expect the percent of locations within 
range of a quarter mile of at least one facilities-based competitor, to 
be more similar to the percent of locations within a half mile of one 
such competitor today.
    44. As we detail more fully below, there is strong evidence of 
rapid growth in competitive investment. Because of this ongoing 
investment, the average building with business data services demand 
over time will find itself closer and closer to a competing facilities-
based competitor's network. The declining distances between buildings 
with business data services demand and the fiber networks of 
competitive providers in general, and those of cable providers with 
extensive fiber networks in particular, create a cycle of investment 
and benefits within an area outside of any particular building. Because 
even small businesses' bandwidth needs are constantly growing, the 
demand for additional investment is likely to be amplified. Greater 
fiber investment leads to lower costs of deploying facilities to 
neighboring buildings, which in turn leads to greater investment. As 
costs continue to drop through further fiber deployments, and potential 
revenues for each building served increase with growing demand for high 
bandwidth services, these competitive providers with significant legacy 
(in the case of cable) and newer networks have powerful economic 
incentives to enter and price their services aggressively. This effect 
will provide a strong disciplining force to the incumbent service 
providers of surrounding locations, and will grow over time. 
Importantly, all else equal, we expect competitors will be particularly 
likely to build out to locations where incumbents have priced 
supracompetitively, to the extent these are the most profitable 
locations. In this manner, over time, abuses of market power can be 
addressed through localized competitive pressures.
    45. The record demonstrates that most business data services 
providers are willing and able to profitably invest and deploy 
facilities within a half mile of existing competitive facilities, and 
often have the ability to build out after winning a customer's bid for 
business, depending upon the scale of investment required to reach the 
customer. Accordingly, we conclude that the relevant geographic market 
for purposes of this market analysis is the region within a half mile 
of a location with business data services demand. We make this 
determination by focusing on the factors that influence suppliers of 
business data services, as opposed to customers, because in most 
instances a customer is unlikely to impact service pricing by moving 
its physical location in response to a material increase in price. This 
point is true for both single- and multi-location customers that seek 
dedicated connections to each location.
    46. We also find that business data services providers commonly 
sell their service in bidding markets, and this is especially so for 
multi-site contracts. Winning bidders then build out to the customer 
within an agreed-upon provisioning timeframe. Consequently, competitors 
outside of the customer's location can affect pricing because the 
winning bid represents the competitive offer that others must beat, 
even if that competitor does not already have facilities in the 
customer's building. That competitor is increasingly relevant the 
closer the competitor's network facilities, actual or potential fiber 
splice points, are to the customer (because its costs likely fall with 
proximity, making its bid more likely to constrain the winning bid). 
Thus, the geographic range of the competition posed by a business data 
services provider is not limited to the specific locations of active 
circuits sold at a particular point in time.
    47. Sprint and Windstream challenge our assertion that business 
data services markets are affected by bidding market dynamics. However, 
business data services contracts, being large-scale, winner-take-all 
awards, closely approximate the conditions laid out by Klemperer of an 
ideal bidding market environment. Moreover, nearby competition has 
similar cost to competition in the location itself (i.e., 
``homogenous'' products) and is therefore likely to effectively 
constrain prices.

D. Competitive Entry in Business Data Services Markets

    48. As part of our analysis, we consider how varying market 
characteristics impact entry by competing providers in business data 
services markets, along with evidence of entry barriers being overcome 
by traditional and non-traditional competing providers. We then 
conclude that, while there can be high barriers to business data 
services entry, evidence shows that firms frequently choose to enter 
this market with significant investments, particularly in areas of 
significant demand, indicating sufficient competitive conditions that 
do not warrant direct regulatory intervention.
1. Barriers to Entry
    49. Market analysis is incomplete without an evaluation of entry 
barriers. As antitrust principles explain, ``[t]he prospect of entry 
into the relevant market will alleviate concerns about adverse 
competitive effects only if such entry will deter or counteract any 
competitive effects of concern . . . .'' In evaluating the prospect of 
entry, agencies ``examine the timeliness, likelihood, and sufficiency 
of the entry efforts an entrant might practically employ.''
    50. Timeliness. Entry must be rapid enough to make an attempt by an 
incumbent to set a price above competitive levels unprofitable. 
Depending on the distance, buildout does not appear to take very long, 
about three to four months, relative to the typical multi-year 
contracts used in selling these services. Thus, in cases where demand 
is prospective and not urgent, and where a competitive LEC has existing 
facilities nearby, for example, within a half mile, buildout or even 
its threat would be timely enough to restrain a dominant provider in 
the relevant market. Instances in which

[[Page 25667]]

business data services are sold as part of a bidding or similar process 
also allow for timely entry, as providers are typically afforded an 
opportunity to provision a customer after a bid is accepted and before 
service must begin. Moreover, even if a competitor with a nearby 
wireline network (for example, perhaps a cable company) is not 
presently capable of entry over the short term, we expect it will 
become so over the medium term.
    51. Likelihood. ``Entry is likely if it would be profitable,'' and 
profitability is precisely what competitive LECs consider when deciding 
whether to deploy fiber to a customer's location. Profitability depends 
on projected expenditures required for construction and anticipated 
revenues from the customer and potential customers. Indeed nearby 
wireline network providers are actively meeting nearby demand, a 
process that can be expected to accelerate over the next few years.
    52. Competitive LECs rarely build on speculation and instead prefer 
to have a customer in place before undertaking the costs associated 
with buildouts. However, providers are also willing to consider 
potential customers nearby or along the route (and may even build a 
more circuitous route to pass by more potential customers). Providers 
generally look to recover construction costs within a certain period of 
time, [REDACTED] while taking into account potential customers. When 
the cost of construction is high, providers may lengthen the recoupment 
period.
    53. Sufficiency. We found earlier that the presence of a second 
competitor in this industry is sufficient to place an effective 
competitive constraint on business data services supply. Given the 
likelihood of entry wherever a competitive wireline network is nearby, 
this will also ensure a similar effect over the medium term.
    54. This evidence demonstrates that providers find ways to enter 
nearby geographic markets and win customers. They consider nearby 
demand and build circuitous routes, they lengthen the terms of their 
contracts to recover the cost of buildout, and they place spare splice 
points along their network routes to accommodate future demand. These 
facts show that once providers have sunk substantial costs into a 
network, it is in their interest to build laterals to as many customers 
as possible because the relative cost of a lateral is much lower than 
the cost of other network facilities. And this conclusion is 
corroborated by evidence of extensive competitive entry into the 
business data services marketplace.
2. Entry and Investment in Business Data Services Markets
    55. Evidence of Competitive Entry by Cable. The entry of cable into 
business data services provisioning has been the most dramatic change 
in the market over the past decade. Cable companies began serving 
business customers using their ``best-efforts'' broadband networks with 
asymmetric speeds in the mid-2000s, but these services were not 
generally competitive with incumbent LECs' business data services. 
Cable companies now offer over fiber carrier-grade reliability, 
scalability, and quality of service functionality to compete for the 
largest enterprise customers across the country and also offer Carrier 
Ethernet services with symmetrical speeds up to 10 Mbps over their 
within-footprint near ubiquitous DOCSIS 3.0 EoHFC networks. As a 
result, incumbent LECs increasingly find themselves competing with 
cable for business data services customers. CenturyLink, for example, 
``views cable providers to be its primary special access competitors, 
given their expansive networks and rapid growth in business markets.''
    56. The growth in consumer broadband demand has also lowered the 
costs to cable companies of deploying fiber to business locations. As 
consumer bandwidth demand grew exponentially over the past decade, 
cable providers were required to invest billions of dollars pushing 
fiber deeper into their networks as they needed to continually split 
nodes to keep pace with the demand. Sprint and Windstream challenge the 
reasonableness of relying on past cable deployment in response to 
growth in consumer broadband demand to project future cable build out 
to meet business data services demand. However, it is not unreasonable 
to acknowledge the fact that every increment of additional investment 
in cable networks brings fiber facilities closer to nearby business 
data services demand and lowers the cost of building to meet that 
demand. Compared to just ten years ago, fiber within the franchise 
areas of cable providers that offer high-speed DOCSIS services has 
dramatically lowered the cost of building out fiber to the surrounding 
business locations due to the shorter distances required to reach any 
location. For example, as a result of network expansion, in March of 
2015, ``approximately [REDACTED] percent of business locations [were] 
within 500 feet of Comcast's EoHFC facilities, an increase from 
[REDACTED] percent in 2013.''
    57. Like other competing providers, cable companies have focused 
investment on building fiber networks for higher-bandwidth Ethernet 
services, which is enabling them to overcome limitations of traditional 
coaxial-based cable systems that cannot meet higher bandwidth demands. 
For example, after first entering the marketplace in 2009, Comcast 
``rolled out Metro Ethernet services to 20 of the top 25 metropolitan 
areas entirely over fiber, with plans ranging from 1 Mbps to 10 Gbps'' 
in 2011. Comcast has invested ``more than $5 billion since 2010'' on 
network infrastructure to provide business data services. Comcast had 
connections, largely using fiber, to approximately [REDACTED] business 
locations in 2016, an increase of [REDACTED] since 2013. Comcast has 
also ``added [REDACTED] over the 2012-2015 period.''
    58. Charter, the second largest cable company and the [REDACTED] 
largest provider of fiber connections to buildings, has invested more 
than [REDACTED] annually, starting in 2013, towards the provision of 
business data services. In 2016, Charter acquired fellow cable 
companies, Legacy Time Warner Cable (TWC) and Bright House Networks, 
LLC, for $90 billion. A stated benefit of the merger was the increased 
ability of the combined entities to compete for ``large enterprise and 
other multi-location customers.'' Post-merger Charter plans to invest 
$2.5 billion into serving commercial areas within its footprint. 
Charter has ``expanded its provision of BDS to approximately [REDACTED] 
new locations'' since the beginning of 2013. As of the second quarter 
of 2016, Charter's commercial revenues driven by enterprise, small and 
medium business growth rose to over $2 billion, an increase of 12.6 
percent over the prior-year period.
    59. Cox, the third largest cable company, was one of the first 
cable companies entering the business data services market and by June 
2016 served ``more than [REDACTED] locations with dedicated point-to-
point services,'' primarily over its fiber facilities. Cox has invested 
more than [REDACTED] in fiber and equipment over the past 10 years, 
with [REDACTED] invested since 2013. In 2015, ``Cox earned 
approximately [REDACTED] in annual revenue from its [business data 
services] . . . and projects earnings of [REDACTED] for 2016, up from 
[REDACTED] in 2013.''
    60. In 2016, Altice, a European company, completed its roughly $10 
billion acquisition of Cablevision Systems Corp. (Cablevision), which 
includes Cablevision's business service unit, Cablevision Lightpath 
Inc., making Altice the fourth largest cable provider. As of the end of 
2015, Cablevision's

[[Page 25668]]

Lightpath unit had 7,700 buildings connected to its fiber network, 
compared to the 4,400 buildings serviced in 2010. Mediacom, the fifth 
largest cable operator serving ``rural and exurban areas of the Midwest 
and Southeast. . . . began deploying BDS on a significant scale 
throughout its service territories in 2011.'' The company has invested 
more than $4 billion on its ``high capacity [fiber] network that serves 
thousands of small rural communities.'' This network supports over 
1,000 macro cell sites, and Mediacom is planning to expand its network 
coverage in downtown areas and commercial districts to connect tens of 
thousands of new business customer locations.
    61. Even smaller cable operators are entering the business data 
services marketplace. ACA, representing a substantial number of small 
cable operators, estimates its members are ``making at least tens of 
millions and upwards of $300 million of investments annually to deploy 
facilities to support the provision of BDS.'' ACA's members primarily 
offer Ethernet business data services over fiber.
    62. Cable business services are reported to have grown at 
approximately 20 percent annually for the past several years, and 
increasingly, they have emphasized Internet access and managed services 
(i.e., security and routing, controlled and secured access to the 
cloud) showing a shift in demand to higher (and more competitive) 
bandwidths. Business services will reportedly generate more than $12 
billion for U.S. cable providers in 2015, up 20 percent or so from 
their milestone total of $10 billion in 2014. According to one analyst, 
business revenues for cable companies will almost double their 2014 
total by 2019.
    63. Expansion by Other Competitive Providers. Non-cable competitive 
LECs and other non-traditional providers also continue to invest and 
expand their network reach. For example, Zayo, founded in 2007, now has 
more than 25,000 buildings connected to its metro fiber network. 
Network connectivity makes up 45 percent of Zayo's business with 38 
percent from dark fiber solutions. Zayo committed to investing an 
estimated $740 million in major network expansion projects from March 
2014 to December 2015. For the quarter ending on June 30, 2016, Zayo 
reported $506.7 million of consolidated revenue, which includes $112 
million from its Canadian operations. Zayo recently closed its purchase 
of Electric Lightwave adding an estimated 12,100 route miles to its 
network as well as connectivity to 3,100 enterprise buildings.
    64. We reject Sprint/Windstream's argument that the Commission has 
not properly accounted for recent consolidation, including the 
CenturyLink/Level 3 and Verizon/XO mergers. The CenturyLink/Level 3 
proposed merger is still pending regulatory approvals, and in approving 
transfer of control applications related to the Verizon/XO transaction, 
the Commission found that ``Verizon's acquisition of XO within 
Verizon's incumbent LEC territory will have a de minimis impact on 
competition in the provision of BDS.'' Sprint/Windstream's criticism 
that the two largest competitive LECs on the Vertical Systems Group 
Leaderboard for Ethernet providers will soon be incumbent LECs fails to 
take into consideration that the bulk of acquired facilities in these 
transactions is outside the incumbent LEC territory and in fact remains 
in the category of a competitive provider for the purposes of the 
Commission's BDS marketplace data. Moreover, our analysis herein takes 
into account the increased competition we have seen in the market since 
our 2013 data collection, including increased competitive pressure from 
cable providers.
    65. Lightower has an all-fiber network with service to over 22,000 
locations and more than 7,000 wireless towers and small cells in 17 
states in the Northeast, Mid-Atlantic, and Midwest, serving 
``enterprise, government, carrier, and data center customers.'' 
Lightower acquired regional fiber provider, Fibertech Networks, in 2015 
for $1.9 billion, doubling its network reach, and acquired Sidera 
Networks in 2013 for $2 billion. The company spends about [REDACTED] 
percent of its revenues on capital investment. Lightower recently added 
over 350 route miles of fiber in North Carolina.
    66. Industry Concentration. In the Further Notice, the Commission 
considered several measures of concentration in varying geographies, 
indicating ``uniformly high levels of concentration.'' On a national 
level, concentration among incumbent LECs was observed, based on 2013 
reported business data services revenues. Degrees of incumbent LEC 
concentration also were observed at geographies of unique building 
locations, census blocks, and zip codes. The measures were difficult to 
determine precisely by geography due to certain biases. Putting the 
concentration measures in context, the Commission explained that it 
``d[id] not yet know 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).'' We find the 
concentration measures alone are largely poor indicators of whether 
market conditions exist that will constrain business data services 
prices, and overstate the competitive effects of concentration.
    67. Traditional and non-traditional providers of business data 
services constrain an incumbent's pricing outside of immediate 
geographies used to describe market concentration in the Further Notice 
in three ways. First, with nearby facilities, a business data services 
provider is able to expand its presence to timely reach a customer. 
Second, a business data services competitor does not need to be already 
offering service in a given building to constrain a supplier at that 
location. A nearby business data services competitor constrains pricing 
by responding to RFPs and participating in similar customer service 
bidding requests, which creates a pricing floor without any physical 
presence of the potential competitor in the nearby geography. Third, 
concentration is greater for the declining legacy DS1 and DS3 channel 
termination services, in which incumbent LECs have a historical 
advantage, compared to newer, and in-demand, Ethernet business data 
services, which are largely competitive. We therefore conclude that 
concentrated supplies of DS1s and DS3s in a particular building or cell 
tower or similar are not reliable indicators of whether business data 
services pricing decisions are made competitively.

E. Other Examples of Competitive Effects in the Business Data Services 
Market

    68. Increasing Ethernet Revenue. Comments show that, as a result of 
more substitutes in the market, incumbent LECs face declining sales in 
TDM services, notably DS1s and DS3s, including customer loss to cable 
operators and other providers. A recent report by Frost & Sullivan 
found that the migration from TDM to Ethernet business data services is 
fueling double-digit revenue growth for Ethernet business data 
services, and that this growth rate is expected to increase as Ethernet 
networks expand. In particular, Ethernet-based services accounted for 
more than 40 percent of total dedicated service revenues in 2013, and 
Ethernet business data services revenues have been growing by over 20 
percent a year since then. The Ethernet bandwidth of incumbent LECs 
grew by only 5.3

[[Page 25669]]

percent in 2013, while the bandwidth of competitive providers grew by 
31.6 percent. Incumbent LEC business data services revenues also 
declined from 2013 to 2015, while competitive LEC and cable competitor 
revenue grew rapidly. Level 3 revenues increased 66 percent, Comcast 
revenues grew by 46 percent, and Time Warner cable revenues increased 
by 73 percent over the same time period. For cable overall, business 
revenues have grown at a 20 percent compound annual growth rate. 
Notably, this revenue growth came in spite of falling prices, which 
likely indicates expansion of market output and/or demand shifts to 
higher bandwidth and thus more competitive services. Vertical Systems 
Group found that Carrier Ethernet pricing fell by double-digit rates 
for all services and speed segments from 2010 to 2015.
    69. Some of the growth in cable's competitive position has come at 
the expense of incumbent and competitive LECs. AT&T, for example, 
calculates it ``lost more than [REDACTED] of its DS1 business from non-
affiliates just between January 2013 and October 2015, and the rate of 
loss is accelerating.'' In addition, ``the number of new DS1 purchases 
from AT&T (i.e., gross, not net, additions) declined by nearly 
[REDACTED] since the end of 2013.'' A degree of those losses were to 
Ethernet, as AT&T reports ``the number of new Ethernet purchases (i.e., 
gross additions) during this period has more than [REDACTED]. Verizon 
reports that it sees similar competitive effects because of cable's 
increased entry into the business data services market. For example, 
comparing the same three-month period year-over-year Verizon saw a 
[REDACTED] percent decrease in Ethernet orders with its customers 
``telling Verizon that trend will continue and worsen as they send more 
business to cable.''
    70. Decreasing Ethernet Prices. There is persuasive evidence of 
recent decreases in the prices for packet-based services across all 
bandwidths. According to Cox, Ethernet prices have declined [REDACTED] 
or more between 2012 and 2016.'' ACA reports smaller cable operators 
have over the past five years ``decreased prices for their Ethernet 
services by approximately 50 percent on average across all geographic 
areas and for all customer segments--with some members reporting that 
prices have decreased even more, by 70 percent.'' Comcast observes 
``steady year-over-year decline in [retail] pricing for dedicated 
Internet access and Ethernet transport services,'' e.g., prices for its 
Ethernet Dedicated Internet service declined by [REDACTED] percent over 
the past 12 months. CenturyLink's Ethernet prices have on average, 
declined by [REDACTED] percent over the past five years.
    71. Charter's monthly price for a 1 Gbps service as of the first 
quarter of 2016 [REDACTED]. Zayo reports price per unit decreases for 
GigE full rate (>1000 Mbps) from $3,300 to $2,800 from December 2013 to 
December 2015, about a 15 percent change. Per unit prices for 
fractional GigE (101-1000 Mbps) services decreased from $2,300 to 
$1,700 over the same period, a 26 percent drop.
    72. Comcast once expected a price of between [REDACTED] per month 
in 2013 for its wholesale 100 Mbps fiber service but now charges less 
than [REDACTED] a month for the same service. Charter reports its 
``average regional price of a 100 Mbps dedicated service'' was 
[REDACTED] per month in 2013 but by the first quarter of 2016, that per 
month price dropped to [REDACTED]. ACS has similarly experienced per 
month price declines for its [REDACTED]. Zayo's pricing trends show the 
monthly price per unit for Fast E Ethernet (10-100 Mbps) service 
decreasing from $1,300 to $1,200 (7.6 percent) from December 2013 to 
December 2015. CenturyLink reports prices for a 100 Mbps Ethernet 
backhaul circuit to a wireless tower have fallen [REDACTED] percent on 
average over the past five years.
    73. There is also evidence that lower bandwidth packet-based 
services are experiencing price declines. For example, Legacy TWC's 10 
Mbps service fell from [REDACTED] per month on average in 2013 to 
[REDACTED] per month by the first quarter of 2016, a 23 percent 
decrease. The company's 5 Mbps service decreased from a [REDACTED] 
monthly average to a [REDACTED] monthly average over the same period, a 
28 percent change.

F. Incumbent LEC Pricing Regulation

    74. We consider a large quantity of evidence in the record. A body 
of evidence particularly relevant to the foregoing discussion 
considered the benefits of current incumbent LEC price regulations. The 
evidence is mixed and we find does not in most locations support 
continued, much less additional, price regulation. Econometric studies 
performed by Dr. Marc Rysman, Commission staff, and commenters examined 
the relationship between incumbent LEC prices and the number of 
business data services competitors they face near a customer location. 
Based on the Commission's 2015 Collection, the Revised Rysman Paper 
showed that incumbent LEC DS1 and DS3 prices were a statistically 
significant three percent and ten percent lower, respectively, in 
census blocks with one or more facilities-based competitors. However, 
these price changes often became statistically insignificant after 
implementing changes to the analysis in response to peer reviewers, 
suggesting that the data are too noisy to draw any firm conclusions.
    75. Furthermore, as recognized by Dr. Rysman, and noted by peer 
reviewers and other commenters in the record, data and modeling 
limitations did not allow for a definitive conclusion that incumbent 
LECs were not pricing competitively. Despite Dr. Rysman's detailed 
analysis, a causal relationship could not be ascribed to his estimates 
due to the possibility that some factor not observed in the data (e.g., 
lower costs of serving a given customer) could be simultaneously 
producing both a greater number of facilities-based competitors and 
lower prices. Further, while some (disputed) evidence was presented of 
incumbent LEC prices being lower where there was competition, other 
evidence was presented of dramatic increases in competitive entry, 
rapid price declines, and service growth. Moreover, analysts and 
forecasters expect strong competitive growth over the next decade in 
business data services, and we find that, all else equal, competitive 
growth will occur exactly where supracompetitive pricing is most 
prevalent.
    76. Current Prices at Cap. In the Further Notice, the Commission 
suggested 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.'' Commenters are at odds over whether the lack of or 
minimal headroom between prices and the caps indicates the possession 
of market power. However, we disagree that prices at the cap 
demonstrate that incumbent LECs generally would have set materially 
higher prices wherever their prices were capped and that prices for 
business data services will increase significantly as a result of our 
actions in this Order. We expect that competition will continue to keep 
prices in check. Moreover, as we explain in our analysis of potential 
catch-up adjustments, the X-factors that were in effect between 1997 
and 2005 may have been unreasonably high and therefore the current 
price cap indices may be too low. In view of these circumstances and 
our findings of competition in the business data services DS1, DS3, and 
transport markets, we find any concern about a

[[Page 25670]]

lack of headroom between prices and the caps to be unwarranted.

G. Competition in the Transport Market

    77. Transport services are typically higher volume services between 
points of traffic aggregation which can more easily justify competitive 
investment and deployment. The Commission has traditionally regulated 
TDM-based special access services in two distinct segments: End user 
channel terminations and dedicated transport; and other special access 
services. The provision and sale of TDM-based special access services 
has reflected, and continues to reflect, the different competitive 
dynamics that characterize the two sets of services. When the 
Commission adopted the Pricing Flexibility Order, it distinguished 
between these two sets of TDM special access services and required 
price cap LECs to make different levels of competitive showings to 
obtain pricing flexibility for each. The Commission's pricing 
flexibility rules also reflect this distinction. Section 69.709 of the 
Commission's rules governs the grant of pricing flexibility for special 
access services other than the channel termination between the LEC end 
offices and customer premises, which includes interoffice facilities 
and channel terminations between an incumbent LEC's serving wire center 
and an IXC. Section 69.711 of the Commission's rules governs the grant 
of pricing flexibility for channel terminations between LEC end offices 
and customer premises. All of these elements comprise the service 
provided to the end user. The Further Notice followed the Commission's 
precedent by defining dedicated service as a service that ``transports 
data between two or more designated points'' and aspired to create a 
``framework [that] reflect[s] how the market operates today.''
    78. Commenters, including competitive providers, support 
maintaining this distinction. Dr. Rysman also acknowledged the 
relevance of this distinction in his paper. This distinction is rooted 
both in the different functionalities these sets of services deliver 
and in the different rate elements price cap carriers use to price 
these services. We find that this distinction remains valid in the 
current special access marketplace and employ it in our approach to 
reforming our regulation of TDM transport services.
    79. In analyzing the competitiveness of TDM transport services, 
based upon the 2015 Collection and the record, we find strong evidence 
of substantial competition, as well as market conditions that suggest 
regulation of TDM transport and other non-end user channel termination 
services is not justified. Indeed competition for such services has 
been robust since a large proportion of TDM transport services were 
deregulated. As Frontier explains, a ``substantial majority of 
transport revenue has been covered by Phase II pricing flexibility 
since the early 2000s.'' AT&T further states that ``the data collection 
strongly supports nationwide Phase II relief for transport.'' It cites 
data showing the widespread deployment of competitive transport 
networks, including the fact that ``as of 2013, competitive providers 
have deployed competing transport networks in more than 95% of census 
blocks with special access demand (and about 99% of business 
establishments are in these MSAs).'' Although INCOMPAS asserts that 
Commission rules requiring certain incumbent LECs to provide unbundled 
transport services is evidence of underlying market power, the record 
overall reflects a competitive landscape where customers often combine 
competitive transport with channel terminations supplied by incumbents. 
According to CenturyLink, it uses incumbent LEC transport facilities 
for ``less than half'' of the end user channel terminations it 
purchases as a competitive provider outside of its incumbent footprint. 
Moreover, data from the 2015 Collection show that ``the vast majority 
of locations with special access demand have'' competitive fiber within 
close proximity. AT&T identified a number of major urban areas that had 
as many as 28 competitive transport providers and cited a number of 
second tier MSAs which commonly have ``over a dozen separate 
competitive transport providers.''
    80. Competitive providers are split on the question of whether the 
transport market is competitive. XO, before becoming part of Verizon, 
found ``considerable competition for transport'' and that ``numerous 
CLECs frequently are collocated in the offices where XO is located.'' 
Other competitive providers dispute the competitive nature of transport 
services and assert that incumbent LECs are able to charge 
supracompetitive rates for TDM transport services and should therefore 
be price regulated. For example, Sprint alleges that ``along many 
routes, competitive providers are simply unavailable'' and asserts that 
competition for transport service is the exception rather than the 
rule. However, Sprint provides no data or anecdotal evidence to support 
its assertion and to rebut the evidence from the 2015 Collection and 
from incumbent LEC commenters that show that competitive transport is 
available in the vast majority of census blocks in MSAs. As AT&T 
states, ``[n]o party to this proceeding has attempted specifically to 
make a case that there is a lack of competition for transport, and 
certainly not on a national basis.''
    81. Evidence of competitive providers investing in transport 
services, rather than purchasing from incumbent carriers, reinforces 
our observations. While business data services providers may choose to 
purchase transport--either as a long-term solution to reach a customer 
or a temporary cost while implementing self-provisioning plans--many 
have deployed transport instead of buying the service.
    82. More broadly, we understand that transport service represents 
the ``low-hanging fruit'' of the business data services circuit, which 
makes it particularly attractive to new entrants. In the Pricing 
Flexibility Order, the Commission noted that competitors often enter 
the transport market before the channel termination market, and we 
continue to adhere to that view. The net present value of the cash 
flows associated with the relatively high expected per-unit cost of 
deploying a new, relatively low-capacity channel termination and the 
expected revenue derived from the sale of that channel termination, 
especially for DS1 and DS3 channel terminations, would be expected to 
be significantly less than the relatively low expected per-unit cost of 
deploying a new, relatively high-capacity inter-office transport 
facility, and the expected revenue derived from the sale of that 
facility. Thus, in the face of increased demand for transport services, 
we observe responsive market conditions that support the deployment of 
competitive facilities, through either new entry or conversion.

H. Conclusions

    83. Packet-based Services. Packet-based services represent the 
future of business data services. We believe the higher bandwidth 
capabilities of these services will lead to greater returns on 
investment and in turn, greater incentives for facilities-based entry 
into the business data services market. In contrast, DS1s and DS3s are 
legacy services that now compete against packet-based broadband 
services such as EoHFC services in the same geographic market. We find 
this competition, or potential competition between legacy and packet-
based services, sufficient enough to discipline pricing. In many 
instances, incumbent LECs are now on similar footing to entrants (even 
if they may still on

[[Page 25671]]

average be advantaged), as they often also deploy new facilities to 
meet customer demand (because even a relatively low demand customer 
today may not be a low demand customer tomorrow, and copper loop 
generally is incapable of meeting higher demands). As a result, we find 
the marketplace for packet-based business data services is competitive.
    84. TDM-based DS1s and DS3s. Within the broader record, we 
acknowledge that, by the nature of legacy services, incumbent LECs have 
a degree of concentration in certain geographies for DS1 and DS3 
services. We also recognize a changing industry with increasingly 
competitive options, particularly at higher bandwidths, and a 
decreasing demand for these legacy services. Our analysis suggests that 
any prior advantage an incumbent might have enjoyed at lower bandwidths 
is now less competitively relevant in light of customer demand that 
attracts a number of traditional and non-traditional competitors that 
are improving legacy cable networks and expanding with new facilities 
to meet demand. This is further supported by the degree of sunk 
investment made by traditional and non-traditional providers of 
business data services to compete. We conclude that incumbent LEC 
market power has been in many cases largely eliminated, and elsewhere 
is declining thanks to increased competition in business data services 
markets.
    85. Transport. Based on the 2015 Collection, the record, and our 
market observations, we find substantial evidence of competition in 
TDM-based transport markets, which, accordingly, suggests that price 
regulation is not required. For these reasons, we conclude that TDM-
based transport is competitive.

IV. An Administrable Framework for Business Data Services Grounded in 
Our Market Analysis and the Record

    86. We intend to apply ex ante rate regulation only where 
competition is expected to materially fail to ensure just and 
reasonable rates. As a matter of policy we prefer reliance on 
competition rather than regulation, wherever purchasers can 
realistically turn to a supplier beyond the incumbent LEC. Based on 
these principles and our market analysis, we find regulation is 
unnecessary for packet-based services, TDM transport services, and 
higher bandwidth (i.e., above DS3) TDM end user channel terminations. 
We also conclude that we should refrain from ex ante pricing regulation 
for TDM end-user channel terminations in areas deemed competitive. We 
then outline a bright-line competitive market test for initially 
determining whether a given price cap area will be treated as 
competitive in the provision of DS1 and DS3 end user channel 
terminations and certain other business data services by the incumbent 
LEC. This test will treat as competitive a particular county if 50 
percent of the locations with BDS demand in that county are within a 
half mile of a location served by a competitive provider based on the 
2015 Collection or 75 percent of the census blocks in that county have 
a cable provider present based on the Commission's Form 477 data. Any 
price cap incumbent LEC serving special access customers within that 
county will be relieved of ex ante pricing regulation. Furthermore, we 
adopt a process for regularly updating the list of competitive counties 
in a way that accounts for changing competitive conditions but also 
avoids the need to undergo burdensome data collections.

A. Regulatory Framework Applicable to Packet-Based Business Data 
Services and to TDM-Based Services Providing Bandwidths in Excess of a 
DS3

    87. After reviewing the record and considering the Commission's 
goals to ensure that rates for business data services are just and 
reasonable, while also encouraging facilities-based competition and 
facilitating technology transitions, we decline to re-impose any form 
of price cap or benchmark regulation on packet-based business data 
services or on TDM-based services providing bandwidths in excess of the 
level of a DS3, and we eliminate that regulation to the extent it 
exists today. In so doing, we impose no new regulation on the packet-
based and higher capacity TDM-based business data services marketplace, 
which will be free from ex ante pricing regulation, regardless of the 
type of entity providing the service. Our market analysis does not show 
compelling evidence of market power in incumbent LEC provision of these 
services, particularly for higher bandwidth services. Moreover, even if 
the record demonstrated insufficiently robust competition, proposals to 
apply price cap regulation to packet-based services were complex and 
not easily administrable and did not reflect the fact that costs to 
serve individual customers vary. Likewise, we decline to impose 
benchmark pricing regulation on incumbent LEC packet-based business 
data services or on TDM-based services of bandwidths in excess of the 
level of a DS3. Because our market analysis shows that such services 
are subject to competition, anchor or benchmark pricing is unnecessary 
and could in fact inhibit investment in this dynamic market by 
preventing providers from being able to obtain adequate returns on 
capital. Additionally, the benchmark pricing proposals in the record 
were administratively complex and unlikely to reliably result in just 
and reasonable rates.
    88. We further find that packet-based services are best not 
subjected to tariffing and price cap regulation, even in the absence of 
a nearby competitor. Packet-based services represent the future of 
business data services and are readily scalable, so competitive LECs 
are generally very willing to deploy such services beyond their 
footprints because they can expect to earn increasing revenues from 
their initial investment with few additional costs. In contrast, the 
record shows that competitive LECs are generally unwilling to extend 
their legacy TDM networks, especially beyond a half mile to provide DSn 
services. Consequently, entrants are better placed to win customers in 
packet-based markets than in those for TDM services. Packet-based 
services are new services, experiencing both rapid growth, and rapid 
change in standards, throughput and usage, and so regulation is more 
likely to impose long-term costs by dissuading providers of packet-
based services from entering.
    89. We do, however, remind stakeholders that packet-based 
telecommunications services remain subject to the Commission's 
regulatory authority under sections 201, 202, and 208 of the Act. These 
statutory provisions allow the Commission to determine whether rates, 
terms, and conditions are just, reasonable, and not unreasonably 
discriminatory in the context of a section 208 complaint proceeding.

B. Regulatory Framework Applicable to TDM Transport Services

    90. We eliminate all ex ante pricing regulation of price cap 
incumbent LEC provision of TDM transport and other transport (i.e., 
non-end user channel termination) special access services. The 2015 
Collection and the record demonstrate widespread competition in the 
market for these services and generally support using a deregulatory 
approach for TDM transport and other non-end user channel termination 
services.
    91. We conclude that competition for TDM transport services is 
sufficiently pervasive at the local level to justify relief from 
pricing regulation nationwide. Commission staff analysis of competitive 
provider responses to question II.A.5. of the 2015 Collection

[[Page 25672]]

shows that in all price cap territories, 92.1 percent of buildings 
served were within a half mile of competitive fiber transport 
facilities. Additionally, for all census blocks with business data 
services demand, 89.6 percent have at least one served building within 
a half mile of competitive LEC fiber. As we concluded in the foregoing 
market analysis, the presence or reasonable proximity of a single 
competitor's facilities represents competition given the high sunk cost 
nature of the business data services market. Our data are conservative 
given the fact that the 2015 Collection includes only a subset of all 
hybrid fiber coax facilities deployed by cable providers (i.e., only 
Metro-Ethernet headend-connected fiber feeder plant) and given that the 
2015 Collection data are from 2013 and therefore necessarily understate 
the level of actual competition for transport services by not including 
competitive facilities that have since been deployed. We find that the 
high percentage of locations within a half mile of competitive fiber 
and the high percentage of census blocks with at least one building 
within a half mile of competitive fiber justify our refraining from 
applying pricing regulation across all price cap areas to TDM transport 
services.
    92. We recognize that our decision in all likelihood will leave a 
relatively small percentage of census blocks (with an even smaller 
percentage of overall demand) price deregulated and without the 
immediate prospect of competitive transport options. However, greater 
harm--primarily manifested in the discouragement of competitive entry 
over time--would result if we were to attempt to regulate these cases 
than is expected under our deregulatory approach. In contrast, lower 
entry barriers for deploying transport services than for end user 
channel termination services and increasing demand for transport means 
that regulatory relief will provide incentives for competitive 
providers to deploy additional transport facilities to compete for this 
demand. While competition may not be universal, it is sufficiently 
widespread for us to have confidence that a combination of these 
factors will broadly protect against the risk of supracompetitive rates 
being charged by price cap LECs over the short- to medium-term. To the 
extent there are points of aggregation that are not served by 
competitors, the relatively high demand at these points makes it likely 
that a competitor could justify investing in competitive transport 
facilities to serve that demand.
    93. Moreover, our goal is not absolute mathematical precision but 
an administratively feasible approach that avoids imposing undue 
regulatory burdens on this highly competitive segment of the market. 
Refraining from pricing regulation for transport services nationally 
achieves the proper balance between precision and administrability. It 
also avoids unnecessary disruption of existing special access transport 
sales arrangements. The alternative would be to impose significant 
regulatory burdens on all participants in the market with an additional 
layer of regulatory complexity that would undermine predictability and 
ultimately hinder investment, including in entry, and growth. Instead, 
we believe that providing regulatory relief in this market segment will 
foster conditions that will continue to encourage competitive entry and 
provide incentive for further investment in fiber transport facilities. 
Finally, our section 208 complaint process represents a continuing 
safeguard against unjust and unreasonable rates.

C. Competitive Market Test Criteria for DS1 and DS3 End User Channel 
Terminations

    94. As noted above, we decline to impose ex ante pricing regulation 
for packet-based business data services and eliminate entirely ex ante 
regulation for TDM-based services providing bandwidths in excess of a 
DS3 and for TDM-based transport services. Based on the record, we have 
determined that such forms of regulation are not necessary because we 
expect that competition will ensure just and reasonable rates for those 
services.
    95. At the same time, many commenters have urged us to take a 
different approach with respect to ex ante regulation of DS1 and DS3 
end user channel terminations that use legacy, circuit-based 
technology. They raise various arguments about why they believe this 
portion of the business data services market requires that we not 
eliminate ex ante price regulation altogether. To the extent commenters 
suggest that there are no circumstances in which we should eliminate ex 
ante pricing regulation, we disagree with those contentions. Our 
decision in this Order will promote investment, deployment, and 
competition in the business data services market in a way that will 
benefit all end users, including those that currently use DS1s and 
DS3s.
    96. We determine it is appropriate to take a different approach 
with respect to the elimination of ex ante pricing regulation of 
legacy, circuit-based DS1 and DS3 end user channel terminations. The 
market for these services is declining as customers opt for more 
flexible packet-based business data service offerings. Moreover, the 
economics of deploying facilities to end user locations makes 
competitive entry in response to demand less likely than with the TDM 
transport market segment, which is typically at higher-bandwidths and 
requires less investment per unit of traffic than required for channel 
terminations. In light of these considerations, we are providing 
additional protections for this portion of the business data services 
market as the market transitions to new technologies by not eliminating 
ex ante pricing regulation in every area. Instead, we adopt a 
competitive market test that will preserve ex ante price regulation in 
those limited number of areas where we predict there is a substantial 
likelihood that competition will fail to ensure just and reasonable 
rates. In addition, even in those areas where we eliminate ex ante 
pricing regulation, the protections of section 208 will continue to 
apply.
    97. Specifically, the competitive market test we adopt today 
assesses the availability of actual and likely competitive options in 
the provision of last-mile services and subjects to ex ante pricing 
regulation only circuit-based DS1 and DS3 end user channel terminations 
and certain other business data services provided by price cap 
incumbent LECs in areas the test finds lack a competitive presence. We 
base the competitive market test on the geographic unit of a county or 
county-equivalent (hereinafter, county) which significantly reduces the 
over- and under-inclusivity issue posed by MSAs which the Commission 
highlighted in the Suspension Order and avoids the administrability 
issues posed by smaller geographic units of measure. The test uses data 
demonstrating the presence of competitive facilities from the 2015 
Collection in combination with the most recent data on cable deployment 
from the Form 477 data collection to determine which counties to 
regulate.
    98. While there is no clear consensus in the record on the right 
approach to the competitive market test, we do see a few points of 
general agreement. The various proposals use bandwidth demarcation 
points and competition test criteria based on counting providers in or 
near a geographic area using the 2015 Collection data. Beyond those few 
high-level points of agreement, there are vast differences of opinion 
among commenters on the current state of competition in the 
marketplace, on the need for a competitive market test, and on what a 
competitive market test should entail. Generally, competitive

[[Page 25673]]

LECs needing to purchase business data services as inputs at wholesale, 
mobile wireless providers not affiliated with an incumbent LEC, 
Windstream and Verizon (both net buyers), and end-user representatives, 
such as Ad Hoc, interpret the 2015 Collection as largely showing a non-
competitive market, requiring regulatory intervention at all but the 
highest service bandwidth levels, i.e., in excess of 1 Gbps. On the 
other side, cable companies and competitive fiber providers that do not 
typically purchase business data services at wholesale, AT&T, and other 
incumbent LECs (net sellers) see a highly competitive marketplace with 
no need of regulatory intervention.
    99. The test we adopt utilizes certain core attributes of a test on 
which there was consensus in the record, including establishing a 
threshold number of providers to find competition, employing a defined 
geographic area of measurement, and basing the test on data from the 
2015 Collection and updating the results of the test to ensure they 
continue to reflect the extent of competition in the market. That said, 
it also represents a departure from some of the proposals in the 
Further Notice in that rather than focus on burdensome pricing 
regulation, it takes a dynamic and forward-looking approach to 
evaluating the benefits and costs of regulation. The test will be 
updated periodically by relying on data the Commission routinely 
collects, so it does not require additional and potentially burdensome 
data collections. We find this approach strikes a reasonable balance 
between precision and administrability, will encourage continued 
investment in and deployment of business data services, and will foster 
a market-driven transition from legacy circuit-based services to newer 
packet-based services and other technologies.
    100. We take a pragmatic approach to formulating a competitive 
market test by considering what data are available to us to evaluate 
competitive conditions both at present and in the future. We then 
determine what geographic unit is sufficiently granular and at the same 
time administrable for the Commission as well as the industry. Finally, 
we consider which criteria best reflect competitive conditions in the 
market while still furthering the Commission's policy objectives. The 
ultimate goal of the test, however, is not to definitively determine 
competitive market conditions but rather to determine on balance which 
areas are best positioned to benefit from price deregulation and which 
areas will benefit more from continued price cap regulation.
    101. In determining where we can appropriately avoid applying ex 
ante price regulations for certain special access services, we balance 
the benefits and costs of such regulation. We recognize that in 
counties where there currently appears to be few competitive 
alternatives for consumers of DS1 and DS3 end user channel terminations 
that the benefits of ex ante price regulation likely outweigh the costs 
since this likely indicates broad entry in such regions may not occur. 
However, in counties where the competitive pressures are able to 
discipline prices for a large fraction of customers, as discussed in 
our market analysis, we see the opposite to likely be the case. Ex ante 
pricing regulation can have negative features. For example, in a county 
where entry is relatively widespread, the absence of entry in specific 
areas may be due to regulated prices inadvertently being set below 
competitive levels. Such prices make entry unprofitable, are harmful to 
long run incentives to invest, can lead to inefficient short run levels 
of production and consumption, and can prevent entry indefinitely. This 
counsels toward being especially wary of imposing price caps except 
where competitive service seems most unlikely to be available within a 
reasonable time horizon. This perspective of balancing the benefits and 
costs of regulating prices, as well as the importance of having an 
administrable system, leads us to adopt the framework discussed below. 
In our judgment, we expect this framework to appropriately balance our 
desire for fostering a dynamic and competitive marketplace with the 
need to ensure rates that are just and reasonable.
    102. Some parties have expressed concern about a potential spike in 
prices in areas deregulated as a result of the competitive market test. 
We believe, however, the test adopted today strikes the appropriate 
balance to apply ex ante regulation where warranted and to allow 
competitive forces to thrive absent ex ante regulation where there is 
adequate competition. If prices were to rise following deregulation, 
then we anticipate that competition will work to drive these prices to 
competitive levels. Moreover, customers are protected in the near term 
from harm that would result from any rates, terms, or conditions that 
are unjust and unreasonable or unjust and unreasonably discriminatory 
because the Commission's section 208 complaint process continues to be 
available for common carriage services.
1. Availability of Data To Measure Competition
    103. 2015 Collection. The most intuitively relevant dataset in our 
toolbox is the one collected in response to the Data Collection Order. 
That data collection covered circuit- and packet-based business data 
services and required responses from providers of both dedicated and 
best-efforts last-mile access services (albeit exempting small 
providers of best-efforts services), as well as purchasers of business 
data services. In short, the data collection came as close as 
practicable at the time to providing a ``clear picture of all 
competition in the marketplace.'' Despite this, some commenters 
question the continued relevance of the data, citing cable providers' 
aggressive expansion into business data services since the data 
collection. These criticisms overstate the limitations of the 2015 
Collection. It is unprecedented in scope and remains a useful and 
appropriate basis for our new regulatory framework. That said, we 
acknowledge that while the 2015 Collection is well suited for the 
initial evaluation of competition, it is unsuitable for measuring 
competition going forward. We also acknowledge that the 2015 Collection 
does not fully capture the extent of cable deployment to date.
    104. Although some commenters propose refreshing the data with 
periodic data collections, most commenters strongly oppose the idea as 
being too burdensome and even ``an obstacle to competition.'' To comply 
with the 2015 Collection, for example, some carriers were ``forced to 
pull data manually from numerous billing and data systems, diverting 
limited time and resources from other critical projects.'' For an 
uncertain number of years, providers would be required ``to 
continuously track and maintain . . . all company documents that may be 
responsive . . . requiring business employees and counsel to devote 
significant resources to conduct broad searches for such documents and 
evaluate their responsiveness.'' We believe the costs of further data 
collections would not justify the benefits obtained from having updated 
data. Below we find that an alternative dataset can be used to update 
our competitive market test with no additional compliance burdens while 
still effectively capturing market competition as compared with a new 
more comprehensive data collection. We therefore decline to extend the 
2015 Collection.
    105. Form 477 Data. In 2013, as the National Broadband Map data 
collection

[[Page 25674]]

was nearing its completion, the Commission issued the Modernizing Form 
477 Order, which redesigned and updated the requirements first spelled 
out in the 2000 Data Gathering Order. To comply with the Form 477 data 
collection requirements, all facilities-based fixed broadband 
providers, including cable operators, are required to report data on 
all census blocks where they make fixed broadband services available to 
residential and business customers at bandwidth speeds exceeding 200 
kbps in at least one direction. Among other things, providers also 
report ``the maximum advertised speed for each technology used to offer 
service in each census block.'' The Commission collects these data 
semi-annually and makes the data available to the public.
    106. We find the Form 477 data well suited for supplementing the 
2015 Collection in the initial analysis of market conditions and a 
conservative proxy for competitive deployment going forward. Form 477 
broadband service availability data necessarily imply the presence of 
broadband-capable cable network facilities, which makes it an ideal 
dataset to ensure the competitive market test accounts for competition 
from cable operators. We recognize, however, that the Form 477 data do 
not measure the presence of other competitive providers. That being 
said, given the long-term sunk cost nature of competitive provision, it 
is unlikely that locations that were previously competitive (as 
evidenced in the 2015 Collection) would become noncompetitive. The key 
question thus becomes whether the Form 477 data can be used as an 
updating mechanism, not merely for the extension of cable supply, but 
as a proxy for the extension of competitive end user channel 
terminations more generally. While the measure is unlikely to be 
perfect, we conclude the Form 477 portion of the competitive market 
test is a good match for the 2015 Collection as a means of capturing 
future changes. Moreover, given cable operators' ongoing aggressive 
deployment of end user channel terminations, which dwarfs that of non-
cable suppliers, it is highly likely the cable-only measure found in 
the Form 477 data will capture the vast bulk of additional deployments 
because it is likely that most non-cable competitive extension of 
business data services networks will occur where cable is also 
deploying or has already deployed. Importantly, these data are updated 
on a semiannual basis and, therefore, any periodic re-evaluation of 
competition in specific markets will always be relatively current. 
Moreover, because these data are collected by the Commission, we are 
confident in their integrity.
    107. In fact, some commenters used Form 477 data to supplement the 
data from the 2015 Collection in their analyses and proposed that we 
use it going forward. Other commenters, while advocating using Form 477 
data, also suggested modifying Form 477 to replicate the 2015 
Collection going forward. We are reluctant, however, to impose 
additional reporting burdens on providers for the same reasons we 
rejected proposals to refresh the 2015 Collection, and therefore 
decline to amend Form 477 to mirror the data gathered by the 2015 
Collection. We believe the data currently collected by the Form 477 is 
already well suited to the needs of the competitive market test. 
Further, we will implement sufficient safeguards to allow us to use 
Form 477 in its present state.
2. Appropriate Geographic Measure
    108. In terms of granularity, our goal through the years of 
regulating the business data services market has been ``to define . . . 
geographic areas narrowly enough so that the competitive conditions 
within each area are reasonably similar, yet broadly enough to be 
administratively workable.'' After considering various possible 
geographic areas to use for the competitive market test, we conclude 
that basing the competitive market test at the county level strikes the 
best balance between being sufficiently granular and administratively 
feasible. We reject other proposals raised in the record, including use 
of MSAs, census blocks, census tracts, and ZIP codes.
    109. Counties. As suggested by various commenters in the record, we 
agree that the geographic area we use for the competitive market test 
should be larger than census blocks or census tracks, but smaller than 
MSAs. We find that counties are granular enough to capture reasonably 
similar competitive conditions yet large enough to be administratively 
feasible and are supported in the record. Counties are significantly 
more granular geographic units than MSAs and thus reduce the risk of 
misidentifying competitive or noncompetitive geographic areas. Counties 
are subdivided into census blocks. Presently, there are 3,233 counties 
in the U.S., as compared to 389 MSAs, of which 204 had been granted 
pricing flexibility relief. Counties have another advantage over MSAs, 
in that MSAs do not cover all of the price cap incumbent LEC study 
areas, while counties do. Moreover, counties are a more stable unit of 
regulation than MSAs. While county boundaries occasionally change, and 
sometimes counties are split, or merged or new ones are created, such 
changes are relatively infrequent. For example, in the decade ending 
2010, there were only two substantial county boundary changes, both in 
rural Alaska, and a merger of a county and a city. In contrast, MSA 
boundary changes are more frequent and far reaching. For example, in 
2003, 41 counties were moved from an MSA to a micropolitan statistical 
area, and changes were made to statistical area boundaries in every 
state.
    110. The Commission's 2015 Collection shows an average of 376 
buildings with last-mile access demand in a county, whereas the average 
number of buildings with last-mile access demand in an MSA is 2,713. 
This statistic shows that counties are much more granular geographic 
units for administering the competitive market test. Furthermore, using 
census data we can compare the number of firms and establishments and 
the employment levels in counties and MSAs. Those data also demonstrate 
that counties allow for a more granular analysis of competitive 
conditions than MSAs: [``Table 1. MSA-County Size Comparisons'' 
omitted].
    111. Counties are also significantly less granular than smaller 
geographic units such as buildings, census blocks, census tracks, and 
ZIP codes, and, thus, significantly more feasible for the Commission 
and industry to administer. Use of counties has another advantage as 
well: Counties do not cross MSAs. Consequently, there is a ready 
translation of the FCC's pricing flexibility regime to counties, which 
will minimize disruption where a county's regulatory status is not 
changed by this Order.
    112. Counties provide a convenient, natural administrative unit for 
capturing competitive effects, and competitive effects from cable 
operators in particular. The competitive presence of cable operators 
will generally conform to county boundaries since cable franchises have 
historically been awarded, with some exceptions, on a county-by-county 
basis. Cable operators may not provide cable service without a 
franchise from a franchising authority. A franchise authorizes the 
construction of a cable system over public rights-of-way, and through 
easements, within the area to be served by the cable system. Thus, a 
franchise license allows a cable operator to overcome many entry 
barriers associated with buildouts and creates more certainty in 
anticipated buildout revenues. With those hurdles

[[Page 25675]]

out of the way, it is in the cable operator's interest to build out an 
extensive network in the jurisdiction. Indeed, a cable operator's 
franchised cable system is often extensive throughout the franchised 
county.
    113. Metropolitan Statistical Areas (MSAs). We conclude that MSAs 
are not well suited to be used as the geographic area for determining 
competitive effects. The Office of Management and Budget (OMB) 
developed MSAs for purposes of compiling statistics for a set of 
certain geographic areas, defining MSAs as ``geographic entities that 
contain a core urban area of 50,000 or more population, and often 
includes adjacent counties that have a high degree of social and 
economic integration with the urban core, as measured by commuting to 
work.'' Furthermore, ``OMB may add counties or principal cities to an 
MSA, remove them, or even create new MSAs.'' Although OMB periodically 
updates its list of MSAs to reflect changes in social and economic 
integration between urban centers and outlying areas, the Commission 
``adopted a list of 306 MSAs based largely on data compiled from the 
1980 census, and froze that list for use in all pricing flexibility 
petitions.'' Thus, even if MSAs were an appropriate geographic area for 
competitive analysis and regulation, the Commission's list of MSAs does 
not reflect the current state of population and business conditions. 
This circumstance has caused confusion among providers that have 
submitted petitions to the Commission containing data calculated using 
different MSA definitions.
    114. In addition, MSAs are too large to reflect the scope of 
competition. Competitive LECs have consistently argued throughout this 
proceeding that the Commission's previous MSA analysis ``ignored the 
wide variability of competitive conditions across a large geographic 
area.'' The Commission agreed in the Suspension Order, analyzing 
business density in six MSAs and finding significant ``variance of 
competitive conditions within an MSA'' because ``[t]he resulting 
statistical entity can be large, including the entirety of distant 
counties if those counties contain exurban areas linked to the core by 
commuting behavior.'' Even some incumbent LECs that initially had 
argued for the continued use of MSAs eventually accepted the use of 
more granular areas.
    115. Buildings and Census Blocks. Some commenters express a strong 
preference for regulation focused on individual buildings with special 
access demand and, as a compromise, propose to regulate on a census 
block level. While this level of granularity might be more precise, it 
creates a range of other problems. For one, buildings with demand is a 
constantly changing statistic as businesses expand or downsize. Census 
blocks are also subject to change as the Census Bureau revises its 
measurements. Another issue is the administrative burden metrics like 
these are likely to impose on providers and the Commission: There were 
658,485 census blocks and 1,216,977 buildings with last-mile access 
demand reported in our data collection. As a practical matter, 
regulation at such a granular level is not administratively feasible, 
either for incumbent carriers, competitive providers or the Commission. 
It ``would inevitably lead to a patchwork of differing regulations from 
census block to census block (or from building-to-building).'' It would 
make it exceptionally difficult for regulated carriers to set prices 
subject to regulation in some areas and not in others and for 
competitive providers to analyze their opportunities to enter a market. 
Finally, it would significantly complicate the Commission's efforts to 
oversee business data services markets or to conduct enforcement 
proceedings that could potentially involve hundreds or even thousands 
of individual census blocks or buildings. We therefore conclude that 
the geographic scope of the competitive market test must be larger than 
buildings and census blocks.
    116. Census Tracts and ZIP Codes. Others suggest the Commission use 
census tracts or, alternatively, ZIP codes to analyze markets in the 
competitive market test. Census tracts are statistical subdivisions of 
a county updated each decennial census. Based on the 2015 Collection 
data, the median census tract had a land area of 1.71 square miles. 
U.S. Postal Service ZIP codes identify the individual post office or 
metropolitan area delivery station associated with mailing addresses. 
ZIP codes are also subject to periodic updates, and zip code boundaries 
can be difficult to obtain. Census tracts are less granular than census 
blocks but more granular than ZIP codes and MSAs; census tracts and ZIP 
codes are considerably more granular than MSAs. As of the 2010 census, 
there were 73,057 census tracts in the U.S. compared to 11,078,297 
census blocks and 389 MSAs. In 2016 there were 33,120 five digit ZIP 
CodeTM Tabulation Areas (ZCTATM) in the U.S. As 
with buildings and census blocks, the sheer number of census tracts and 
ZIP codes, along with their variability over time, significantly 
undermine the administrability of using them for the competitive market 
test for incumbent carriers, competitive providers and the Commission.
3. Appropriate Level of Competition
    117. Upon examining the structure of the business data services 
industry and the record before us, we find that a combination of either 
one competitive provider with a network within a half mile from a 
location served by an incumbent LEC or a cable operator's facilities in 
the same census block as a location with demand will provide 
competitive restraint on the incumbent LEC that will be more effective 
than our legacy regulatory regime in ensuring rates, terms, and 
conditions are just and reasonable. Our conclusion that a ``nearby BDS 
competitor'' provides sufficient competition to forgo regulation of an 
incumbent LEC's provision of BDS is based on three findings: (1) A 
determination of the geographic scope within which a likely BDS 
provider can realistically compete with an incumbent LEC; (2) a finding 
that one such competitor in addition to the incumbent LEC provides a 
reasonable degree of competition in BDS supply; and (3) a finding that 
the benefits of such competition outweigh the potential unintended 
costs of regulation.
a. Effect of a Nearby BDS Competitor
    118. The record in this proceeding indicates that providers 
actively compete for customers located within about a half mile from 
their networks by bidding on requests for proposals and sending their 
sales personnel to offer their services. When bidding on a contract, 
providers often ``have no way of knowing with any reasonable degree of 
certainty which other providers are capable of serving that customer 
over their own facilities'' and, therefore, when bidding on an RFP they 
``make much rougher assessments of the possibility of facing 
competitive bids''--a dynamic that ``ensure[s] that the benefits of 
competition redound to all customers in an area where competitive 
facilities have been deployed, not just those who are located within a 
certain distance of a network, or that offer a certain level of 
revenues.'' Accordingly, we determine nearby competitive network 
facilities exert competitive pressure on incumbent LECs whether or not 
their network is within a half mile of a customer's location.
    119. We further find that wireline providers of BDS are commonly 
willing to extend their existing network out approximately a half mile, 
and in some instances further, to meet demand. That is, the cost of 
meeting demand within

[[Page 25676]]

one-half mile, including the costs of network extension and customer 
connection, is usually less than the present value of expected net 
revenues that buildout to that location will entail. This is true for 
cable companies who today are major and aggressive business data 
services suppliers. For example, in 2013 cable already supplied BDS, 
largely over fiber facilities, to more than one in ten locations with 
BDS demand, and may well reach 23.5 percent of locations today. We 
additionally assume as a reasonable approximation that a cable company 
competes for any BDS demand, or will do so within a few years, wherever 
it is supplying mass market broadband services over its own network, or 
will do so sometime over the next few years. We find this is so even 
for locations with BDS demand that are not currently connected to the 
cable company's network, and which may be more than a half mile from a 
fiber-node (because cable companies are actively driving fiber closer 
to all end users, and so extending fiber to a new location beyond that 
distance may be economic given broader network objectives). In sum, we 
find a wireline supplier is an effective competitor in meeting BDS 
demand at a location if it either delivers BDS to a location or has a 
network within one half mile of the location with BDS demand, and/or is 
a cable company with a widespread HFC network that surrounds the 
location with BDS demand. We hereafter refer to such competitors as 
nearby competitors, and to their networks as nearby networks.
b. Effect of a Single BDS Competitor
    120. We find that, in the market for business data services, there 
is a substantial competitive effect when a wireline competitor is 
present to discipline rates, terms, and conditions to just and 
reasonable levels. We arrive at this conclusion because there is a 
general expectation that the largest benefits from competition come 
from the presence of a second provider, with added benefits of 
additional providers falling thereafter, in part because, consistent 
with other industries with large sunk costs, the impact of a second 
provider is likely to be particularly profound in the case of wireline 
network providers. A wireline provider is willing to cut prices to as 
low as the incremental cost of supplying a new customer, requiring 
minimal contribution to its sunk costs. In addition, we find that the 
presence of a nearby competitor is likely to prevent substantial abuse 
of market power, whether through high prices or lack of innovation, and 
equally that a lack of actual supply by a nearby competitor likely 
arises when existing suppliers' offerings are reasonable in both price 
service characteristics. That is, active supply occurs most rapidly in 
locations where the most profits are likely to be obtained, including 
where, for example, the transition to packet-based services is most 
valued. In other words, active supply is most likely to occur where the 
costs of missing competition are greatest. Equally, active supply is 
most likely to be postponed where the benefits of additional 
competition are small, because the potential profit gained from 
extending supply is small.
    121. We reject some commenters' characterization of the Qwest 
Phoenix Order as a blanket finding by the Commission that two 
competitors are insufficient to constrain incumbent LEC pricing. 
Although the Commission raised concerns about the competitive nature of 
a duopoly in that order, it did not categorically reject the 
possibility that a market with two competitors could represent 
sufficient competition to restrain supracompetitive pricing by 
providers. To the contrary, it specifically recognized that ``under 
certain conditions duopoly will yield a competitive outcome.'' We find 
that the high sunk cost nature of the BDS market gives providers the 
incentive to extend their network facilities to new locations with 
demand even when those locations contribute revenue only marginally 
above the incremental cost of the network extension. In their comments, 
incumbent LECs substantiate this conclusion by citing substantial 
losses they have recently incurred, primarily to new entrant cable 
operators. They also provide examples of their responses to cable 
competition involving both price reductions and new service offerings. 
Reports by cable providers of significant year-over-year growth in 
their BDS revenues corroborate this story and show a shift in demand to 
higher (and more competitive) bandwidths.
    122. We also distinguish our analysis here from that which the 
Commission employed in the Qwest Phoenix order. Although our 
competitive market test takes into account competition only from 
providers of copper, fiber, and coax last-mile facilities, in many 
locations there are likely more competitors present than the two 
captured by the test, such as providers of fixed wireless last-mile 
services, including providers of emerging 5G last-mile transmission 
technology, which promises to be widespread. Thus, technological 
changes that have occurred or are likely to occur in the near future 
make the Commission's reasoning in the Qwest Phoenix decision 
inapposite.
    123. Some competitive LECs urge us to deregulate only locations 
with four providers (one incumbent LEC and three competitors) with 
last-mile connections in the building or in the census block. We find 
that such an approach would result in substantial overregulation of the 
business data services market and therefore we decline to adopt it. The 
primary driver of the number of connections at any location is the 
nature of demand in the location. We fully expect locations with a 
single customer to typically have only one provider. Even those 
locations with multiple customers may only have a single provider--the 
provider that won the bidding process to supply the location. However, 
as we explain above, the high sunk network cost nature of this industry 
indicates that even as few as two nearby providers have the incentive 
to undercut each other's price to win customers so long as they at 
least recover the incremental cost of extending supply to any customer. 
Accordingly, requiring even two, let alone three or four providers to 
be already supplying a given location as the rule for deregulation 
would result in overregulation in numerous locations that have 
competitive choice. This issue would become even more pronounced as 
wireline network providers compete for more locations. On the basis of 
the 2015 Collection, deregulating locations with at least three (an 
incumbent LEC plus two other facilities-based providers) or four (an 
incumbent LEC plus three other facilities-based providers) suppliers 
would mean less than one percent of locations would be price 
deregulated and would re-impose price regulation on the vast majority 
of locations. Such a radical change would impose substantial regulatory 
costs on incumbent LECs--and consequently on small businesses, wireless 
carriers, and other consumers--and would dramatically reduce incentives 
for all carriers to build out next-generation infrastructure, which 
directly contravenes our goal of encouraging investment and innovation.
    124. Though we believe the record is convincing on the impact of 
one nearby competitor ensuring reasonably competitive outcomes in the 
medium term (i.e., over several years), even if it were not, the 
inability to draw firm conclusions from the data permits the Commission 
to make a predictive judgment regarding the impact of regulation on the 
market. Notwithstanding whether one nearby competitor is sufficient for 
a market to realize the substantive benefits of

[[Page 25677]]

competition, we note that the 2015 Collection analysis did not permit a 
definitive conclusion on incumbent LEC market power. In addition, as 
demonstrated by the market analysis in this Order, the evidence in the 
record suggests significant competition for these business data 
services. We conclude the best policy to encourage competition is to 
refrain from ex ante pricing regulation when the competitive market 
test adopted in this Order is satisfied. We find this policy to be 
sound even if our market analysis does not result in the perfect 
regulation of every building in the country--for any administrable rule 
will necessarily be overinclusive in some cases and underinclusive in 
others. Consistent with our precedent, we conclude that competition is 
the preferred method of ensuring just and reasonable rates, terms and 
conditions and preventing unreasonable discrimination. Refraining from 
ex ante pricing regulation in these instances where we see active and 
likely medium-term competition developing is the most effective means 
of ensuring continued development of actual and robust competitive 
outcomes.
c. Potential Unintended Costs of Regulation
    125. Finally, we find that there are substantial costs of 
regulating the supply of BDS and these likely outweigh any costs due to 
the residual exercise of market power that may occur in the absence of 
regulation. As a baseline, the presumption that ``[c]ompetition is best 
. . . because competition is the single best way of ensuring that 
customers benefit'' and the promotion of the same guides us. The 
question is not whether today nearby competition is everywhere fully 
effective, or even whether it will become so over the next few years. 
The question is whether the costs of the lack of fully effective 
competition, even as these decline over time, are likely smaller than 
the net costs of regulation.
    126. Here we explain why we find that the net costs of regulation 
in the business data services industry are likely to be large, most 
especially because regulation is likely to undermine entry, potentially 
postponing the gains from competition for many years. Even well-crafted 
regulations have unintended consequences, inhibiting competition, 
reducing investment, and end user benefits. This is especially true in 
markets as highly dynamic and complex as those for BDS. In general, 
regulation discourages entry wherever it enforces prices that do not 
allow firms full cost recovery or raises the costs of entry. As the 
record before us indicates, both of these side effects are likely in 
BDS supply. Moreover, regulation in rapidly growing markets is riskier 
than in otherwise similar stable or stagnating markets.
    127. First, it is very difficult for firms to set efficient prices 
when they must tariff and for a regulator to estimate the efficient 
price level in a business with the following characteristics: High 
uncertainty due to frequent and often large unforeseen changes in both 
customer demand for services and network technologies that are hard to 
anticipate and hedge against in contracts with customers; a complex set 
of products and services, which are tailored to individual buyers; 
costs of provision that vary substantially across different customer-
provider combinations; and large irreversible sunk-cost investments 
that a provider is required to make before offering service. In these 
circumstances, efficient prices are often tailored to individual 
purchasers, and are often subject to renegotiations that account for 
changing circumstances. Moreover, in these circumstances, the efficient 
price level, which must be reflected in the price cap, is extremely 
difficult to determine, not least because it must reflect the option 
value of sinking network investments in a rapidly-changing environment. 
Both of these sources of regulatory error, especially failure in 
setting a price cap, can lead to prices that are too low which prevent 
entry (or alternatively prices that are too high which encourage 
excessive entry). For example, an inability to quickly adjust a tariff, 
means prices can be too low where they otherwise would be changed, 
while the restraints of tariffing can force a provider to set prices 
that are too low for some customers and too high for others, simply 
because of barriers to filing separate tariffs that allow such 
different customers to self-select into the option that suits them 
best. Similarly, price caps can force, through required averaging (such 
as the geographic average required in our price caps), prices that are 
too low in some locations and too high in others. The effect is to rule 
out entry in the former case, and to sometimes encourage inefficient 
entry in the latter. Moreover, price caps that are overall too low 
discourage entry (as well as long-run network reinvestment), which can 
have substantive knock-on effects on entry decisions given that supply 
in BDS is about recovering more than the incremental cost of each 
customer to pay for total network costs. Such negative effects 
accumulate over the life of the cap.
    128. Second, given that most wireline network costs must be sunk 
for periods of between 20 years and sometimes two or more times that 
length of time, entrants and incumbents looking to reinvest are 
extremely sensitive to any increases in costs that might reduce their 
capacity to recover these costs. In particular, a small rise in costs 
that remains in place over a long time period can have a substantial 
impact on whether a particular investment opportunity is viewed 
positively. That is exactly what regulation does. It directly raises 
incumbent's costs, making them unwilling to invest and hence making 
them less effective competitors, and it creates an additional source of 
uncertainty that entrants must contend with when evaluating entry. If 
there is a small probability that future regulation will harm the 
entrant's projected income streams, then this can materially discourage 
entry (because over the course of the decades the expected present 
value of the accumulated harm can be large).
    129. Lastly, we reiterate that ``the Commission should construct 
regulation to meet not only today's marketplace, but tomorrow's as 
well.'' Available metrics show the BDS market as dynamic, evolving 
rapidly, and becoming increasingly competitive across all service 
offerings. When a market is changing and growing, it offers tremendous 
opportunities to new entrants and therefore creates fewer regulatory 
concerns. Rather than only having the option of taking customers from 
existing suppliers by offering them very similar services, new entrants 
can seek unaffiliated customers, or tempt incumbents' customers away by 
offering new services that incumbents either do not offer, or if they 
do, are no more experts in it than the entrant (in fact, incumbents may 
be hampered by fears of cannibalizing their legacy services or by their 
cultures and other factors that suited the legacy world). In short, 
competition is likely to be more effective in dynamic growing markets 
than regulation. In addition, a high degree of flux greatly increases 
the chances that regulatory error will stifle competition and reduce 
welfare because it is applied to a circumstance that, without the 
regulation, may have quickly been overtaken by innovation and/or 
competition. Thus, regulation of such markets is generally considered 
to be counterproductive.

[[Page 25678]]

4. Competitive Market Test Methodology
    130. In this section, we adopt the competitive market test 
methodology that we will use to determine which local markets are 
sufficiently competitive to warrant deregulation of price cap incumbent 
LEC provision of DS1 and DS3 end user channel terminations and certain 
other business data services. As we note above, we take a pragmatic 
approach to structuring the competitive market test, with the goal of 
promoting innovation and investment and recognizing recent trends and 
developments in the BDS marketplace. Furthermore, as also discussed 
above, we take a network-centric approach which takes into account the 
high sunk cost nature of BDS networks that gives nearby competitors a 
significant incentive to compete for potential clients within an 
economically buildable distance from their networks. This is the case 
for traditional competitive LECs and for newer entrants such as cable 
providers with extensive networks.
    131. For the competitive market test to most closely approximate 
the realities of competition in the business data services market, it 
ideally should deregulate where there is competition and regulate where 
there is not. Accordingly, we can use the 2015 Collection to measure 
the relative effectiveness of different competitive market tests at 
that point in time by assessing their respective error rates--i.e., how 
often they fail to deregulate locations or census blocks that are 
competitive and how often they fail to regulate locations or census 
blocks that are not. A competitive market test with an appropriately 
weighted combination of such error rates will tend toward maximizing 
competitive effects and minimizing regulatory failure. However, we also 
consider the importance of minimizing regulatory disruption. In 
particular, we seek to be conservative in deregulation and 
reregulation, and we specifically decline to re-regulate counties that 
were previously granted Phase II pricing flexibility.
    132. Data. Our first step in establishing a competitive market test 
is to use data from the 2015 Collection to identify areas that are 
competitive. First, we use the location data in the 2015 Collection to 
determine which buildings or locations with last-mile access demand are 
within a half mile of a location served by a competitor over its own 
facilities. We use a half mile distance based on our analysis of the 
record, discussed above, that determined that competitive providers are 
actively competing for customers located within that distance and are 
generally willing to build out that distance in response to business 
data services demand. We previously determined that two providers in 
the relevant market are sufficient to ensure competitive prices. Thus, 
all business locations with demand for last-mile access in a county 
that are within a half mile of a competitive provider's facilities are 
deemed competitive.
    133. We supplement the 2015 Collection data with additional and 
more current data from the Form 477 on broadband availability by cable 
providers which offers the best available and most current data on the 
sale of broadband services by cable providers and which is closely 
correlated with physical presence of cable networks. Data based on 
census blocks are very granular and therefore provide an appropriate 
measure on which to base our calculations for cable networks. Census 
blocks can be very small. If the median census block ``were a circle, 
then it would be approximately 0.2 miles across''--an area that can 
easily fit (and often does fit) a single building. Indeed, ``half [of 
all census] blocks are smaller than a tenth of a square mile (6.4 
acres).'' Given the high sunk cost nature of cable broadband networks, 
we find when a cable provider is capable of providing Internet 
broadband service within any census block, then generally they have the 
incentive to make the incremental investment necessary to serve 
locations with BDS demand in that census block, especially over the 
medium term. Accordingly, we treat as competitive census blocks in 
price cap incumbent LEC study areas that the Form 477 data show have a 
cable presence--whether serving business or residential clients.
    134. We conclude that it is necessary to base the competitive 
market test on data from both the 2015 Collection and the Form 477 data 
collections since neither collection captures the full extent of 
competition. The 2015 Collection includes data on traditional 
competitive LECs but only includes a portion of cable competitive 
facilities both because of the nature of the data reported and the fact 
that it does not capture cable competition that has emerged since the 
collection. The Form 477 data includes reasonably comprehensive data 
from which we can infer the presence of cable network facilities but 
does not provide comprehensive data on traditional competitive LECs. 
Because competitive LECs do not typically have locally ubiquitous 
networks, a report of supply by such a provider in a census block is 
less likely to mean they can extend their network to cover demand 
anywhere in the census block, so a traditional competitive LEC's Form 
477 report of presence in a census block often is not a good indication 
whether it can readily extend service to other locations in that census 
block. Additionally, such providers may offer business data services in 
a block, but not supply broadband service as defined in the Form 477 
data collection and not report that service for Form 477 purposes. 
Basing our test on both datasets will most closely approximate the full 
spectrum of competition in the business data services market, including 
competition from medium-term entrants. As we explain above, recent 
buildout by cable companies dwarfs that of traditional competitive LECs 
and, therefore, the 2015 Collection is likely to closely reflect the 
state of traditional competitive LEC deployment as of 2013. To the 
extent the test does not capture some recent deployment by traditional 
competitive LECs, providers have recourse through a section 208 
complaint process.
    135. Setting Appropriate Thresholds. The next step in formulating 
the competitive market test is to use the highly granular data from 
both datasets to assess the accuracy of different combinations of 
thresholds we might adopt for the test. These datasets measure 
competition at very local levels--individual locations and census 
blocks. However, for administrative purposes we have chosen to use 
counties to apply regulation. Thus, we use these more granular data to 
assess competition at the county level. This entails a higher degree of 
imprecision than if we were to base the test on locations or census 
blocks (which would entail more burden and administrative cost). In 
particular, we do not require a county to be 100 percent competitive to 
deregulate it. Were we to require this, few counties, if any, would 
qualify. For similar reasons, we do not require a county to completely 
lack competition in order to regulate it. We acknowledge that by 
setting the percentage threshold at something less than 100 percent 
necessarily leaves a portion of businesses at non-competitive locations 
within a county deemed competitive without the near-term potential for 
competition. However, for the reasons discussed above, it is important 
not to overregulate, and thereby reduce incentives for competitive 
entry. Indeed, competitors, and particularly near-ubiquitous 
competitors like cable providers, have an incentive to build to

[[Page 25679]]

locations even beyond a half mile from their facilities, depending on 
cost and revenue opportunity. Conversely, setting a percentage 
threshold too low would also distort the results of the competitive 
market test by deregulating counties with only a relatively minor 
competitive presence, leaving a higher percentage of locations with 
business data services demand without the likelihood of a competitive 
option. Consequently, we apply our judgment to strike a balance in 
light of the data at our disposal.
    136. We set percentage thresholds that result in a test that more 
accurately approximates competitive conditions in the county broadly. 
We set a separate threshold for each of the two datasets we use and 
note that, given the differences in the two datasets, the percentage 
thresholds will not be identical. Given the interdependency of the 
datasets, we analyze combinations of thresholds to assess their impact 
on the accuracy of our test and to determine which combination yields 
results with the lowest weighted error rates.
    137. Utilizing the data from the 2015 Collection and Form 477, we 
tested a variety of thresholds for both datasets. Any pair of 
thresholds regulates certain price cap counties and deregulates all 
others. This leads to two types of regulatory error that we can 
approximately measure using the 2015 Collection: the first type of 
error occurs in regulated counties where there will be locations as of 
2013 that were within a half mile of a location supplied over the 
facilities of a competitor (i.e., wrongly regulated), while the second 
type of error occurs in deregulated counties where there will be 
locations that were not within such a distance (i.e., wrongly 
deregulated). We measure these two types of errors by the number of 
locations in each category. Given the preceding, a natural way to 
proceed would be to seek a pair of thresholds that minimize some 
weighted sum of these two error counts.
    138. Following our competitive analysis that revealed the high 
costs of regulating this industry, we could, for example, assign twice 
as much weight to the first type of error of regulating where we should 
deregulate (i.e., wrongly regulating) as to the second type of error of 
deregulating where we should regulate (i.e., wrongly deregulating). 
Such a measure would overstate the first type of error, regulating 
locations that should be deregulated. This would reflect the scenario 
where one thought that the burdens and costs of inappropriately 
regulating were twice those of inappropriately deregulating. For 
example, in Figure 2 a weight of 2/3 is assigned to a competitive 
building that is regulated and a weight of 1/3 is assigned to a 
noncompetitive building that is deregulated. The darkest blue area 
shows the range in which the weighted sum of errors takes its lowest 
values, while the darkest red area shows the range in which the 
weighted sum of errors takes its highest values. Taking this approach 
allows us identify the thresholds that minimize the weighted sum of 
these two errors. In particular, the appropriate thresholds given these 
weights would deregulate a county where 32 percent of buildings with 
BDS demand are within a half mile of a location supplied over 
competitive facilities or with 3 percent of census blocks with cable 
presence. [``Figure 2. Threshold percentage combinations (wrongly 
regulated locations given twice as much weight): Sum of Number of 
Buildings Deregulated without Competition and Sum of Number of 
Buildings Regulated with Competition'' omitted].
    139. We next reverse these weights and instead assign twice as much 
weight to wrongly deregulated non-competitive buildings as to wrongly 
regulated competitive buildings. As the dark blue area of the contour 
map indicates, the appropriate thresholds for deregulating a county 
would be 48 percent for buildings with BDS demand within a half mile of 
a location supplied over competitive facilities and 23 percent for 
census blocks with cable presence. [``Figure 3. Threshold percentage 
combinations (wrongly deregulated locations given twice as much 
weight): Sum of Number of Buildings Deregulated without Competition and 
Sum of Number of Buildings Regulated with Competition'' omitted].
    140. Alternatively, we can assign equal weight to both errors--that 
is, give both types of errors equal importance--then we would choose 
thresholds that minimize the simple sum of the number of buildings 
inappropriately regulated or deregulated. Figure 4 demonstrates that 
under this scenario the resulting thresholds would deregulate a county 
where about 47 percent of buildings with BDS demand are within a half 
mile from competitors' facilities as competitive or where about 11 
percent of census blocks have cable facilities. [``Figure 4. Threshold 
percentage combinations (wrongly regulated and wrongly deregulated 
locations equally weighted): Sum of Number of Buildings Deregulated 
without Competition and Number of Buildings Regulated with 
Competition'' omitted].
    141. This analysis suggests that setting a threshold of 32 to 48 
percent for the 2015 Collection would be reasonable. Out of an 
abundance of caution--we want to ensure that counties we deregulate 
will be predominantly competitive--we select the highest threshold--48 
percent--and round up to 50 percent, which only slightly increases the 
error rate. Based on this threshold alone, we find that 1,862 or 59 
percent of all counties and county equivalents in the United States 
that have some census blocks that are within a price cap study area 
would be treated as competitive, resulting in the deregulation of 91.1 
percent of locations with special access demand. If we were to use this 
threshold alone, we estimate that 89.5 percent of locations with 
special access demand would be appropriately regulated, with 77,900 
locations potentially over regulated and 48,045 potentially under 
regulated.
    142. Our analysis suggests that setting a threshold of 3 to 23 
percent would be one reasonable means of setting the trigger threshold 
for the Form 477 data. Nonetheless, we believe a more cautious approach 
is warranted for three reasons. First, we recognize that all but 8.9 
percent of locations with special access demand are already deregulated 
by the half mile test--and any test using the Form 477 data will likely 
overlap substantially with the locations already targeted by that test. 
So any additional deregulation using Form 477 must be justified at the 
margin. Second, we recognize that deployment in any marginal counties 
targeted alone by the cable census block test is likely to be more 
sparse than in those targeted by the half mile test, and so the 
facility of cable deployment to any given location is likely to be 
somewhat less than in more concentrated areas. Third, we want to ensure 
that counties we deregulate--now and in future competitive market test 
updates--will be predominantly competitive in nature. Accordingly, we 
choose a more conservative approach and adopt a 75 percent threshold 
for the Form 477 data. With that threshold, an additional 17 or 0.5 
percent of all counties and county equivalents would be treated as 
competitive, resulting in the deregulation of an additional 0.8 percent 
of locations with special access demand. We estimate that adding that 
threshold increases the percentage of locations appropriately regulated 
to 90.2 percent, with 8,367 locations more appropriately regulated. We 
note also that because Form 477 data encompass cable's best-efforts 
business data services, and this source of cable

[[Page 25680]]

competition is growing rapidly, we expect setting even a conservative 
threshold such as this one will result in further deregulation going 
forward.
    143. We acknowledge that this competitive market test does not as 
perfectly delineate areas as we would like; yet we believe it strikes 
the right balance. It balances the need for precision against the need 
for a test that is feasible to administer, and also balances the 
benefits of appropriate regulation of competitive and non-competitive 
areas while seeking to avoid the costs of inappropriate regulation. It 
does not require additional data collections and yet closely 
approximates the results such data collections are likely to yield. It 
ensures that we adopt competitive thresholds that most closely 
approximate actual competitive market conditions and minimize 
regulatory error. It deregulates areas with sufficient potential for 
competitive entry in response to significant profit opportunities and 
retains ex ante pricing regulation in areas where competitors are less 
likely to be able to enter and therefore creates appropriate incentives 
for just and reasonable rates and continued growth, innovation, 
investment, and deployment in the dynamic business data services 
market. Lastly, it is conservative in deregulating, reflecting a desire 
to not move too quickly and recognizing the nascent nature of cable 
competition not captured in the 2015 Collection.
    144. We find that it is not necessary to create a special process 
or mechanism for challenging the results of the competitive market 
test. For administrability purposes, any such process would need to be 
limited to a single criterion, for example, the accuracy of the Form 
477 data. The Commission has designed the competitive market test in a 
manner that reduces the need for, and the significance of, any post-
decision challenge process because it has established very clear 
standards based on data that is readily accessible. In addition, we 
believe that parties can rely on the accuracy of the Form 477 data 
because it is certified to by company officials, compliance is subject 
to enforcement actions, and filers are required to submit revised data 
upon discovery of a significant error. Furthermore, commenters 
generally agree that the Commission should avoid establishing a 
separate process that is burdensome on the parties and the Commission. 
For example, NCTA urges the Commission to forego any extensive and 
involved challenge process such as in the Connect American Phase II 
universal service program that included more than 140 parties 
challenging the classification of nearly 180,000 census blocks and that 
took the Commission nine months to resolve. Accordingly, consistent 
with our goal of eliminating unnecessary administrative burdens, we 
conclude, based on the substantial administrative costs and apparently 
minor benefit, there is no reason to implement a challenge process 
here.

D. Updating Competitive Market Test Results

    145. To ensure the results of the competitive market test continue 
to reflect competitive conditions in the business data services 
marketplace, we adopt a process for updating those results every three 
years using Form 477 data across all areas served by price cap 
carriers.
    146. The results of the competitive market test offer a static 
snapshot of a dynamic and constantly changing business data services 
market. Most commenters that support the use of a competitive market 
test also support updating the test periodically. We therefore adopt an 
administratively efficient process that will periodically update the 
results of the test to govern the transition of a county from non-
competitive to competitive status.
    147. We base our initial application of the competitive market test 
on the two principle data sources we currently have at our disposal, 
the 2015 Collection and Form 477. The Form 477 data are updated on a 
semi-annual basis and will therefore continue to be useful in measuring 
competition in subsequent updates to the test. The data in the 2015 
Collection, however, will become increasingly stale and therefore less 
relevant to actual market conditions in subsequent updates of the test. 
We agree with commenters that express concerns about the burdens such 
new data collections would entail. At this point, we find that the 
costs of such collections outweigh the benefits. The 2015 Collection 
was the most comprehensive data collection the Commission has 
conducted, and the burden of conducting additional such collections, 
even if streamlined, would likely be considerable.
    148. Moreover, we agree with commenters that the Commission ``does 
not need to issue a request for a broad, large-scale data collection as 
it did in 2012'' in order to obtain updated market data. We can instead 
use the existing Form 477 data collection, which would provide 
continuity with the initial test that also relies on these data. The 
Form 477 data on broadband availability are well suited to identify 
increases in competitive broadband deployment, particularly by cable 
providers which are the most likely sources of competitive growth. We 
conclude it is not necessary, as some commenters suggest, to modify 
Form 477 to request additional information. The current Form 477 data 
are sufficiently precise to capture the changes in competitive 
deployment that are likely to occur in a three-year timeframe. Thus we 
are able to achieve our goals of updating the competitive market test 
results using accurate data and at the same time avoid imposing any 
additional burdens on providers or the Commission.
    149. We agree with commenters that support the suggestion in the 
Further Notice that the Commission reapply the test every three years. 
We find that the three-year period strikes the right balance between 
ensuring the competitive market test remains reasonably accurate and 
avoiding unnecessary disruption of sales arrangements and 
administrative burdens by overly frequent updates.
    150. As Sprint explains, ``[three years] permits the Commission to 
evaluate whether markets are changing to become more competitive and 
will ensure that the regulatory framework reflects accurate information 
about the BDS marketplace.'' We disagree with commenters arguing for 
more or less frequent updates. More frequent updates are likely to be 
unnecessarily disruptive of longer-term business data services sales 
arrangements, while less frequent updates will be insufficient for the 
Commission to properly assess changes in the marketplace and to ensure 
the test remains current.
    151. We direct the Wireline Competition Bureau to review Form 477 
data on a regular three-year basis and determine whether any additional 
regulated counties meet the 75 percent threshold. The Bureau shall 
release a Public Notice that lists newly competitive counties and shall 
also provide this information on the Commission Web site. Parties 
desiring to challenge these results may file petitions for 
reconsideration or seek full Commission review through an application 
for review.
    152. While commenters may disagree with how to update the initial 
competitive market test results, commenters widely note that the 
Commission should select administrative processes that are efficient. 
We note there are more than 3,100 counties in the U.S. that are 
included in our initial competitive market test computations. About 40 
percent of these are treated as non-competitive and about 60 percent as 
competitive. We have previously noted

[[Page 25681]]

that, given the sunk and irreversible cost nature of business data 
services provision, it is unlikely that locations that were 
competitive, as evidenced in the 2015 Collection and Form 477 data, 
would become noncompetitive. Sunk costs represent the biggest barrier 
to entry, and these data demonstrate that this barrier has been 
overcome. On the other hand, given the recent pace of technology, 
innovation, and the rollout of more efficient products in the business 
data services market, we are confident that competition will continue 
to grow in competitive markets. As a result, we find that the cost of 
reapplying the competitive market test for nearly 2,000 counties 
already treated as competitive would outweigh the benefit, if any. We 
thus decide we can achieve our objectives of adopting an 
administratively efficient process to update the competitive market 
test by reducing the number of counties subject to retesting. We shall 
update our test calculations only for the non-competitive counties to 
determine whether customers in these locations are benefitting from 
competition. Consistent with this approach, once a county is treated as 
competitive, it will not be retested.

E. Altering Business Data Services Forbearance

    153. Prior forbearance actions and deemed grants have created a 
situation in which the statutory provisions and rules that apply to a 
price cap incumbent LEC or a competitive LEC in its provision of 
business data services vary depending on the provider's identity and 
the specific services being provided. We expand upon and adjust these 
prior actions and deemed grants to the extent necessary to level the 
regulatory playing field for all of these business data services 
providers. We also amend our rules as appropriate to implement our 
light-touch regulatory framework for business data services. These 
actions flow from--and are consistent with--our findings above on the 
intense and growing competition in business data services.
    154. Our actions expanding forbearance are taken pursuant to 
section 10 of the Communications Act. That provision, enacted as an 
integral part of the ``pro-competitive, de-regulatory national policy 
framework'' established in the 1996 Act, requires that the Commission 
forbear from applying any provision of the Act, or any of the 
Commission's regulations, if the Commission makes certain findings with 
respect to such provisions or regulations. Under section 10(a), the 
Commission is required to forbear from any such provision or regulation 
if it determines that: (1) Enforcement of the provision or regulation 
is not necessary to ensure the telecommunications carrier's ``charges, 
practices, classifications, or regulations'' are ``just and reasonable 
and are not unjustly or unreasonably discriminatory;'' (2) enforcement 
of the provision or regulation is ``not necessary for the protection of 
consumers;'' and (3) forbearance is ``consistent with the public 
interest.'' In making this public interest determination, the 
Commission must also consider, pursuant to section 10(b), ``whether 
forbearance from enforcing the provision or regulation will promote 
competitive market conditions.''
1. Detariffing of Packet-Based Services and Circuit-Based Services 
Above the DS3 Bandwidth Level
    155. We forbear from the application of section 203 of the 
Communications Act to each price cap LEC in its provision of any 
packet-based business data services or circuit-based business data 
services above the DS3 bandwidth level. This action expands upon prior 
forbearance grants and deemed grants applicable only to certain 
carriers and certain packet-based and circuit-based business data 
services.
    156. In 2006, Verizon's Broadband Forbearance Petition was deemed 
granted by operation of law after the Commission did not act on it 
within the statutory time limit. That petition had sought forbearance 
from the application of Title II common carrier and Computer Inquiry 
requirements to ``all broadband services'' that Verizon ``does or may 
offer.'' But Verizon had subsequently narrowed the scope of its 
forbearance request to exclude DS1 and DS3 services. Following this 
deemed grant, AT&T, legacy Embarq, legacy Frontier, Qwest, and ACS 
filed petitions requesting similar forbearance relief. The Commission 
granted these petitions in part, finding that forbearance from the 
application of dominant carrier regulation, including tariffing under 
section 203, to the petitioning incumbent LECs' then existing packet-
based and optical transmission broadband data services met the 
statutory forbearance criteria. These partial grants reflected the 
Commission's predictive judgment that, in comparison to traditional 
dominant carrier regulation and for the carriers' and services being 
addressed, ``eliminating the extra layer'' of regulation provided by 
tariffing and the Commission's ex ante pricing rules, ``while leaving 
in place basic Title II common-carrier regulation'' under sections 201, 
202, and 208, ``will better promote competition and the public 
interest.'' The record here confirms this predictive judgment and 
supports expanding the prior forbearance to include additional carriers 
and services.
    157. Currently the vast majority of business data services 
providers are not subject to section 203 in their provision of business 
data services--non-incumbent LECs are not required to comply with 
tariffing requirements, nor are the price cap incumbent LECs that have 
received forbearance to the extent they provide services within the 
scope of the forbearance grants and deemed grants. We find that the 
lack of regulatory parity that stems from the prior applications of 
forbearance is preventing competition and holding back our efforts to 
``encourage the deployment on a reasonable and timely basis of advanced 
telecommunications capability to all Americans.'' Thus, our 
determination is based on ``what the agency permissibly sought to 
achieve with the disputed regulation,'' that is, to ensure that rates, 
terms, and conditions for the provision of these business data services 
are just, reasonable, and not unreasonably discriminatory. We find that 
``in light of an overwhelming record of declining prices, it is simply 
not credible to argue that rate regulation is necessary to simulate 
competitive pricing'' for these services. Additionally, the lack of 
regulatory parity among broadband data services providers created by 
the imbalanced forbearance grants and deemed grants over the years has 
created barriers to entry and impeded competition. Extending 
forbearance from tariffing will lead to regulatory parity, and a more 
level playing field among packet-based and optical transmission 
business data services providers.
    158. We further conclude that disparate forbearance treatment of 
carriers providing the same or similar services is not in the public 
interest as it creates distortions in the marketplace that may harm 
consumers. Allowing such disparate application of our tariffing 
requirements undermines, rather than promotes, competition among 
telecommunications services providers within the meaning of section 
10(b).
    159. We predict that competition in the business data services 
market, along with the statutory and regulatory requirements that 
remain, is sufficient to ensure just, reasonable, and not unjustly or 
unreasonably discriminatory rates, terms, and conditions by business 
data services providers and to protect business data services 
consumers. We therefore find that application of section

[[Page 25682]]

203 is not necessary within the meaning of sections 10(a)(1) and 
10(a)(2). Those same considerations, plus our desire to promote 
competition and broadband deployment, likewise persuade us that such 
forbearance is in the public interest. Therefore, consistent with the 
Commission's prior findings, we find that forbearing from these 
regulations in an equal manner is consistent with the public interest 
within the meaning of section 10(a)(3).
2. Detariffing of Other Special Access Services
    160. We also forbear from the application of section 203 to each 
price cap incumbent LEC in its provision of business data services 
elements that comprise transport pursuant to section 69.709(a)(4) of 
the Commission's rules, and to DS1 and DS3 end user channel 
terminations services and any other special access services currently 
tariffed in competitive counties or in non-competitive counties 
previously subject to Phase II pricing flexibility.
    161. The Commission has previously recognized that ``tariffs 
originally were required to protect consumers from unjust, 
unreasonable, and discriminatory rates in a virtually monopolistic 
market, and that they become unnecessary in a marketplace where the 
provider faces significant competitive pressures.'' We find above that 
business data services transport is competitive throughout the nation 
and that DS1 and DS3 end user channel terminations services and other 
tariffed special access services are competitive in certain counties. 
Where a price cap LEC provides these services in competitive markets, 
application of section 203, including its tariffing requirement, is not 
necessary to ensure that the LEC's charges, practices, classifications, 
or regulations are just, reasonable, and not unjustly or unreasonably 
discriminatory. Nor is application of section 203 necessary to protect 
consumers.
    162. We recognize that in some discrete geographic areas, including 
portions of non-competitive counties previously subject to Phase II 
pricing flexibility, some customers may not have access to competitive 
transport services during the near-term. Similarly, in some portions of 
the counties that we classify as competitive, some end users may not 
have viable alternatives to the incumbent LEC's DS1 and DS3 end user 
channel terminations services and other special access services within 
that time frame. But even in these areas, we believe tariffing may 
reduce incentives for competitive entry and ultimately inhibit growth 
in the market and competition over the longer term. Additionally, price 
cap LECs will remain subject to sections 201 and 202, and to our 
enforcement of those provisions through the section 208 complaint 
process. In these circumstances, we find that the additional 
contribution that tariffing--and other ex ante regulation--of price cap 
LECs' special access services provides to protection against unjust, 
unreasonable, and unreasonably discriminatory rates, terms, and 
conditions is not necessary within the meaning of sections 10(a)(1) and 
10(a)(2).
    163. Those same considerations, plus our desire to promote 
competition and business data services deployment, likewise persuade us 
that forbearance is in the public interest. In competitive markets, 
tariffing has several adverse consequences, including reducing a 
carrier's incentives to offer price discounts and ability to respond 
quickly to changes in demand or costs, delaying and increasing the 
costs of innovation, and preventing a carrier from tailoring service 
arrangements to meet its customers' specific needs. Tariffing also 
imposes significant administrative costs on carriers and the 
Commission, and ultimately inhibits competitive entry in discrete areas 
where a price cap LEC currently may be the only provider. Given these 
costs, we find that forbearance from the application of section 203 to 
price cap LECs' business data services elements that comprise transport 
pursuant to section 69.709(4), and to DS1 and DS3 end user channel 
termination and any other tariffed special access services in 
competitive counties, is consistent with the public interest within the 
meaning of section 10(a)(3). We note that the record was supportive of 
detariffing services in competitive markets.
    164. A small number of counties that had been regulated under Phase 
II pricing are now deemed non-competitive pursuant to our competitive 
market test. Incumbent LECs in these counties have been providing DS1 
and DS3 end user channel termination and other special access services 
free of price cap, but not tariffing, regulation. Like we do for other 
services, we conclude that for these incumbent LECs tariffing's costs 
generally outweigh its benefits to consumers, and that forbearance from 
the application of section 203 to DS1 and DS3 end user channel 
termination and other tariffed special access services by these 
incumbent LECs in these counties is consistent with the public 
interest.
    165. In contrast, we conclude it is not practical to detariff 
carriers that are now subject to--and will remain subject to--price cap 
regulation, where the tariff is the tool the Commission has used--and 
will continue to use--to enforce that regulation. This is not a concern 
with the counties now subject to Phase II pricing to the extent an 
incumbent LEC has not been subject to price cap regulation and, as we 
decide below, will not be subject to such regulation going-forward.
3. Transition Mechanisms
    166. Our detariffing actions in this Order will be mandatory after 
a transition that will provide price cap incumbent LECs sufficient time 
to adapt their business data services operations to a detariffing 
regime. We also require that competitive LECs, which are currently 
subject to a permissive detariffing regime, detariff their business 
data services by the end of this transition.
    167. The transition will begin on the effective date of this Order 
(sixty (60) days after Federal Register publication) and will end 
thirty-six (36) months thereafter, a period that we find sufficient for 
carriers to adapt to a detariffing regime. In addition, for six (6) 
months after the effective date of this Order, we require price cap 
incumbent LECs to freeze the tariffed rates for end-user channel 
terminations in newly deregulated counties, as long as those services 
remain tariffed. We adopt these transition mechanisms in light of the 
need for an adequate transition to ensure that small businesses will 
have time to adjust to the new regulatory conditions.
    168. During this transition, tariffing for these services will be 
permissive--the Commission will accept new tariffs and revisions to 
existing tariffs for the affected services. Apart from the rate freeze 
noted above, carriers will no longer be required to comply with price 
cap regulation for these services, and once the rules adopted in this 
Order are effective, carriers that wish to continue filing tariffs 
under the permissive detariffing regime are free to modify such tariffs 
to reflect the new regulatory structure outlined in this Order for the 
affected services. This will allow carriers to respond to competitive 
pressures and introduce new business data services as they adapt to 
detariffing.
    169. Carriers, including non-incumbent LECs, may remove the 
relevant portions of their tariffs for the affected services at any 
time during the transition, and the rate freeze does not apply to 
services that are no longer tariffed. Once the transition ends, no 
price cap incumbent LEC or competitive

[[Page 25683]]

LEC may file or maintain any interstate tariffs for affected business 
data services. This will prevent carriers from obtaining ``deemed 
lawful'' status for tariff filings that are not accompanied by cost 
support and invoking the filed-rate doctrine in contractual disputes 
with customers. Business data services providers will also be prevented 
from picking and choosing when they are able to invoke the protections 
of tariffs.
    170. We recognize that our detariffing actions will change the 
legal framework for existing service arrangements for business data 
services, many of which assume a tariffing environment and may not 
expire until after the end of the transition to mandatory detariffing. 
We do not intend our actions to disturb existing contractual or other 
long-term arrangements--a contract tariff remains a contract even if it 
is no longer tariffed. In that vein, contract tariffs, term and volume 
discount plans, and individual circuit plans do not become void upon 
detariffing. Instead, we expect all carriers to act in good faith to 
develop solutions to ensure rates are just and reasonable.
4. Verizon Deemed Grant
    171. In this section of the Order, we conform the forbearance 
provided to Verizon and its successors in interest, Hawaiian Telcom, 
and the legacy Verizon portions of FairPoint and Frontier (together the 
Verizon Legacy Companies), to the forbearance provided other price cap 
carriers. This action, when coupled with our other forbearance actions 
in the Order, levels the playing field among price cap carriers 
providing packet-based and optical transmission business data services 
as telecommunications services.
    172. In 2006, Verizon's 2004 petition seeking forbearance from the 
application of Title II and Computer Inquiry requirements to certain of 
its enterprise broadband services was deemed granted by operation of 
law after the Commission did not act on that petition within the 
statutory time limit. We agree with those commenters that argue that we 
have statutory authority to reverse the deemed grant. Section 10 
directs the Commission to ``forbear from applying'' statutory 
provisions and regulations to a telecommunications carrier when certain 
statutory criteria are met. We read the statute as giving us the 
authority to modify or reverse forbearance that has been deemed granted 
when we determine that one or more of those forbearance criteria are no 
longer met. Otherwise, forbearance based on the lack of a need to apply 
a statutory provision or regulation, and the public interest in such 
non-application, under one set of circumstances would remain locked in 
place even when circumstances change. Congress would not have intended 
to create such rigidity in enacting statutory provisions requiring 
``Regulatory Flexibility,'' as section 10(a) is captioned. 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.
    173. We reject certain commenters' argument that statutory silence 
means that we lack authority to modify or withdraw forbearance once it 
is deemed granted, or that only Congress can modify or reverse 
forbearance received through a deemed grant. That argument largely 
rests on the D.C. Circuit's holding in Sprint Nextel v. FCC that the 
Verizon deemed grant ``did not result in reviewable agency action'' 
because ``Congress, not the Commission, [had] `granted' Verizon's 
forbearance petition'' In so holding, the D.C. Circuit did not address 
the Commission's authority, under section 201(b), to adopt rules 
necessary ``to carry out the `provisions of this Act,' '' which include 
each Title II provision encompassed within the Verizon deemed grant. 
Congress's determination in section 10(c) that forbearance will be 
``deemed granted'' in the absence of timely agency action does not in 
any way limit our authority to later ``reassess'' the deemed grant as 
we ``reasonably see fit.''
    174. We recognize that modifying or reversing forbearance once 
granted by the Commission or by operation of law is a step that should 
be taken with great care. We find this narrowly tailored action is 
appropriate in this case because such reversal is consistent with the 
substance of the statutory forbearance requirements. Verizon's 
forbearance from core Title II obligations came from the highly unusual 
circumstance of a deemed grant. Our partial reversal is consistent with 
the Commission's unanimous commitment, in the AT&T Forbearance Order, 
``to avoid persistent regulatory disparities between similarly-
situated'' carriers by issuing ``an order addressing Verizon's 
forbearance petition . . . on grounds comparable to those set forth'' 
in the AT&T Forbearance Order.
    175. Notably, in its own comments in this proceeding, Verizon has 
recognized the importance of a level playing field in the business data 
services arena. The forbearance relief ``deemed granted'' to Verizon 
encompasses economic regulation that applies to all other common 
carriers, economic regulation that applies to all other incumbent LECs 
or Bell Operating Companies (BOCs), and public policy regulation that 
applies to all other common carriers. Continued forbearance from this 
regulation would be inconsistent with the statutory forbearance 
criteria. For example, as we find above, the protections provided by 
sections 201 and 202(a), coupled with our ability to enforce those 
provisions in a complaint proceeding pursuant to section 208, are 
necessary to protect against unjust, unreasonable, and unjustly or 
unreasonably discriminatory rates, terms, and conditions for those 
business data services. Similarly, section 251(b) imposes a number of 
duties on LECs, including the duty to implement number portability and 
the duty to provide competing telecommunications service providers with 
access to the LECs' poles, ducts, and conduits under just and 
reasonable rates, terms, and conditions. Acting to bring the Verizon 
Legacy Companies' forbearance into line with the forbearance granted to 
other carriers is necessary to ensure just, reasonable, and not 
unreasonably discriminatory rates, terms, and conditions for business 
data services provided on a common carrier basis, and is consistent 
with the Commission's decisions granting more tailored forbearance to 
other carriers.
    176. Other provisions and requirements forborne from by the deemed 
grant promote access to telecommunications services by individuals with 
disabilities, protect customer privacy, and increase the effectiveness 
of emergency services, among other objectives. As the Commission 
previously found, these and other public policy requirements under 
Title II ``advance critically important national objectives'' and thus 
are necessary to protect consumers. Indeed, continued forbearance from 
these requirements would be inconsistent with the critical consumer-
protection goals that led to their adoption.
    177. We further conclude that disparate treatment of carriers 
providing the same or similar services is not in the public interest as 
it creates distortions in the marketplace that may harm consumers. 
Allowing Verizon and its successors in interest, but not its business 
data services competitors, to continue to avoid compliance with 
obligations applicable to other business data services providers would

[[Page 25684]]

undermine, rather than promote, competition among telecommunications 
services providers within the meaning of section 10(b). Therefore, 
consistent with the Commission's repeated findings, we find that 
applying these obligations to the Verizon Legacy Companies to the 
extent they provide business data services on a common carrier basis is 
consistent with the public interest.

V. Regulation in Non-Competitive Counties

    178. We now turn to the question of what ex ante regulation, if 
any, we should apply to special access services in counties that are 
classified as non-competitive pursuant to our competitive market test. 
To ensure affordability of DS1 and DS3 services without unnecessarily 
constraining incumbent LECs' incentives to invest and innovate, we will 
apply price cap regulation in the form of Phase I pricing flexibility 
(Phase I pricing) to DS1 and DS3 end user channel terminations and 
certain other business data services provided by incumbent LECs in 
counties that we determine are non-competitive. Allowing Phase I 
pricing will enable incumbent LECs to timely and effectively respond to 
any competition that develops in these markets through contract tariffs 
and volume and term discounts. We also prohibit the use of overly 
restrictive non-disclosure agreements in contract tariffs for business 
data services sold in non-competitive areas.

A. Retaining Price Cap Regulation in Non-Competitive Counties

    179. We conclude that, subject to the exception discussed below, we 
should continue to apply price cap regulation, as modified in this 
Order, to price cap LECs' DS1 and DS3 end user-channel terminations and 
certain other non-competitive business data services in non-competitive 
counties to ensure the rates, terms and conditions for such services 
are just and reasonable. We agree with the commenters--including 
Verizon, INCOMPAS, Sprint, Windstream, Ad Hoc, Birch et al., NASUCA et 
al., and Public Knowledge--that argue that price cap regulation is the 
most effective regime for ensuring that rates for non-competitive 
services are just and reasonable. The price cap system, as modified by 
the measures we adopt in this proceeding, will limit the extent to 
which price cap LECs can exercise their market power over the rates for 
TDM-based end user channel terminations in non-competitive counties.
    180. When properly applied, price cap regulation replicates some of 
the beneficial incentives of competition in the provision of business 
data services while balancing ratepayer and stockholder interests. 
Price caps encourage LECs to become more productive and innovative by 
permitting them to retain reasonably higher earnings while discouraging 
wasteful investment. At the same time, price cap regulation offers 
regulated firms flexibility in setting relative prices, instead of 
relying on uniformed regulatory direction. In sum, price cap regulation 
helps ensure just and reasonable prices for customers in non-
competitive markets while affording providers good incentives to reduce 
costs and an opportunity to earn a reasonable return on their 
investments.
    181. We do not, however, require incumbent LECs that were 
previously granted Phase II pricing flexibility to reinstitute price 
caps in non-competitive counties that are within former Phase II 
pricing areas because we find that the costs of doing so exceed the 
benefits as described above. Incumbent LECs that have previously been 
granted Phase II pricing flexibility in these counties have been 
providing DS1 and DS3 end user channel terminations and other business 
data services free of price cap regulation for a number of years and 
have adapted their internal systems accordingly. Bringing these 
services back into price caps would require that incumbent LECs revamp 
their billing, information technology, and third-party management 
systems, at significant cost. Additionally, reinstituting price cap 
regulation would require the carrier to recreate what the price cap 
would be had it never received pricing flexibility, which would involve 
burdensome and complicated calculations. According to the 2015 
Collection, only 69 counties in former Phase II pricing areas are 
deemed non-competitive pursuant to our competitive market test, and 
these counties collectively have only [REDACTED] buildings with demand 
for end user channel terminations (only a portion of which is for DS1s 
or DS3s). We find that the costs of reinstituting price caps for 
carriers previously granted Phase II pricing flexibility in these 
counties outweigh the potential benefits. We also recognize that 
incumbent LECs in non-competitive counties that were not previously 
granted Phase II pricing flexibility would not have to bring services 
back into price caps, and therefore would not have the same costs. 
Therefore, these carriers will remain within the revised price cap 
system adopted in this Order.
    182. To encourage competitive entry into the counties we have 
identified as non-competitive, we will not apply price cap regulation 
to DS1 and DS3 end user channel terminations provided by non-incumbent 
LECs. When a non-incumbent LEC provides DS1 or DS3 services in a non-
competitive market, it typically does so in competition with an 
incumbent LEC that enjoys marketplace advantages, including a 
ubiquitous network and significant economies of scale. Extending price 
cap regulation to non-incumbent LECs would impose significant costs 
while generating few, if any, benefits. These costs would include 
administrative compliance costs that, by their very nature, would 
reduce the amount of capital available for the non-incumbent to upgrade 
its network and expand its business data services footprint to 
additional locations within the non-competitive county. Of greater 
concern, such regulation would reduce the non-incumbent's capacity to 
efficiently set prices and increase its exposure to regulatory risk, 
further leading to less competitive entry and investment. And, any 
benefits would be minimal since the incumbent LEC's price cap rates 
typically will set a ceiling on the rates the non-incumbent can charge 
for its DS1 and DS3 end user channel terminations.

B. Expanding Pricing Flexibility in Non-Competitive Counties

    183. In 1999, the Commission established a process for granting 
price cap LECs pricing flexibility for special access services when 
specified regulatory triggers were satisfied. The pricing flexibility 
framework separates special access services into two segments, end user 
channel terminations and dedicated transport and special access 
services other than end user channel terminations, and provides two 
levels of pricing flexibility relief for each segment. Phase I relief 
gives price cap LECs the ability to lower their rates through contract 
tariffs and volume and term discounts, but requires that price cap LECs 
maintain their generally available price cap-constrained tariff rates 
to ``protect[ ] those customers that lack competitive alternatives.'' 
Phase II relief permits a price cap LEC to raise or lower its rates 
throughout an area, unconstrained by price cap regulations.
    184. Business data services remaining within price caps after this 
Order will consist largely of incumbent LECs' DS1 and DS3 end user 
channel terminations in non-competitive counties, but will also include 
various other price cap

[[Page 25685]]

services that carriers decide to keep regulated pursuant to price caps 
during the transition to mandatory detariffing. Consistent with the 
proposal the Commission made in the Further Notice, we transition all 
business data services that remain subject to price caps into Phase I 
pricing. This will provide price cap LECs with flexibility while 
precluding them from charging above-cap rates in non-competitive 
counties. Price cap LECs in non-competitive areas will be able to 
negotiate individualized rates through contract tariffs and volume and 
term discounts. Those LECs must maintain generally available tariff 
rates subject to price cap regulation for end user DS1 and DS3 channel 
terminations, and other special access services included in their price 
cap tariffs in non-competitive counties that are not subject to the 
regulatory relief provided in this Order.
    185. The record is clear that contract tariffs benefit both 
customers and price cap LECs. As Ad Hoc observes, Phase I pricing 
flexibility allows price cap LECs to respond to competition by 
negotiating lower contract rates. This flexibility, when coupled with 
our requirement that price cap LECs choosing to exercise Phase I 
pricing flexibility remove contract revenues from the relevant price 
caps basket for purposes of determining their price cap indices and 
actual price indices, will protect customers that do not negotiate 
contract tariffs from cross-subsidizing those that do. And the 
requirement that carriers maintain generally available price cap-
constrained tariff rates will ``protect those customers that lack 
competitive alternatives'' against unreasonably high rates. We 
therefore amend our price cap rules to allow all price cap LECs in non-
competitive counties to lower their rates through contract tariffs and 
volume and term discounts in a manner consistent with the Commission's 
current Phase I pricing flexibility rules. Accordingly, these incumbent 
LECs will be required to maintain generally available tariffs offering 
price cap regulated rates available to all subscribers.
    186. These requirements will not apply to carriers within former 
Phase II pricing areas that are deemed non-competitive pursuant to our 
competitive market test that were previously granted Phase II pricing 
flexibility. Instead, current Phase II price cap LECs in these non-
competitive counties will be required to continue offering its current 
generally available rates for end user DS1 and DS3 channel terminations 
and for the other special access services as long as those services 
remain under tariff. This requirement will cease once the services are 
detariffed.

C. Prohibiting Non-Disclosure Agreements in Non-Competitive Areas

    187. In order to ensure that purchasers of business data services 
can fully participate in Commission proceedings and that the Commission 
can conduct appropriate oversight of business data services, we adopt a 
rule prohibiting the use of non-disclosure agreements in tariffs, 
contract tariffs, and commercial agreements for business data services 
provided in non-competitive areas that forbid or restrict disclosure of 
information to the Commission. In the interest of protecting sensitive 
information, a provider may require that information related to its 
business data services be submitted to the Commission subject to a 
Commission protective order or, if there is none, with a request for 
confidential treatment pursuant to the Commission's rules.
    188. We agree with commenters that argue that non-disclosure 
agreements affecting the provision of business data services in non-
competitive areas that restrict parties from disclosing commercially 
sensitive information to the Commission deter parties from sharing 
information with the Commission. The use of such non-disclosure 
agreements has been described as ``ubiquitous'' and their impact 
significant. Such non-disclosure agreements hinder the Commission's 
access to data important to its oversight of the business data services 
market and its ability to effectively discharge its core statutory 
responsibilities under sections 201 and 202. The Commission previously 
observed in another proceeding that ``overly broad, restrictive, or 
coercive nondisclosure requirements may well have anticompetitive 
effects'' and explained that ``demands by incumbents [for such non-
disclosure agreements] . . . are of concern and any complaint alleging 
such tactics should be evaluated carefully.''
    189. We find misplaced AT&T's assertion that the Further Notice 
fails ``to identify a single instance where it has actually requested a 
contract pertaining to BDS and the parties refused to provide it.'' To 
the contrary, the record demonstrates that the risks of inhibiting the 
flow of information about the business data services market to the 
Commission are real and have at times impacted the conduct of this 
proceeding. Indeed, as the Commission observed in the Further Notice, 
non-disclosure agreements likely precluded some parties from responding 
fully to the voluntary data requests issued by the Bureau in 2010 and 
2011, contributing to delay in analyzing and resolving the questions at 
issue in this proceeding. Parties acknowledged that non-disclosure 
agreements had this effect. Moreover, it is not the instances where the 
Commission has sought information and been denied that are our chief 
concern, but rather the instances where the Commission has been unaware 
of potentially important information about the business data services 
market and stakeholders have been precluded by non-disclosure 
agreements from sharing that information in the first place.
    190. AT&T also expresses concern that public release of information 
subject to a non-disclosure agreement will result in ``significant 
competitive harm.'' Disclosure to the Commission, however, is clearly 
distinguishable from disclosure to the public generally. We routinely 
adopt protective orders to protect parties' interests in maintaining 
the confidential nature of information submitted. As Level 3 explains, 
``AT&T's claim that such a rule would undermine parties' 
confidentiality [interests] is without merit because the Commission's 
rules and procedures prohibit disclosure of information that has been 
made subject to confidentiality requirements.'' In this proceeding, the 
Commission has sought confidential data and information on multiple 
occasions and has consistently adopted protective orders limiting 
access to the information to certain individuals in order to ensure the 
confidentiality of these data and information.
    191. We agree with commenters that recognize that the solution for 
concerns about inappropriate disclosure of sensitive information 
submitted to the Commission is to ensure such information is submitted 
subject to a protective order or to a request for confidential 
treatment pursuant to the Commission's rules. We conclude that because 
the information in question will not be made generally available to the 
public, our action here does not undermine parties' interest in 
insulating confidential or commercially sensitive information from the 
public. We therefore require that parties submitting to the Commission 
confidential information that is subject to a non-disclosure agreement 
seek confidential treatment of that information under the relevant 
protective orders, or otherwise pursuant to the Commission's rules.
    192. We address two types of restrictions non-disclosure agreements 
impose and determine that both are precluded by the action we take 
here. First, we find that there is no justification for non-disclosure 
agreements that contain provisions that

[[Page 25686]]

prohibit outright the disclosure of confidential information to the 
Commission. Such agreements are expressly intended to obstruct parties' 
ability to disclose information to the Commission and the Commission's 
ability to access information necessary to oversee and evaluate the 
business data services market. They undermine our ability to render 
fact-based decisions informed by a complete record, and are generally 
contrary to the public interest.
    193. We also find that non-disclosure agreements that require a 
direct request or legal compulsion prior to allowing disclosure also 
inhibit the Commission's conduct of its core regulatory and oversight 
functions and are therefore contrary to the public interest. By 
precluding the voluntary disclosure of information, such agreements 
render it impossible for the Commission to be aware of information in 
business data services sales agreements or even the existence of such 
sales agreements, and effectively preclude the Commission's ability to 
seek that information or those sales agreements.
    194. Allowing voluntary disclosure to the Commission, subject to 
the Commission's protections for confidential information where 
necessary, will allow parties to disclose relevant information in a 
more timely fashion, which will in turn make the Commission's oversight 
and regulatory work more timely and efficient. The Commission's 
protective orders and confidentiality regulations will effectively 
insulate against the risk of inappropriate disclosure by ensuring 
confidential treatment of such information.
    195. We agree with commenters that argue that restrictions on non-
disclosure agreements for business data services are unnecessary in 
markets treated as competitive under the competitive market test. In 
these areas, market forces should be sufficient to protect purchasers 
of business data services from unreasonable practices. NASUCA et al. 
asserts, however, that prohibiting overly restrictive non-disclosure 
agreements is necessary to facilitate competitive conditions in the BDS 
marketplace generally. We agree that imposing a prohibition on such 
non-disclosure agreements will foster competitive conditions in areas 
that our data show are not yet competitive. We do not, however, see a 
need to impose this prohibition in competitive areas. In those areas, 
the Commission will still have access to relevant industry data through 
mandatory requests or data collections if needed. We therefore limit 
our restrictions on business data services-related non-disclosure 
agreements to those that apply to non-competitive areas as we define 
them in this Order. This reasoning applies to all non-disclosure 
agreements that govern business data services sales--whether they are 
contained in tariffs, contract tariffs, or commercial agreements. The 
presumption should be that competitive market dynamics would 
characterize the majority of sales in any arrangements that governed 
sales in both types of areas. Additionally, the bulk of sales of TDM 
based business data services in non-competitive areas would presumably 
be effected through TDM-only tariffs and contract tariffs. Parties are 
of course free to structure their sales arrangements in such a manner 
as to avoid including sales of services for both types of areas in a 
single agreement.
    196. Accordingly, we adopt a general rule prohibiting the use of 
non-disclosure agreements in or related to tariffs or contract tariffs 
for the sale of business data services in areas treated as non-
competitive by our competitive market test to the extent they forbid or 
impose any restriction on a party's ability to voluntarily disclose 
information to the Commission pursuant to appropriate safeguards for 
confidential information. No provider of business data services in 
areas treated as non-competitive may enter into or enforce a non-
disclosure agreement that in any way forbids or prevents any party to 
that agreement from disclosing any information relevant to the 
Commission's business data services proceedings to the Commission. The 
rule we adopt today applies to all forms of agreements for the sale of 
TDM-based business data services, including price cap tariffs and 
contract tariffs in non-competitive areas. Parties submitting 
confidential information to the Commission that is subject to a non-
disclosure agreement must either submit such information subject to the 
relevant protective orders governing this proceeding or, in the absence 
of a relevant protective order, seek confidential treatment for such 
information pursuant to sections 0.457 and 0.459 of the Commission's 
rules.

D. Adjustments to Price Cap Levels

    197. Pursuant to the framework adopted in this Order, the primary 
services that will remain under price cap regulation will be the DS1 
and DS3 end user channel terminations that incumbent LECs provide in 
non-competitive counties. To help ensure just and reasonable rates for 
these services, we adopt an X-factor of 2.0 percent that reflects our 
best estimate of the productivity growth that incumbent LECs will 
experience in the provision of these services relative to productivity 
growth in the overall economy. We retain Gross Domestic Product-Price 
Index (GDP-PI) as the measure of inflation that incumbent LECs will use 
in their price cap index calculations, continue to make a low-end 
adjustment available to price cap LECs in certain circumstances, and 
decline to adopt other changes that would affect price cap rates. In 
particular, we find that that no catch-up adjustment to the price cap 
indices is warranted.
1. Background
    198. The core component of the Commission's price cap system is the 
price cap index, which is designed to limit the prices that a price cap 
LEC may charge for services. Each price cap LEC's price cap index 
historically has been adjusted annually based primarily on a 
productivity factor or ``X-factor'' and a measure of inflation (GDP-
PI). The X-factor initially represented the amount by which LECs could 
be expected to outperform economy-wide productivity gains. The X-factor 
serves as an adjustment to the price cap indices to account for these 
productivity gains, and is subtracted from GDP-PI in the Commission's 
price cap formula.
    199. The Commission last set X-factors for special access services 
in the 2000 CALLS Order. These X-factors, unlike prior X-factors, were 
not productivity-based but collectively acted as ``a transitional 
mechanism . . . to lower rates for a specified time period'' based on 
an industry agreement. The CALLS X-factor for special access services 
increased from 3.0 percent in 2000 to 6.5 percent for 2001 through 2003 
but was set equal to inflation beginning in 2004. This frozen X-factor 
was intended to be an interim measure, lasting only until the 
expiration of the CALLS plan on June 30, 2005, yet the Commission has 
not acted to replace it with a productivity-based measure. As a result, 
price cap LECs' special access rates have remained frozen at 2003 
levels, excluding any necessary exogenous cost adjustments.
2. Adopting a Productivity-Based X-Factor
    200. The Commission's price cap system has been running on 
autopilot since June 30, 2005, with no analysis as to why rate levels 
from 2003 might have remained reasonable despite widespread changes in 
the business data services marketplace. We end this freeze by replacing 
the CALLS era frozen X-

[[Page 25687]]

factor with a productivity-based X-factor.
    201. Our analysis includes several steps. We begin by deciding to 
use a total factor productivity (TFP) methodology in calculating 
business data services productivity gains or losses relative to growth 
in the general economy. We then decide to use the U.S. Bureau of Labor 
Statistics' Capital, Labor, Energy, Materials, and Services data for 
the broadcasting and telecommunications industries (KLEMS (Broadcasting 
and Telecommunications)) in applying our methodology. We use KLEMS 
(Broadcasting and Telecommunications) data to establish a zone of 
reasonable X-factor estimates. From that zone, we select an X-factor of 
2.0 percent. Price cap LECs will apply this X-factor annually to help 
ensure that their price cap indices incorporate future productivity 
growth.
a. Selecting a Methodology for Calculating Productivity Gains or Losses
    202. A price cap is intended to mimic competitive-market outcomes. 
One aspect of a competitive market is that output price growth over 
time matches the difference between industry input price growth and 
industry productivity growth. Another aspect of a competitive market is 
strong cost-reduction and investment incentives. A price cap that grows 
at a rate equal to the difference between the growth rate of input 
prices and industry productivity growth might, at least initially, hold 
prices to competitive levels, but if it were frequently updated on the 
basis of the regulated firms' behavior, quickly taking away any 
additional profits obtained either by implementing productivity 
increases or by negotiating lower input prices, the regulated firms 
would have little incentive to invest in cost and input price 
reduction. Consequently, in the Further Notice, the Commission proposed 
to use a proxy for the difference between the growth rate of input 
prices and industry productivity growth in setting allowed price growth 
under the cap. That proxy is a measure of the economy-wide rate of 
inflation, based on a national price index (i.e., GDP-PI), that is 
adjusted, through an infrequently updated X-factor chosen to account 
for systematic differences between the growth rates of national prices 
and the difference between telecommunications industry input price 
growth and industry productivity growth. This proxy approach provides 
regulated firms with good incentives to reduce costs.
    203. Under the approach outlined above, steps that a firm takes to 
lower its costs will not immediately affect the price cap. To see why, 
note that the price cap is adjusted based on two quantities: the 
national rate of inflation (GDP-PI) and the X-factor. The firm's cost-
lowering actions will have, at most, a negligible effect on the 
national inflation rate. As for the X-factor, while the regulator 
periodically will assess the extent to which the regulated firms have 
lowered their costs (and thus might adjust the X-factor and price cap 
accordingly), this process typically occurs with substantial delays. 
Between X-factor adjustments, firms can keep any additional profits 
that they achieve through cost reductions; hence, the price-cap regime 
provides material incentives for firms to reduce their costs.
    204. In summary, our proposed approach is to estimate an X-factor 
to be subtracted from the annual change in the GDP-PI to determine the 
annual change, c, in the price cap index: c = P-(D + t) (Equation 1), 
where P is the economy-wide rate of inflation (i.e., the GDP-PI), D is 
the projected difference between the economy-wide rate of inflation and 
the growth rate of industry input prices, and t is the projected growth 
rate of the industry's productivity level. The X-factor, which is the 
sum of D and t, may be interpreted as a correction term by which the 
projected growth rates of economy-wide prices are adjusted to account 
for systematic differences between the broader economy and the 
regulated industry. Several commenters agree that this approach is 
sound, no commenters oppose it, and we adopt it.
    205. In the past, the Commission has relied on staff studies of the 
historical total factor productivity (or TFP) growth rate of incumbent 
LECs to estimate future productivity growth. TFP is the relationship 
between the output of goods and services to inputs, and is commonly 
used to measure productivity in the economy as a whole. TFP studies 
typically measure productivity using the ratio of an index of the 
outputs of a firm, industry, or group of industries to an index of 
corresponding inputs. Productivity growth is measured by changes in 
this ratio over time. In a TFP model, output is typically measured in 
terms of physical units (e.g., minutes or calls) of the good or service 
produced. In a case in which more than one good or service is supplied 
(i.e., there are multiple outputs), a standard practice is to create an 
index (e.g., an average that weights by output revenue shares) that 
aggregates the output levels. The resulting output index shows changes 
in the level of output over time; in other words, it provides the 
growth rate of the measured output. Similarly, the growth rate of the 
aggregate input index depends on the combined growth rates of the 
individual input indices--such as indices for capital, labor, energy, 
materials and services--weighted, for example, by input expenditure 
shares.
    206. In the Further Notice, the Commission proposed to calculate 
the X-factor by subtracting from the historical rate of change in GDP-
PI the historical rate of change in industry input prices and adding to 
it the historical rate of change in industry TFP. The calculation can 
be expressed by the following formula: X = % [Delta] GDP-PI-% [Delta] 
Industry Input Prices + % [Delta] Industry TFP (Equation 2). No 
commenter challenges this basic TFP methodology. The X-factor analyses 
presented by the parties generally follow this approach. Consistent 
with past practice, we conclude that we should apply this TFP 
methodology in our X-factor calculations.
b. Selecting an Appropriate Data Source
    207. Having settled on a methodology for calculating the X-factor, 
we need to identify an appropriate data source. Upon review of the 
record, we find that KLEMS (Broadcasting and Telecommunications) is the 
only reliable and internally consistent dataset in the record for 
measuring incumbent LEC productivity and input prices. We select that 
dataset for our X-factor calculations.
(i) Available Data Sources
    208. The KLEMS (Broadcasting and Telecommunications) database was 
one of three datasets on which the Commission invited comment. The 
other two consist of: (a) Data from the peer review process in 
connection with the development of the Connect America Cost Model 
(CACM); and (b) those data in combination with cost data that TDS 
Metrocom (TDS) submitted in this proceeding (CACM-TDS). All three 
datasets are described more fully in Appendix B to the Report and 
Order. The Commission asked whether these datasets would provide a 
reasonable basis for estimating business data services productivity 
growth relative to growth in the general economy.
    209. The Commission also asked the parties to suggest adjustments 
to these datasets that might improve their utility as a measure of 
business data services productivity growth and requested that the 
parties suggest additional datasets that might better balance precision 
with administrative feasibility. Only one party, Sprint, suggests an 
additional dataset--a version of KLEMS (Broadcasting and 
Telecommunications)

[[Page 25688]]

that purportedly is restricted to data from the telecommunications 
industry (KLEMS (Telecommunications)). Sprint also suggests refinements 
to the CACM dataset that, in Sprint's view, improve it. We discuss 
these datasets in turn.
    210. KLEMS (Broadcasting and Telecommunications). This dataset 
provides yearly industry-level measures of input prices and total 
factor productivity. This dataset has many merits because, as 
commenters point out, it relies on ``publicly available, annual 
industry-level data on industry-level measures of input prices and 
total factor productivity'' and was ``developed using rigorous total 
factor productivity principles and is a valid source of measuring total 
factor productivity and input price trends for various industries.'' It 
also is ``reliable and internally consistent,'' and based on ``well-
accepted economic theory and publicly available data.'' But instead of 
being restricted to business data services or wireline 
telecommunications, this dataset provides data for the broadcasting and 
telecommunications sectors, which collectively have annual revenues 
approximately twelve times those for business data services. These 
sectors include broadcasting, cable television, and satellite 
television distribution services, wireless telecommunications, mass 
market Internet access services, and the Voice-over-Internet Protocol 
(VoIP) industries, each of which has a cost structure and produces 
outputs different from the business data services industry.
    211. The parties dispute the effect of this broad scope on BDS 
productivity growth estimates that are derived from the KLEMS 
(Broadcasting and Telecommunications) dataset. Ad Hoc and Sprint 
contend that this broad scope creates a downward bias in those 
estimates. AT&T and CenturyLink maintain, however, that any bias would 
overstate BDS productivity growth relative to productivity growth in 
the overall economy. AT&T argues that ``wireless services, broadband 
Ethernet services, and cable and wireline Internet access services'' 
supply are more productive than legacy DSn and that the KLEMS 
(Broadcasting and Telecommunications) dataset therefore may overstate 
productivity growth for the TDM-based services to which the X-factor 
will apply. CenturyLink asserts that growth in labor productivity has 
been significantly higher in broadcasting and wireless 
telecommunications than in wireline telecommunications, and that it is 
therefore unlikely that broadcasting and wireless telecommunications 
have experienced lower overall productivity growth than wireline 
telecommunications. Although the record falls short of providing the 
information we would need to resolve whether the KLEMS (Broadcasting 
and Telecommunications) dataset overstates or understates BDS 
productivity growth, we find that this dataset provides the best 
available information under the circumstances.
    212. CACM and CACM-TDS. The CACM and CACM-TDS datasets, even with 
the refinements suggested by Sprint, are less than ideal. As explained 
more fully in Appendix B to the Report and Order, the CACM dataset 
combines CostQuest cost share data from the CACM peer review process 
with labor cost data from the Bureau of Labor Statistics (BLS), and 
real estate price data from Moody's Investor Service and Real Capital 
Analytics. While this dataset provides a more direct focus on business 
data services than KLEMS (Broadcasting and Telecommunications) 
provides, we find it neither reliable nor internally consistent. 
Sprint's refinements to this database do not cure these fundamental 
problems. Both of these datasets rely in part on data from the CACM 
peer review process that was developed to determine the forward-looking 
economic costs of providing broadband Internet access services. Those 
data provide at best a clumsy tool for determining historical total 
factor productivity growth for business data services. In addition, as 
refined by Sprint, the CACM dataset includes company-specific data that 
we and the parties to this proceeding are unable to fully evaluate and, 
therefore, may be unreliable. We therefore reject the CACM dataset as 
well as that dataset as refined by Sprint as potential data sources for 
our X-factor calculations.
    213. The CACM-TDS dataset adds historical cost data from TDS's 
incumbent LEC operations to the CACM dataset. While the addition of the 
TDS data further tightens the focus on business data services, those 
data do ``not address or eliminate any of the fundamental shortcomings 
with the CACM data'' because they are ``proprietary, unvalidated data 
from a single competitor that is seeking regulation.'' We therefore 
reject the CACM-TDS dataset as a potential data source for our X-factor 
calculations.
    214. KLEMS (Telecommunications). To address, in part, the alleged 
overbreadth of the KLEMS (Broadcasting and Telecommunications) dataset, 
Sprint proposes a dataset that purportedly excludes broadcasting 
industry data and therefore, as asserted by Sprint, is preferable to 
KLEMS (Broadcasting and Telecommunications) as a tool for measuring 
business data services productivity growth. The KLEMS 
(Telecommunications) dataset, however, suffers from many of the scope 
problems of the KLEMS (Broadcasting and Telecommunications) dataset 
with several additional problems. As an initial matter, excluding 
broadcasting data from the KLEMS (Broadcasting and Telecommunications) 
dataset would reduce, but not eliminate, any overbreadth problem. And 
we are unable to verify Sprint's assertion that the KLEMS 
(Telecommunications) dataset excludes broadcasting industry data. 
Indeed, AT&T and CenturyLink et al. make credible arguments that the 
KLEMS (Telecommunications) dataset ``comingle[s] broadcasting and 
telecommunications data.'' This uncertainty over which industries are 
reflected in the KLEMS (Telecommunications) dataset precludes any 
finding that it provides a more narrow focus on business data services 
productivity growth than that provided by the KLEMS (Broadcasting and 
Telecommunications) dataset. We are unable to determine what 
methodology the European Union used to translate KLEMS (Broadcasting 
and Telecommunications) data into KLEMS (Telecommunications) data and 
whether that data source is indeed restricted to telecommunications 
data.
    215. Even if it does exclude broadcasting, the KLEMS 
(Telecommunications) dataset is problematic for at least two additional 
reasons. First, that dataset only provides a price index for energy, 
non-energy materials, and purchased services inputs, and omits critical 
input prices for capital and labor, which means that it provides only 
an incomplete picture of the industries within its scope. Second, the 
KLEMS (Telecommunications) dataset also provides a value-added, rather 
than a gross output, measure of productivity growth, which precludes an 
apples to apples comparison of that growth to input prices, which are 
based on gross input. Each of these problems--lack of transparency, 
omission of critical inputs, and employing a value-added methodology--
provides an independent basis for not using KLEMS (Telecommunications) 
in our X-factor calculations. We therefore reject this dataset as a 
potential data source for those calculations.
(ii) Selection of Data Source
    216. None of the datasets before us allow us to estimate with 
precision business data services productivity growth relative to growth 
in the general economy, and indeed of those datasets

[[Page 25689]]

only KLEMS (Broadcasting and Telecommunications) is reliable and 
internally consistent. In these circumstances, we conclude that the 
better course is for us to use that dataset to determine business data 
services productivity and input price growth, relative to economy-wide 
productivity and input price growth, rather than postponing that 
determination pending a search for a better option. As the D.C. Circuit 
has recognized, the Commission endeavors to find the best solutions 
but, at times, must settle for solutions that are ``reasonable under 
difficult circumstances.'' The D.C. Circuit has noted:

    [W]hen an agency makes rational choices from among alternatives 
all of which are to some extent infirm because of a lack of concrete 
data, and has gone to great lengths to assemble the available facts, 
reveal its own doubts, refine its approach, and reach a temporary 
conclusion, it has not acted arbitrarily or capriciously.

    Here, where our X-factor decision provides only our `` `tentative 
opinion' about the dividing line between reasonable and unreasonable 
rates for the limited purpose of exercising [our] suspension power'' 
under section 204 of the Act, we believe that we may properly rely on 
the KLEMS (Broadcasting and Telecommunications) dataset in our X-factor 
calculations. We now turn to those calculations.
c. X-Factor Calculations
    217. We determine the productivity-based X-factor as follows. 
First, we use KLEMS (Broadcasting and Telecommunications) data to 
develop a range of X-factors for four periods: 1987 to 2014; 1997 to 
2014; 2005 to 2014; and 2009 to 2014. Second, from this range of X-
factors we develop a zone of reasonableness from which it would be 
appropriate to select an X-factor. Third, we decide not to adjust that 
zone to compensate for KLEMS (Broadcasting and Telecommunications)'s 
overbreadth. Finally, we select the X-factor from within this zone.
    218. Data Periods. We use four different data periods to calculate 
four different X-factors to gauge the sensitivity of KLEMS 
(Broadcasting and Telecommunications)-based calculations to different 
data periods and because there is no single, correct data period that 
we might use for this purpose. The four data periods are: 1987 to 2014; 
1997 to 2014; 2005 to 2014; and 2009 to 2014. We note that Sprint 
supports using 1997 to 2014, and AT&T supports using 2005 to 2014.
    219. 1987 to 2014. This is the longest period for which KLEMS 
(Broadcasting and Telecommunications) data are available. As the 
longest timeframe, this data period has the most observations and 
therefore collectively these observations contain the most information. 
In particular, this period includes two complete business cycles. This 
is an advantage because productivity increases when the economy expands 
and decreases when the economy contracts. Measuring productivity over 
at least one complete business cycle increases the likelihood that the 
results represent the future state of the economy. Two complete cycles 
might be preferred to one because no two business cycles are alike. One 
business cycle may not represent the future any better than the other.
    220. This period also includes a significant amount of time before 
and after the two business cycles. Using a timeframe that includes the 
maximum period for which data are available minimizes the likelihood of 
an arbitrary choice among many possible shorter periods within the 
longer period, given that there is no obviously correct choice. The 
disadvantage of this time period is that the data from the earliest 
years in the period may be stale or otherwise reflect economic 
conditions that are unlikely to persist into the future. The value of 
the most recent and most relevant data within this time period might 
not be apparent if combined with older data that are stale and 
irrelevant.
    221. 1997 to 2014. This period includes one complete business 
cycle. As discussed above, at least one complete business cycle should 
be included in the data on which a productivity study is based because 
productivity is procyclical. Sprint supports using 1997 to 2014 data 
instead of 2005 to 2014 data because the latter period largely reflects 
the longest and deepest recession the U.S. has experienced since 1945. 
Sprint concludes that a longer time period is therefore likely to 
provide a better estimate of future productivity growth. An additional 
reason to use this period, or one longer, is that the current economic 
expansion is 93-months-old, which is significantly longer than the 58-
month average length of prior expansions going back to 1945. A shorter 
period may give too much weight to a relatively long-period of 
expansion. Another reason why this current economic expansion is unique 
is that the average annual growth rate of this expansion is the lowest 
among expansions since 1945, approximately 2.1 percent per year.
    222. 2005 to 2014. AT&T argues that this period balances the 
tradeoff between short and long data periods. AT&T claims that data for 
a shorter period better captures recent productivity trends, but that 
such a period might reflect large variation in productivity that would 
lead to unstable X-factor projections. In contrast, AT&T asserts that a 
longer period might produce a more stable series, but such a period 
might include stale data that are irrelevant to forward-looking 
productivity projections. One disadvantage of this timeframe is that it 
does not encompass at least one complete business cycle. This problem 
perhaps is partially mitigated because the period includes the December 
2007 peak and June 2009 trough of the current business cycle and a 
large fraction of the current expansion.
    223. 2009 to 2014. This period minimizes the number of observations 
that contain stale information and depicts recent trends. The main 
disadvantage of this period is that it does not contain at least one 
complete business cycle. In fact, this period only includes years of 
expansion. So, this period might not provide data representative of 
future productivity growth.
    224. Table 2 provides, for each of these four periods, X-factors 
calculated using Equation 2 and KLEMS (Broadcasting and 
Telecommunications) data. [``Table 2. KLEMS (Broadcasting and 
Telecommunications) X-factors'' omitted].
d. Zone of Reasonableness
    225. The four data periods reflected in Table 2 establish a zone of 
productivity-based X-factor estimates of between 1.7 and 2.3 percent. 
This zone is relatively narrow, as the data period does not have a very 
large impact on the value of the X-factor. For example, the difference 
between the lowest and the highest percentages is 0.6 percentage 
points. The arithmetic average and the mid-point of the four X-factors 
are both 2.0 percent. The average implicitly weights the most-recent 
observations the most and the earliest observations the least because 
the most recent observations are in the most periods and the earliest 
observations are in the fewest periods.
    226. We find that it would be unreasonable to adjust this zone 
either upward or downward to account for the broad scope of the KLEMS 
(Broadcasting and Telecommunications) dataset from which this zone was 
derived. Any such adjustment would necessarily reflect our 
determination that this overbreadth creates either a downward bias in 
our productivity growth estimates (which could lead to our adjusting 
the range upward) or an upward bias (which could lead to our

[[Page 25690]]

adjusting the range downward). The parties provide sharply divergent 
views on the direction of any possible adjustment. On the one hand, 
several parties argue that price cap LECs are realizing decreasing 
business data services per unit costs from the growth in packet-
switched services, such as Ethernet, as customers transition from TDM 
to packet-switched services. Other parties maintain that price cap LECs 
have achieved little productivity growth relative to that in the 
overall economy and that the DS1 and DS3 services that will be subject 
to price caps have not shared in any decrease in per unit costs.
    227. Cost-reducing growth is clearly occurring in price cap LECs' 
overall business data services operations. A significant portion of the 
assets, particularly outside plant, used to provide DS1s and DS3s, are 
also used to provide higher bandwidth circuit-based services or packet-
based services, and vice versa. The more such sharing occurs (i.e., the 
more demand density increases), the lower both the incremental and 
average cost of any service, and total factor productivity increases. 
These cost reducing effects occur and apply to remaining DS1 and DS3 
services, even when higher bandwidth circuit-based services or packet-
switched services are substituted for them, so long as the two sets of 
services share costs.
    228. Growth in providing higher bandwidth circuit-based services 
and packet-based services is outpacing declining DS1 and DS3 services, 
a trend that strongly suggests that overall unit costs will continue 
decreasing into the foreseeable future. Price cap LECs are investing 
aggressively in modern packet-based telecommunications networks and 
services. AT&T, for example, announced that by the year 2020, 75 
percent of its network will be controlled by software. AT&T disclosed 
in an annual report that it was ``focused on building a modern network 
architecture that will provide the highest efficiency and productivity 
in the industry'' and ``[t]o make that happen'' the ``biggest [front] 
by far is transforming [AT&T's] network from hardware to software-
centric'' which allows AT&T to ``deliver the most network traffic at 
the lowest marginal cost in the industry.'' Verizon announced a 
software-defined networking-based strategy ``to introduce new 
operational efficiencies and allow for the enablement of rapid and 
flexible service delivery to Verizon's customers.''
    229. The record does not make clear, however, to what extent, if 
any, these decreasing unit costs and overall productivity gains will 
apply to the services that will remain under price caps, which for 
practical purposes consist of DS1 and DS3 channel terminations. Indeed, 
it is possible that, for DS1 and DS3 services in general, declining 
utilization of incumbent LEC plant and rising service-specific costs 
will more than offset any overall gains in business data services 
productivity. As AT&T points out, ``demand for DSn services has been in 
rapid decline in recent years, as price cap LECs retire their legacy 
TDM networks.'' As a result, price cap LECs are likely experiencing 
``very low utilization on [their] legacy TDM switches'' and the 
``accompanying loss of scale economies suggests that it is unlikely 
that price cap LECs have achieved productivity gains that are in excess 
of inflation'' for DS1 and DS3 services. This declining utilization of 
DSn-specific plant means that providers must amortize shared costs 
among fewer customers (i.e., unit costs are likely rising). It 
therefore appears that, for DS1 and DS3 services generally, price cap 
LECs' operating expenses may have fallen at a much slower rate than the 
demand for their services, causing their average cost of providing DSn 
services to steadily climb.
    230. Nor does the record make clear whether any overall trend in 
DS1 and DS3 productivity growth extends to the areas that will remain 
under price caps. These non-competitive areas have significantly less 
demand density than the competitive areas that will no longer be 
subject to the price cap regime. The price cap LECs therefore may be 
less likely to achieve the same gains in economies of scale in non-
competitive areas than in competitive areas. Whether these gains would 
be higher or lower than elsewhere cannot be determined from the record. 
The price cap LECs' initial price cap indices (and consequently all 
changes to those indices) reflected the costs of serving all areas 
within those LECs' service territories. CenturyLink argues adjustments 
to those indices should account for the higher costs of serving the 
areas that will remain under prices caps ``[w]hether due to unique 
geographic difficulties, insufficient population density to generate 
economies of scale, or an array of other possible rationales.'' 
However, the X-factor is determined by the rate of change of costs, not 
by whether the absolute level of costs is higher or lower in a given 
location.
    231. While the record does not enable us to resolve the disputes 
over price cap LECs' productivity growth and ability to recover the 
costs of serving non-competitive areas with absolute certainty, we find 
that our KLEMS (Broadcasting and Telecommunications)-based calculations 
likely overstates, rather than understates, business data services 
productivity growth in those areas. The price cap LECs have not 
submitted the company-specific input price and output data that we 
would need to quantify this overstatement (and adjust the zone of 
reasonableness downward). We therefore make no such adjustment.
    232. We reject Sprint's argument that we should adjust the zone of 
reasonableness upward to bring it into line with prior X-factor 
prescriptions, which were based on relatively narrow sets of data 
related almost exclusively to price cap LEC operations rather than 
broad datasets such as KLEMS (Broadcasting and Telecommunications). 
Sprint points out that in the 1999 Price Cap Performance Review 
proceeding, Commission staff computed X-factors for each of the years 
1986 through 1998 using price cap LEC-specific data that were 
significantly higher than the X-factors that would have been computed 
using KLEMS (Broadcasting and Telecommunications) data. We find that 
this comparison fails to account for differences between the task 
before the Commission in the 1999 Price Cap Performance Review 
proceeding, which was to determine an X-factor for all special and 
switched access services to be provided by price cap LECs, and our task 
here of determining an X-factor only for those business data services 
that price cap LECs will provide in non-competitive areas.
e. Selection of X-Factor
    233. We conclude that we should select an X-factor below the top of 
the zone of reasonableness, 2.3 percent, in order to recognize the 
diminishing share DS1 and DS3 services have had, and will continue to 
have, of the overall business data services market. Indeed, over the 
longer term, these services will be replaced by Ethernet services or 
other more advanced business data services made possible by the 
transition to IP-based services transmitted over fiber. As demand for 
DS1 and DS3 services continues to fall, the costs directly attributable 
to (in contrast to the costs for assets shared between those services 
and packet-based services) maintaining this legacy technology, will 
begin to rise. For example, over time the volume of TDM equipment sales 
will fall to levels that deny manufacturers economies of scale. 
Similarly, there will likely be additional costs associated with 
warehousing, work programs, and

[[Page 25691]]

maintaining expertise in TDM technology, while moving aggressively 
toward the widespread deployment of Ethernet and other advanced 
technologies.
    234. Requiring DS1 and DS3 rates to be reduced by percentages that 
ignore the transition from a legacy, TDM technology to an advanced 
technology could require the incumbent LECs to supply DS1s and DS3s at 
rates that do not recover their costs, and that inefficiently 
incentivize businesses to rely on DS1 and DS3 services, rather than 
more advanced business data services. Presumably, there are customers 
that will wish to continue to rely on a legacy technology at least for 
a period of time even though a new technology is readily available 
because it is less expensive on a net present basis for them to do so. 
In a competitive market, customers that continued to rely on a legacy 
technology as a new technology begins to dominate the market would be 
charged higher prices if costs directly attributable to the old 
technology were rising. Our X-factor decision should incorporate this 
aspect of competitive markets.
    235. The lower-bound of the zone of reasonableness is 1.7 percent, 
a percentage based on data from 2009 to 2014. While this percentage 
provides insight into the most-recent trends in productivity and input 
prices, it reflects only a period of unusual macroeconomic expansion, 
as explained above. We find this period too short and too 
unrepresentative by itself to provide reliable insight into future 
business data services productivity growth. No party has submitted an 
X-factor study or similar data-based analysis purporting to show that 
the X-factor should be lower than 2.0 percent. AT&T's proposed X-
factor, like our X-factors, reflect KLEMS (Broadcasting and 
Telecommunications) data. AT&T used data for 2005 to 2014 in 
calculating its X-factor, a period for which the X-factor is 2.0 
percent. In these circumstances, we find that the X-factor we select 
should be above the lower bound of reasonableness.
    236. As mentioned, the KLEMS (Broadcasting and Telecommunications) 
data on which this zone of reasonableness is based is overly broad; 
and, although we think an upward bias more likely, we are unable to 
resolve the dispute among the parties as to whether this broad scope 
creates a downward or upward bias. Our inability on the record before 
us to quantify either the magnitude or the direction of this bias 
supports selection of the average or the mid-point of the four X-
factors, both of which are 2.0 percent. Taking all of these factors 
into account, we prescribe an X-factor of 2.0 percent. This X-factor 
reasonably assigns weight to the four different X-factors and accounts 
to the extent possible for the uncertain effects of bias in the overly-
broad data.
3. Methodology for Setting Inflation Measure
    237. We retain the U.S. Department of Commerce's Bureau of Economic 
Analysis's (BEA's) chain-weighted GDP-PI as the measure of inflation 
that price cap LECs will use in their price cap index calculations. As 
a chain-weighted index, GDP-PI captures economy-wide inflation over the 
medium-term and long-term comprehensively and ``significantly more 
accurate[ly]'' than fixed-weighted indexes, which become 
unrepresentative after a few years of change. We find no alternative 
measure of inflation that is as accurate as GDP-PI in the medium and 
long-term and that is not susceptible to carrier influence or 
manipulation. Accordingly, we retain GDP-PI as the inflation measure in 
our price cap formula.
4. No Catch-Up Adjustment Is Warranted
    238. The price cap indices have been effectively frozen since the 
CALLS plan expired on June 30, 2005. We conclude that no catch-up 
adjustment to those indices is warranted.
    239. Assessment Periods. We use three time periods in assessing 
whether a catch-up adjustment is warranted: July 1, 1997 to November 
30, 2017; July 1, 2000 to November 30, 2017; and July 1, 2005 to 
November 30, 2017. The starting points for these periods are the day 
the Commission's 1997 X-factor prescription took effect, the date the 
CALLS plan took effect, and the day after the CALLS plan expired. Their 
ending point is the day before the going-forward X-factor adopted in 
this Order will take effect. For simplicity, we refer to these periods 
as 1997 to 2017, 2000 to 2017, and 2005 to 2017.
    240. The Commission prescribed X-factors in 1991, 1995, 1997, and 
2000. The 1991 and 1995 prescribed X-factors were productivity-based 
and judicially upheld. The 1997 X-factor of 6.5 percent, while 
productivity-based, was reversed and remanded by the D.C. Circuit. 
Including 1997 to 2000 in the assessment period reflects that judicial 
action as well as the fact that the Commission never addressed the 
remanded X-factor on its merits. Instead, in the CALLS Order, the 
Commission replaced the remanded X-factor with a ``transitional 
mechanism'' under which the X-factor increased from 3.0 percent in 2000 
to 6.5 percent for 2001 through 2003 and was set equal to inflation 
beginning in 2004. These X-factors, however, were based on an industry 
agreement, not changes in productivity and input prices. Including 2000 
to 2005 in the assessment period reflects that administrative history. 
Finally, including 2005 to 2017 in the assessment period reflects the 
Commission's failure to incorporate a productivity-based X-factor into 
its price cap system once the CALLS plan expired.
    241. Methodology. First, for each of the three assessment periods, 
we use the most currently-available KLEMS (Broadcasting and 
Telecommunications) data through 2014 to calculate compound annual 
growth rates in broadcasting and telecommunications productivity and 
input prices. We then calculate the difference between these two rates. 
Second, we compound the value of each annual difference over the number 
years in each assessment period. The results are the percentages by 
which the price cap index would be adjusted to accurately reflect 
changes in productivity and input prices. Third, we subtract the 
historical change in the price cap index from each compounded value to 
calculate the catch-up adjustment for each assessment period. Finally, 
we evaluate whether we should adjust the price cap indices using these 
catch-up factors.
    242. We use KLEMS (Broadcasting and Telecommunications) data for 
three data periods--1997 to 2014, 2000 to 2014 and 2005 to 2014--to 
estimate historical changes in levels of productivity and input prices 
for purposes of the catch-up calculations. The year 2014 is the most 
recent year for which KLEMS (Broadcasting and Telecommunications) data 
are available, and data are published only for calendar years. As we 
explain below, we adopt December 1, 2017 as the effective date for the 
going-forward X-factor. As we have no data for 2015 to November 30, 
2017, we extrapolate annual growth rates based on the data periods that 
end in 2014 for an additional 35 months beyond the end of the data 
(i.e., for 2015, 2016, and 11 months of 2017), because mathematically 
it is simple, the period of extrapolation is relatively short, and 
there is no obviously superior method. We also assume that productivity 
and input price growth rates over the last six months of 1997, 2000, 
and 2005 were the same as over each entire year, again for simplicity 
and the lack of any obviously superior way to exclude the first six 
months of 1997, 2000, and 2005 or to reconcile the

[[Page 25692]]

use of calendar-year data with an estimation period that reflects 
tariff years that begin on July 1.
    243. Table 3, below, sets forth the KLEMS (Broadcasting and 
Telecommunications) compound annual rates of growth in productivity and 
input prices for 1997 to 2017, 2000 to 2017 and 2005 to 2017, and the 
annual difference between the two rates of growth, C. Table 3 also 
shows the value of these differences compounded over the assessment 
periods, E, and the historical change in the price cap index over the 
assessment periods, F. The historical change in the price cap index 
reflects the X-factors that were in effect during the assessment 
periods and the rate of inflation during these periods as measured by 
changes in GDP-PI (but ignores exogenous cost changes). The catch-up 
adjustment for each assessment period, G, is equal to the compounded 
change in price cap index, E, minus the historical change in the price 
cap index, F. This calculation accounts for differences between what a 
KLEMS (Broadcasting and Telecommunications)-based X-factor would have 
been and the actual X-factors that applied. [``Table 3. Potential 
Catch-up Adjustments for Multiple Periods Through November 30, 2017'' 
omitted].
    244. Discussion. We decline to require price cap LECs to implement 
a catch-up adjustment to baseline price cap levels. First, focusing on 
the period since expiration of the CALLS plan, 2005 to 2017, the annual 
difference between the KLEMS (Broadcasting and Telecommunications) 
industry price index and productivity is only -0.11 percent annually, 
which when compounded over a 12-year, five-month period results in only 
a 1.40 percent potential reduction in the price cap index. This 
suggests that historical business data services productivity gains for 
the assessment period 2005 to 2017 were almost exactly offset by 
inflation, which is what the X-factor has been set equal to since the 
expiration of the CALLS plan on June 30, 2005. Indeed, the annual and 
12-year, five-month differences of -0.11 percent and -1.40 percent, 
respectively, are so small as to be well within the margin of error for 
our calculations. Any catch-up adjustment would apply only to lower 
bandwidth business data services, such as DS1s and DS3s, and only to 
the extent price cap LECs provide them within non-competitive areas. We 
find it likely that productivity growth for these services in these 
areas lagged productivity growth for price cap LECs' business data 
services generally between 2005 and 2017.
    245. Second, the results for the assessment periods that begin in 
1997 and 2000 suggest that the 6.5 percent X-factor that the Commission 
prescribed in 1997 as well as the X-factors that were in effect during 
the CALLS plan were unreasonably high and therefore that the price cap 
indices were unreasonably low. This could help explain the extent to 
which certain price cap incumbent LECs have priced at the top of the 
price caps. The 1997 to 2017 assessment period results show a 
difference between industry price index and productivity of -0.35 
percent annually, which when compounded over a 20-year, five-month 
period would have reduced the price cap index by 6.84 percent. 
Adjusting this figure by the -26.31 percent historical change in the 
price cap index produces a catch-up adjustment that would increase 
price cap levels by 19.47 percent. The 2000 to 2017 assessment period 
results show a difference between industry price index and productivity 
of -0.34 percent annually, which when compounded over a 17-year, five-
month period would have reduced the price cap index by 5.81 percent. 
Adjusting this figure by the -13.94 percent historical change in the 
price cap index produces a catch-up adjustment that would increase the 
price cap index by 8.13 percent.
    246. We decline to require price cap LECs to implement a catch-up 
adjustment to the price cap index. An adjustment based on the period 
since the CALLS plan expired would result in only a modest decrease in 
price cap levels and would likely overstate productivity growth for the 
business data services that will remain under price caps. Such an 
adjustment also would ignore the facts that the X-factors used during 
the CALLS plan itself were not productivity-based and that the X-factor 
adopted before CALLS was struck down by the D.C. Circuit. Adjustments 
based on periods when those X-factors were in effect would increase 
price cap levels, a result that no party has urged. In these 
circumstances, we believe it more prudent to rely on existing price 
caps levels, which at least have the benefit of minimizing potential 
rate shock to consumers.
    247. Finally, we recognize that carriers have entered price-cap 
regulation at different points over the last 20 years, and so any 
catch-up adjustments would need to reflect that fact. It would make no 
sense, for example, to impose a catch-up adjustment calculated to 
reflect productivity over the last 12 or 20 years to a carrier that 
converted to price cap regulation just five years ago. And weighing the 
uncertain benefit of such adjustments to consumers against the cost to 
carriers (and ultimately consumers) of applying these differing 
adjustments as well as the cost to the Commission to monitor 
compliance, we conclude that not imposing a catch-up adjustment serves 
the public interest.
5. Additional Price Cap Adjustment Mechanisms
    248. We consider several potential features of the price cap regime 
whose implementation could affect price cap rates. We retain the low-
end adjustment mechanism for price cap LECs that meet certain 
conditions. We, however, decline to incorporate into our price cap 
regime three mechanisms that would affect the X-factor--a consumer 
productivity dividend, a growth or ``g'' factor, and earnings sharing 
between ratepayers and carriers, or to subdivide the special access 
price cap basket into different categories or subcategories.
    249. Low-End Adjustment. We retain a low-end adjustment mechanism 
because we find it provides an appropriate backstop to ensure that 
carriers are not subject to protracted periods of low earnings that 
impair their ability to attract capital and provide service. This 
adjustment will only be available to price cap LECs to the extent they 
provide business data services in non-competitive areas. Carriers that 
obtained pricing flexibility under the Commission's prior rules, 
exercise downward pricing flexibility pursuant to this Order (for 
example, by entering into a contract tariff with a customer), or elect 
the option to use Generally Accepted Accounting Principles (GAAP) 
rather than the Part 32 Uniform System of Accounts as set forth in our 
recent Part 32 Accounting Order will be ineligible for a low-end 
adjustment. We find that, consistent with past practice, setting the 
low-end adjustment mark at 8.75 percent, 100 basis points below the 
authorized rate of return for rate of return carriers, will continue to 
ensure that price cap LECs have the opportunity to attract sufficient 
capital.
    250. Historically, the low-end adjustment permitted 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 temporarily 
increase their price cap indices in the next year to a level that would 
allow them to earn 100 basis points below the prescribed rate of 
return. Unusually low earnings may be attributable to an error in the 
productivity factor, the application of an industry-wide factor to a 
particular LEC, or unforeseen circumstances in a particular area of the 
country. Failure to include any adjustment for such

[[Page 25693]]

circumstances could harm customers as well as stockholders of such a 
LEC, as a below-normal rate of return over a prolonged period could 
threaten the LEC's ability to raise the capital necessary to provide 
modern, efficient services to customers. We therefore retain the low-
end adjustment mechanism.
    251. The low-end adjustment mechanism permits a one-time PCI 
adjustment to a single year's rates to avoid back-to-back earnings 
below a benchmark. If a price cap LECs' earnings fall below the low-end 
adjustment mark in a base year period, it is entitled to adjust its 
rates upward to target earnings to an amount not to exceed the low-end 
mark, using the period as a baseline. In the past, the Commission used 
100 basis points below the authorized rate of return for rate-of-return 
carriers as the low-end adjustment mark. The authorized rate of return 
for rate-of-return carriers is presently 9.75 percent, and 8.75 percent 
is 100 basis points below that percentage. The latter percentage is 
above the embedded cost of debt the Commission determined for each 
price cap LEC in March 2016. An 8.75 percent rate of return should 
provide each eligible price cap LEC with the opportunity to meet its 
existing obligations to debtholders and attract sufficient capital 
while continuing to provide services.
    252. We reject Sprint's argument that we should not base our low-
end mark on the authorized rate of return for rate-of-return carriers 
because that rate does not reflect the large price cap LECs' cost of 
capital. The rate reflects a weighted average cost of capital that was 
calculated using data from a proxy group that included large price cap 
LECs (e.g., AT&T, Verizon, and CenturyLink), mid-sized price cap LECs 
(e.g., FairPoint, Frontier, Hawaiian Telcom, and Windstream), as well 
as publically traded rate-of-return LECs. Accordingly we set the low-
end adjustment mark at 8.75 percent.
    253. Consumer Productivity Dividend. We decline to incorporate a 
consumer productivity dividend (CPD) adjustment into the X-factor 
adopted in this Order. In instituting price caps in 1990, the 
Commission expected that incentive regulation would result in greater 
productivity gains than LECs had historically achieved under rate of 
return regulation. The CPD was designed to ensure that ratepayers would 
benefit from these additional gains. The 2.0 percent X-factor adopted 
in this Order reflects all anticipated future business data services 
productivity growth. There should be no additional gains beyond those 
captured in this X-factor. We therefore do not include a CPD in the X-
factor.
    254. Growth Factor. We decline to adopt a growth or ``g'' factor 
adjustment to the price cap indices because we find that our 2.0 
percent X-factor already accounts for average cost decreases due to 
demand growth, which the ``g'' factor was designed to capture. We find 
that a ``g'' factor is unnecessary because the 2.0 percent X-factor 
should capture all of the productivity changes for business data 
services, including demand growth. If business data services demand 
growth leads to the realization of scale economies, input prices fall, 
and productivity increases, which our X-factor calculations should 
capture. Therefore, we do not include a growth factor similar to the 
``g'' factor in the price cap index formula for special access 
services.
    255. Earnings Sharing. We decline to reinstate earnings sharing 
arrangements between ratepayers and carriers. In the Further Notice, 
the Commission asked whether it should reinstate earnings sharing, 
which had been a feature of the Commission's original price cap system. 
In 1997, the Commission eliminated earnings sharing, finding 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. The only party directly addressing this area opposes 
reinstating earnings sharing. We find that the Commission's prior 
reasoning supporting eliminating earnings sharing persuasive, and there 
is no record support to overturn the Commission's past finding and 
reinstate earnings sharing.
    256. Baskets and Bands. We decline to subdivide the special access 
basket into different categories and subcategories. The only party 
addressing this area, Inteliquent, asks that we create a service basket 
subcategory for multiplexing services to ensure that any required TDM 
rate reductions flow through to these services, which it asserts have 
unreasonably high rates. Simply creating a multiplexing subcategory 
within the special access basket, however, would not by itself result 
in lower multiplexing rates. Even if we were to accept Inteliquent's 
premise that multiplexing rates are unreasonably high, the record in 
this proceeding would not enable us to determine a reasonable level.
6. Implementation
    257. Having adopted a new X-factor for use in the price cap index 
for price cap LECs in non-competitive areas, we now set forth the path 
for implementing that new approach. We require revised tariff review 
plans (TRPs) implementing the X-factor to be filed with the Commission 
to become effective on December 1, 2017.
    258. Incumbent LECs that file tariffs under the price cap 
ratemaking methodology are required to file revised annual access 
charge tariffs every year, which become effective on July 1. The annual 
filings include submission of TRPs that are used to support revisions 
to the rates, including revisions that pertain to the X-factor. To ease 
the burden on the industry, and because base period demand and the 
value of GDP-PI reflected in the price cap indices typically are not 
updated during a tariff year, we permit incumbent LECs to use the same 
base period demand and value of GDP-PI in their December 1, 2017 
filings as in their July 1, 2017 annual filings.
    259. Consistent with that approach, each price cap incumbent LECs 
must file, for business data services, revised TRPs and rates to 
reflect the newly revised X-factor. The X-factor adopted in this Order 
only applies prospectively, and each price cap incumbent LEC must 
recalculate its price cap index based on the December 1, 2017, 
effective date of this X-factor. In particular, the new X-factor should 
be reflected in the calculation of the price cap index for the special 
access basket and the pricing bands for each service category and 
subcategory within this basket. Rates must be established at levels 
where the actual price index does not exceed the price cap index and 
the service band index for each service category and subcategory does 
not exceed its upper limit. For purposes of this filing, the price cap 
incumbent LECs must base the calculation of these indices on our rules 
for an annual filing, other than for the periods used to measure base 
period demand and the value of GDP-PI. Further specific direction on 
the material required to be filed in the TRPs will be provided in a 
public notice or order preceding the December 1, 2017 effective date of 
the 2.0 percent X-factor, which will address compliance with price cap 
tariff filing procedures (including required certifications).

E. Wholesale Pricing

    260. We decline to adopt ex ante rules governing the relationship 
between wholesale and retail rates for business data services, or to 
otherwise intervene in the marketplace for wholesale business data 
services.
    261. The Communications Act and Commission precedent provide ample 
guidance regarding the pricing of wholesale business data services.

[[Page 25694]]

Section 201(b) of the Act requires that ``[a]ll charges . . . for and 
in connection with [interstate or international telecommunications 
service] shall be just and reasonable . . . .'' Section 202(a) of the 
Act prohibits ``any unjust or unreasonable discrimination in charges . 
. . for or in connection with like communication service . . . .'' It 
has long been the Commission's policy that, under these provisions, 
``interstate access services should be made available on a non-
discriminatory basis and, as far as possible, without distinction 
between end user and . . . [wholesale] customers.'' But, as the D.C. 
Circuit has explained, ``[b]y its nature, section 202(a) is not 
concerned with the price differentials between qualitatively different 
services or service packages. In other words, so far as `unreasonable 
discrimination' is concerned, an apple does not have to be priced the 
same as an orange.''
    262. In response to requests for comments on the issue in the 
Further Notice, some commenters offer anecdotal evidence that price 
caps LECs provide retail services at rates lower than the prices they 
charge competitive LECs for components of those services. They argue 
that charging retail rates that are lower than wholesale rates violates 
the Act's prohibition against unjust or unreasonable discrimination in 
charges and that we should adopt a rule prohibiting providers from 
charging more for resale than wholesale services. However, despite 
competitive LEC assertions to the contrary, we find that there is 
little concrete evidence that incumbent LECs charge their wholesale 
customers higher rates than they charge retail customers for like 
business data services. At most, the record provides selective 
information regarding a handful of incidents where an incumbent LEC's 
wholesale pricing policies allegedly impeded a competitive LEC's 
ability to compete. As such the record provides no basis for us to 
adopt generally applicable rules governing the application of section 
201(b)'s prohibition against unjust or unreasonable practices or 
section 202(a)'s prohibition against unjust or unreasonable 
discrimination to alleged problems in the wholesale business data 
services marketplace.
    263. In reaching this conclusion, we also reject requests that we 
mandate that, as a general matter, wholesale business data services 
rates must be lower than the retail rates for like services. Certain 
parties argue that because it costs business data services providers 
less to provide wholesale services than to provide like retail services 
wholesale rates should reflect these lower costs. However, any such 
mandate could have the unintended effect of preventing providers from 
reducing retail rates to competitive levels, as the provider would then 
have to reduce its wholesale rates to below those levels.
    264. Three commenters suggest potential methods and amounts for an 
industry-wide discount. Advocates of action on wholesale pricing share 
an underlying premise, that wholesale services pricing should exclude 
avoided retail sales expenses. We do not find it necessary to make a 
finding concerning the accuracy of this premise and decline to set an 
industry-wide wholesale discount. Incumbent LECs are not required to 
tailor prices based solely on costs, although rates must be just and 
reasonable and not unreasonably discriminatory. We expect that 
continued growth in competition as a result of this Order will have a 
positive effect on the marketplace without the need for a wholesale 
discount. Additionally, our section 208 complaint procedures remain 
available to remedy any claimed anticompetitive or discriminatory 
behavior.
    265. Sections 201(b) and 202(a) do not explicitly require rates to 
correspond to costs--only that such rates be just and reasonable and 
not unreasonably discriminatory. Indeed, with any generally available 
offering, it is unlikely that the costs to provide service to any two 
customers would be exactly the same, and we do not require carriers to 
price their offerings based on the myriad of different costs imposed by 
various customers. In fact, we prohibit carriers from discriminating 
against similarly-situated customers. The same analysis is true in this 
situation.
    266. Additionally, Sprint and Windstream ask that we ``confirm that 
carriers cannot avoid [their] resale obligations merely by bundling 
non-Internet telecommunications services with Internet access or with 
add-on information services.'' LARIAT asks that we establish rules to 
prohibit ``refusal to deal.'' We find that these practices do not lend 
themselves to blanket rules or detailed pricing methodologies, and we 
therefore reject these requests.

VI. Additional Modernizing Actions

A. Certain Services Described In the Record Are Not Common Carrier 
Services

    267. A number of commenters dispute the accuracy of a seemingly-
categorical statement in the Further Notice ``not[ing] that business 
data services are telecommunications services, regardless of the 
provider supplying the service,'' and going on to assert that ``BDS 
providers are therefore common carriers . . . subject to Title II in 
the provision of their services . . . .'' As we discuss below, that 
terse suggestion in the Further Notice does not accurately reflect the 
nuanced analysis required for such a classification decision. This 
proceeding is not the appropriate place to make any generalized or 
comprehensive classification decisions of that sort for business data 
services. We do, however, discuss the services described in detail in 
the record by certain providers, which we find to be private carriage 
offerings based on the facts provided here. In doing so, we reiterate 
the Commission's longstanding approach to the associated classification 
issues, guarding against any lingering misunderstandings regarding 
classification flowing from statements in the Further Notice.
1. Background
    268. Under the analytical framework for distinguishing between 
services offered on a common carriage or private carriage basis--
commonly known as the `NARUC analysis' (or the like) for the court 
cases from which it derives--common carriage under the Act has two 
prerequisites: (1) An indifferent holding out of service to all 
potential users; and (2) the transmission by customers of 
``intelligence of their own design and choosing.'' By contrast, ``a 
carrier will not be a common carrier where its practice is to make 
individualized decisions, in particular cases, whether and on what 
terms to deal.'' As the D.C. Circuit explained in NARUC I, ``[t]he 
original rationale for imposing a stricter duty of care on common 
carriers was that they had implicitly accepted a sort of public trust 
by availing themselves of the public at large.'' This ``quasi-public 
character . . . coupled with the lack of control exercised by'' 
customers of the carriers' services ``was seen to justify imposing upon 
the carrier'' heightened duties.
    269. In the 1996 Act, Congress added new statutory categories of 
``telecommunications,'' ``telecommunications services,'' and 
``telecommunications carriers'' to the Communications Act. 
Telecommunications is defined in relevant part as ``the transmission . 
. . of information of the user's choosing,'' echoing the second prong 
of the traditional NARUC analysis. Telecommunications services, in 
turn, involve the offering of telecommunications for a fee to the 
public, which the Commission has found to ``encompass only 
telecommunications provided on a

[[Page 25695]]

common carrier basis,'' relying on the longstanding NARUC analysis for 
that evaluation. As the Commission found, this interpretation gives 
meaning to the `to the public' criteria in the telecommunications 
service definition in a manner that accords with the relevant 
legislative history. Because telecommunications services meet the 
standard for common carriage, providers of telecommunications 
services--i.e., telecommunications carriers--are acting as common 
carriers to the extent that they are providing such services.
2. Discussion
    270. Against the backdrop of the Commission's established approach 
to addressing private carriage, common carriage, and telecommunications 
service classification issues, we agree with commenters that statements 
in the Further Notice were unduly broad insofar as they could be read 
to suggest that all business data services necessarily are 
telecommunications services subject to common carrier regulation. Our 
approach to such classification issues requires an understanding and 
analysis of the facts regarding particular service offerings that the 
record underlying the Further Notice was lacking. To the contrary, as 
discussed below, the record generated in response to the Further Notice 
demonstrates that some business data services currently are being 
offered on a private carriage basis in the marketplace today. The 
record is not sufficiently detailed and comprehensive to provide a 
basis to broadly classify all business data services. By addressing 
examples where particular providers submitted more detailed information 
regarding certain of their services, however, we can mitigate the risk 
of continued uncertainty or confusion regarding the Commission's 
approach to such classification questions that potentially were 
introduced by statements in the Further Notice.
    271. Affirmative Arguments for Private Carriage Classification of 
Certain Services. Comcast and Charter each submitted detailed 
information about certain categories of services sufficient to enable 
us to classify those as private carriage offerings based on the record 
here. With respect to its wholesale cellular backhaul service and E-
Access service, Comcast explains that it makes individualized decisions 
whether it will, in fact, offer such services in a given instance or to 
a given customer. Comcast describes its offering of retail Ethernet 
transport similarly, explaining that it does not hold out such services 
to all interested buyers. For its part, Charter explains that 
particularly in the case of business data services provided to 
enterprise customers, it makes individualized decisions whether to 
offer service to given customers. The case-by-case decisions about 
whether to offer these services to a given customer described by 
Comcast and Charter stand in contrast to the ``quasi-public character'' 
that is a ``critical'' premise of common carrier classification--and 
the associated heightened duties--identified by the D.C. Circuit in 
NARUC I. The absence of this critical factor is central to our private 
carriage analysis of these services.
    272. Comcast and Charter each further explain that they make 
highly-individualized decisions regarding any rates and terms they do 
offer for the relevant categories of services in order to meet the 
particular needs of a given customer. The plausibility of these 
descriptions is reinforced by the fact that the customers for these 
services typically include large wireless carriers, other large service 
providers, or enterprises. The record reveals that such entities are 
likely to have the size and sophistication to demand uniquely-tailored 
wholesale or retail offerings that enable them to meet particularized 
needs. Although a few commenters dispute the private carriage claims in 
the record, for the reasons described below in our response to those 
arguments, we are not persuaded that they require a different 
conclusion with respect to the services we classify as private carriage 
here. Thus, considering the totality of the circumstances, we conclude 
that the Comcast and Charter services identified above, when offered in 
the manner described in the record, constitute private carriage 
services--not common carrier services or telecommunications services.
    273. As other examples, Mediacom, ACS, and BT Americas also argue 
that services they each provide constitute private carriage. Although 
the information they submitted is not quite as detailed or specific as 
that of Comcast and Charter, we nonetheless agree that, as described, 
these services reflect private carriage offerings. Notably, each of 
these providers explains with respect to its relevant services that, 
rather than offering service to all potential customers and offering 
rates and terms indifferently, they instead make individualized 
decisions about whether and on what terms to offer service. There also 
is little indication in the record of any disagreement that these 
particular providers are offering service on a private carriage basis, 
as they contend. Building on our analysis for Comcast and Charter 
above, under our evaluation of the totality of the evidence here, we 
likewise conclude that the services described by Mediacom, ACS, and BT 
Americas are private carriage when offered as these providers describe.
    274. Responses to Arguments Disputing that Those Services are Held 
Out on a Private Carriage Basis Under the NARUC Analysis. Some 
commenters purport to provide evidence that business data service 
providers generally, or Comcast and Charter in particular, offer 
business data services in a manner that reflects an indifferent holding 
out of service to the public, and thus should be classified as common 
carrier telecommunications services. We reject such claims in the 
context of the specific providers' services addressed above for a 
number of reasons.
    275. First, generalized statements about marketplace trends 
broadly, or Comcast's or Charter's networks or services generally--but 
which do not purport to address more specifically the particular 
services we discuss above--do not provide a basis to reject the 
evidence put forward by Comcast, Charter or the other providers 
addressed above that is specific to those providers' services. Even 
assuming arguendo that certain characterizations of the marketplace as 
a whole or particular providers' networks or offerings might commonly 
hold true in a general sense, we find no basis to assume that they hold 
true with respect to particular service offerings sufficient to 
overcome more specific contrary evidence.
    276. Second, we are unpersuaded by arguments that particular 
aspects of how these providers offer service do not inherently require 
a classification of private carriage as to the offering of the relevant 
services, or can be consistent with common carriage. We do not base our 
decision on any single aspect of the manner in which Comcast, Charter, 
Mediacom, ACS, or BT Americas offer the specified services. Rather, we 
confirm those providers' claims of private carriage based on the 
totality of the evidence before us describing the manner in which the 
relevant services are offered. Under that analysis we find sufficient 
evidence of individualized determinations whether to offer service to 
given customers and, when services are offered, individualization on a 
sufficient range of key terms of the offering to warrant a finding of 
private carriage. Thus, whether any subset of actions taken by those 
providers would or would not be sufficient to support a private 
carriage classification is not an issue we confront or address here.
    277. We also find a variety of those claims overstated, even on 
their own terms. For example, some commenters

[[Page 25696]]

cite marketing materials or other statements from certain of the 
providers discussed above as undercutting these providers' claims that, 
as to the relevant services, the providers make individualized 
decisions whether and on what terms to deal. In many cases, the cited 
materials or statements, while focused on particular services or 
categories of services, nonetheless still are too high-level or 
generalized to provide meaningful insight into the more granular 
details of how particular services are offered in practice. Even 
materials or statements purporting to speak to particular service 
offerings on a somewhat more granular basis do not lend themselves to 
simplistic analysis. Where service is offered via a tariff, the 
analysis can be more straightforward not only because the filed tariff 
doctrine requires the tariffed rates and terms to be controlling, but 
even more fundamentally because only common carrier services may be 
offered on a tariffed basis. Outside the tariffing context, we agree 
with commenters that marketing materials or the like might well be used 
merely to make it known that a given company is a potential provider of 
particular services without representing a formal offer of service to 
all customers to which the service might legally and practicably be of 
use. On their face, we do not find the marketing materials or other 
provider statements cited here to represent a formal holding out of the 
services addressed above to all potential users. Nor are we persuaded 
by the record that, in practice, Comcast, Charter, Mediacom, ACS, or BT 
Americas treat those statements or marketing materials in such a 
manner. Insofar as the statements and marketing materials thus are 
compatible with those providers' representations regarding whether and 
how they offer the relevant services, we are not persuaded to reject 
the providers' representations on the basis of such materials and 
statements.
    278. Also overstated are commenters' claims regarding common 
technical characteristics or terms of agreements, whether in marketing 
materials, ``rate sheets,'' or from practical interactions with 
Comcast, Charter, Mediacom, ACS, or BT Americas. These claims do not 
dissuade us from the private carriage determination we make as to those 
providers. Such considerations can be relevant to the classification 
analysis, but the evidence before us in that regard does not require a 
common carrier classification here. Even to the extent that such 
evidence here directly applies to the particular providers' services 
addressed above, we are persuaded that, in significant part, they do 
not reflect a formal offer of service at particular rates and terms 
that these providers genuinely anticipate potential customers 
accepting, but merely serve a starting point for negotiations of 
relevant rates and terms. In addition, to the extent that Verizon 
identifies certain similarities in its interactions with a variety of 
different service providers (when acting as a customer) and with its 
own operation (when acting as a service provider), that is distinct 
from the relevant question of whether a single provider treats all 
potential customers similarly and thus should be classified as a common 
carrier. Further, some uniformity in technical characteristics in a 
given provider's service offering appears largely inevitable given the 
need to conform to industry standards, common equipment, and the like, 
and if that were enough to warrant a finding of common carriage, the 
notion of private carriage could be rendered a nullity. Additionally, 
issues regarding the rates and terms of any offering are distinct from 
the question of whether any offering (whatever the rates and terms) is 
made to all potential users of the service--a ``critical'' issue under 
NARUC I--and do not implicate our findings in that regard discussed 
above. Thus, while relevant to consider as part of arguments about a 
providers' individualization in rates and terms, under the totality of 
the circumstances here, we conclude that the alleged ``uniformity'' in 
service offerings cited by commenters is limited and does not preclude 
our private carriage classification for Comcast, Charter, Mediacom, 
ACS, and BT Americas.
    279. Third, we reject common carriage claims based on asserted 
similarities between particular aspects of these providers' offering of 
service and the manner in which incumbent LECs or others offer service. 
We are not persuaded that comparisons or analogies to how other 
providers such as incumbent LECs or others have offered service 
necessarily are illuminating. Although there are a variety of prior 
decisions where the Commission has suggested that business data 
services are telecommunications services, those decisions are best 
understood as descriptive of the agency's general sense of how 
providers--and particularly incumbent LECs--were, in practice, offering 
such services at the time. They do not expressly claim (or justify) any 
formal, comprehensive classification of business data services under 
our longstanding classification approaches. Those prior decisions thus 
also do not prejudge the classification of services being offered in 
the marketplace today or in the future--whether by competitive 
providers or incumbent LECs--which potentially could be appropriately 
classified as private carriage, as well. We need not and do not resolve 
such broader classification issues here.
    280. The record also does not demonstrate that the Commission has 
any statutory authority to compel common carriage offerings of what 
otherwise are private carriage business data services--to compel a 
provider to ``offer[]'' business data services ``for a fee directly to 
the public'' if the provider has not voluntarily done so. The precedent 
cited by commenters advocating such a compulsion arose where the 
Commission was exercising licensing authority. By contrast, the 
providers that are the focus of private carriage arguments in the 
record here--particularly cable operators--do not require any 
Commission license or authorization before introducing domestic, 
private carriage business data services, so those orders do not 
demonstrate Commission authority as relevant here. Instead, commenters 
merely assert their view that doing so would be desirable as a way to 
advance various policy goals. Absent any statutory authority, we cannot 
compel common carriage for what otherwise are private carriage 
offerings.
    281. Responses to Arguments Advocating Compelled Common Carriage or 
a Different Classification Approach. We also reject arguments for 
requiring that some or all business data services be offered on a 
common carriage basis as telecommunications services even where 
providers otherwise have elected to offer them on a private carriage 
basis. Although the traditional NARUC analysis recognizes the 
possibility that a service provider might be under a legal compulsion 
to offer service on a common carrier basis, the record does not 
demonstrate grounds for imposing such a requirement here. As a 
threshold matter, we agree with commenters that the Further Notice did 
not provide adequate APA notice for the Commission to compel common 
carriage for business data services generally, or to do so for some 
segment of the industry, via the adoption of a legislative rule of 
general applicability.
    282. In addition, we also find insufficient the policy grounds 
cited by commenters advocating compelled common carriage here. As a 
number of commenters recognize, our precedent generally has identified 
market power as a prerequisite for potentially compelling common 
carriage, but the record here

[[Page 25697]]

does not reveal that the specific providers offering particular 
business data services on a private carriage basis have market power 
with respect to those services. While arguing that the Commission also 
can compel common carriage based on other public interest 
considerations, Public Knowledge et al. nonetheless acknowledge that 
even then the Commission must consider ``whether the public interest 
benefits outweigh the costs of applying regulation.'' Yet even that 
standard is not met on the record here. Although some commenters seek 
to minimize the perceived extent of regulatory burdens that would flow 
from compelled common carriage, the Commission itself has acknowledged 
that meaningful burdens do, in fact, flow from common carrier 
treatment. Some service provider commenters also explain that they have 
relied on their ability to operate on a private carriage basis, and the 
flexibility it provides, when electing to enter the marketplace with 
particular business data service offerings. Thus, we find it likely 
that Commission action broadly treating as common carriage services 
that providers wish to offer as private carriage would discourage 
investment in such services. At the same time, we find any alleged 
countervailing public interest benefits entirely speculative. The 
generalized claims in the record about the need for common carriage, 
even assuming arguendo that they held true in some cases, do not 
demonstrate the nature and extent of any benefits (if any) that would 
flow from compelling common carriage by the specific providers 
discussed above as to the specific services that we find here to be 
offered on a private carriage basis. We thus find no policy rationale 
for compelling common carriage by any particular providers here.
    283. For similar reasons, we decline to adopt a new approach to 
classification here that departs from our longstanding reliance on the 
NARUC analysis as some commenters propose. Commenters advocating that 
we classify business data services solely through our own 
interpretation of the statutory ``telecommunications service'' 
definition do not put forward a theory of interpretation that we find 
reasonable. Instead, these commenters focus to such a degree on the 
desired outcome of such a classification approach that we are left 
unclear how the Commission could achieve that outcome without adopting 
such a sweeping interpretation of ``telecommunications services'' as to 
virtually eliminate any distinction between offerings ``to the public'' 
and private offerings. Thus, as a matter of statutory construction, the 
record does not persuade us to depart from our longstanding 
classification approach, which gave full meaning to the relevant 
statutory language consistent with the legislative history.
    284. Independently, we are not persuaded by policy arguments that 
we should depart from our longstanding classification approach even if 
we could do so as a matter of statutory interpretation. The arguments 
in favor of such action are, like the arguments commenters raised in 
favor of compelled common carriage, generalized assertions about 
providing perceived benefits or remedying perceived risk of harms that 
are divorced from any specific circumstances where application of our 
longstanding classification approach would yield private carriage 
classifications. As we explained when rejecting proposals to compel 
common carriage, such arguments do not demonstrate what public benefits 
would flow if the specific services of certain providers that we find 
to be offered on a private carriage basis--or those of other providers 
not addressed here--were instead classified as common carriage. That 
shortcoming is even more problematic for any argument to revisit the 
Commission's classification approach, because absent some theory for 
limiting the interpretation just to this context, increasing the reach 
of the telecommunications service definition would also result in 
regulatory burdens for providers of other communications services that 
would be classified as common carrier telecommunication services under 
that interpretive approach. We thus find no grounds for adopting an 
approach to service classification here that departs from our 
longstanding reliance on the NARUC analysis.
    285. Given that we do not depart here from our longstanding 
approach to evaluating private carriage and common carriage 
classification, we also continue to adhere to our precedent under which 
shared use arrangements typically were classified as private carriage. 
Consequently, this addresses the concerns of some commenters that 
research and education (R&E) networks that historically had been 
treated as private carriage under that framework might newly be 
classified as common carrier telecommunications services under a new 
approach to classification.

B. Expiration of the Section 214 Interim Wholesale Access Rule

    286. By this Order, the Commission ``identifies a set of rules and/
or policies that will ensure rates, terms, and conditions for special 
access services [business data services] are just and reasonable.'' As 
a result, the interim wholesale access rule for discontinued TDM-based 
business data services and unbundled network element platform (UNE-P) 
replacement services (also called commercial wholesale platform 
services) established in the 2015 Technology Transitions Order will 
expire when these rules and policies become effective. We decline to 
extend the interim rule for UNE-P replacement services.
    287. Background. UNE-P replacement services are wholesale voice 
services that consist of a DS0 loop, switching, and shared transport, 
and allow competitive carriers to provide local exchange service 
without facilities. In the 2015 Technology Transitions Order, the 
Commission concluded that, as a condition to receiving authority to 
discontinue a legacy TDM-based service used as a wholesale input by 
competitive providers, an incumbent LEC must provide wholesale access 
to UNE-P replacement services and business data services at DS1 speed 
and above on reasonably comparable rates, terms, and conditions to any 
requesting telecommunications carrier. This interim rule will expire 
when the requirements established in this Order are published in the 
Federal Register and become effective. In the 2015 Technology 
Transitions Further Notice, the Commission asked whether it should 
extend the interim rule for UNE-P replacement services only for a 
further interim period beyond completion of this proceeding, and if so, 
for how long. The Commission ``recognize[d] that incumbents are 
currently offering such commercial arrangements in TDM on a voluntary 
basis'' and further ``recognize[d] the benefits of agreements reached 
through market negotiations.''
    288. Discussion. Consistent with the Commission's statement in the 
2015 Technology Transitions Order that ``the special access proceeding 
provides a foreseeable and definitive point in the future at which we 
can reassess the efficacy and necessity of the [interim] requirement,'' 
we have reevaluated the continued need for the interim rule. We 
determine that the interim rule is no longer necessary, and we will not 
extend it beyond the timeline for expiration established in the 2015 
Technology Transitions Order. In reaching this conclusion, we return to 
the Commission's longstanding policy of ``encourag[ing] the innovation 
and investment that come from facilities-based competition.'' Thirteen 
years ago, the Commission found that ``[i]t is now

[[Page 25698]]

clear, as discussed below, that, in many areas, UNE-P has been a 
disincentive to competitive LECs' infrastructure investment.'' Today, 
we conclude that if we maintained and extended the interim rule, it 
would have a similar negative impact on incumbent LEC deployment of, 
and transition to, next-generation network infrastructure and 
innovative IP services that benefit all Americans, businesses and 
consumers alike. We will no longer deter investment in next-generation 
facilities or distort the market by extending the interim rule. 
Although Granite argues that UNE-P rate regulation was more stringent 
than the ``reasonably comparable'' interim rule, the difference is 
merely one of degree rather than of kind.
    289. We find arguments raised by proponents of extending the UNE-P 
replacement rule today to be highly similar to arguments that the 
Commission rejected in 2015 when declining to set a further end date 
for the interim rule. Granite and others have known since the interim 
rule's adoption that the Commission intended the condition ``to be 
interim and short-term in nature''; indeed, the Commission emphasized 
that ``consistent with that goal we have adopted a specific and 
foreseeable endpoint.'' In the 2015 Technology Transitions Further 
Notice the Commission inquired only whether it would be appropriate to 
require an extension for a further interim period to the extent 
``wholesale arrangements for voice are unlikely.'' Based on our 
conclusions herein, we decline to alter the end date of the interim 
rule. We find some merit to the argument that it did not make sense to 
specifically tie the interim rule's termination as to UNE-P replacement 
services to the end of this proceeding as opposed to a fixed end date. 
However, unlike proponents of the interim rule, we find that the 
appropriate remedy for this arguably erroneous decision is to 
permanently terminate the interim rule as expeditiously as possible.
    290. We are not persuaded that competition will be harmed by the 
termination of the interim rule. Proponents of the interim rule ask us 
to ensure that the specific wholesale inputs on which they depend are 
available at ``reasonably comparable'' rates, terms, and conditions if 
and when incumbent LECs transition those inputs fully to Internet 
Protocol (IP). But ``[o]ur statutory duty is to protect efficient 
competition, not competitors.'' Companies that offer multilocation 
enterprise voice service--such as Granite and the members of the 
Wholesale Voice Coalition--contend that their service is difficult to 
provide without access to regulated inputs due to the high cost of 
serving some individual customer locations, the typically low number of 
lines per customer location, and the need to serve numerous locations 
per customer. Given these companies' multilocation business model, it 
is plausible that they could absorb a loss to serve some customer 
locations yet still find serving that customer worthwhile. However, 
neither Granite nor any other party has linked the challenges of 
serving some individual customer locations to competitive or customer 
impact. For instance, Granite has not quantified how many of its 
customers would become uneconomical to serve without the interim rule, 
shown how it would choose among constructing its own facilities, 
reselling cable, and reselling incumbent LEC services in the absence of 
the rule, nor shown how these issues would adversely affect overall 
competition in the market. Instead, supporters of extending the interim 
rule focus on how it would adversely impact them as individual 
competitors and call for us to conduct a detailed examination of the 
marketplace for wholesale voice platform services and--if we are 
unwilling to cement the rule permanently in place--extend the interim 
rule until the study is complete. We decline to expend public resources 
to further distort the market, raise costs associated with the 
transition to IP, deter facilities investment, and introduce regulatory 
uncertainty.
    291. We find the remainder of the arguments in the record in 
support of extending the condition similarly unpersuasive. Granite has 
argued that its overall costs would increase 159 percent if it were 
required to convert from purchasing UNE-P replacement services to 
resold incumbent LEC voice lines, but it has not demonstrated that 
absent the interim rule such a conversion would be necessary, nor 
supported that assertion beyond submitting a generalized declaration. 
We are equally unpersuaded by a June 2015 study that purports to find 
that loss of wholesale access to incumbents' voice services would 
result in customer harm of between $4.443 billion and $10.168 billion 
per year. This calculation is based on Granite's estimate that 
competitive carriers provide $30 per line of value to their customers, 
a remarkable assertion for which the study provides no particularized 
or verifiable support. Moreover, proponents of extending the interim 
rule continue to rely on the same data submitted in support of the 
initial adoption of the interim rule.
    292. Finally, we note that arguments in favor of extending the 
interim rule are premised on the expectation that wholesale voice 
arrangements will not occur absent regulatory action. We disagree. Our 
view is informed significantly by developments subsequent to the 2015 
Technology Transitions Order. First, we anticipate that growing 
intermodal competition will continue to diminish incumbent LECs' once-
central role in the voice marketplace. Second, incumbent LECs--in 
particular, BOCs such as AT&T, Verizon, and CenturyLink--continue to 
offer UNE-P replacement services in TDM on a voluntary basis under 
commercially negotiated terms. In the course of forbearing from local 
switching and shared transport unbundling obligations under section 271 
in the 2015 USTelecom Forbearance proceeding, the Commission concluded 
that it did ``not find persuasive Granite's argument that BOCs would 
never offer UNE-P replacement services [in TDM] but for the section 271 
`backstop.' '' Since that time, neither Granite nor others have shown 
that prices or availability of TDM-based UNE-P replacement services 
have changed as a result of the forbearance. We see no convincing 
reason in the record to assume that the market would operate 
differently in IP. Granite attempts to show otherwise by pointing to 
negotiations in which AT&T refused Granite's request to include a 
clause acknowledging the interim rule. However, the interim rule was a 
time-limited regulatory obligation independent of any contract. We fail 
to see how AT&T's refusal of Granite's requested belt-and-suspenders 
protection is probative. Similarly, we do not see Granite's barebones 
allegation of ``one ILEC's refusal to engage in negotiations with 
competitive carriers about access to replacement IP voice services'' as 
significantly probative. Carrier practices may change over time, 
particularly in this early phase of the IP transition, and one 
carrier's practices may be suggestive, but are not demonstrative of the 
entire market. Given that incumbent LECs offer UNE-P replacement 
services in TDM in a manner that proponents of the interim rule deem 
satisfactory (as demonstrated by their goal of obtaining mandated 
``reasonably comparable'' rates in IP), and assuming as Granite does 
that ``IP-based services . . . cost less to provide than the TDM 
services,'' we anticipate that incumbent LECs will make similar 
offerings available in IP.

[[Page 25699]]

    293. While our predictive judgment regarding the availability of 
wholesale voice inputs from incumbent LECs in IP influences our 
decision, it alone is not dispositive. Our overarching goal here is to 
increase incentives for and remove barriers to facilities investment 
and the IP transition. We therefore allow the interim rule to terminate 
as scheduled. We also reject the request to prohibit non-disclosure 
agreements with respect to UNE-P replacement services as unsupported by 
the record, inconsistent with our decision to reduce regulatory 
intervention, and beyond the scope of the Further Notice.

VII. Other Issues

A. Denying Applications for Review

    294. The Commission delegated authority to the Bureau to implement 
the 2015 Collection. In carrying out this responsibility, the Bureau 
released the Data Collection Implementation Order and the Data 
Collection Reconsideration Order, making certain modifications and 
clarifications to the 2015 Collection requirements. CenturyLink and 
USTelecom each filed applications for review (AFRs), seeking reversal 
of certain Bureau actions in these orders. We deny these applications. 
We conclude that the CenturyLink AFR is moot in light of the reforms 
adopted in the Order, and we deny the USTelecom AFR because we find 
that the Bureau acted within its delegated authority in limiting the 
data collection to one year.
    295. On September 18, 2013, the Bureau released the Data Collection 
Implementation Order clarifying the scope of the collection, providing 
instructions on how to respond to the data collection questions, and 
providing a list of all modifications and amendments to the data 
collection questions and definitions. These actions were based on 
feedback received from potential respondents, including the PRA 
comments filed with the Commission during the 60-day public comment 
period, and the Bureau's further internal review. The 2015 Collection 
required providers to report locations with connections. In the Data 
Collection Implementation Order, the Bureau clarified that this meant 
the connections were considered capable of providing a dedicated 
service for the purposes of reporting locations. The Bureau further 
clarified that cable system operators in their local franchise areas 
were required ``to report those Locations with Connections owned or 
leased as an IRU (i.e., an indefeasible right of use) that are 
connected to a Node (i.e., headend) that has been upgraded or was built 
to provide Metro Ethernet (or its equivalent) service, . . . regardless 
of the service provided over the Connection or whether the Connection 
is idle or in-service.'' For connections not linked to a MetroE-capable 
node, cable system operators were only required to report in-service 
connections used ``to provide a Dedicated Service or a service that 
incorporates a Dedicated Service within the offering as part of a 
managed solution or bundle of services sold to the customer.''
    296. On October 22, 2013, CenturyLink filed an AFR, seeking 
reversal of the Bureau's decision in the Data Collection Implementation 
Order to exclude from the collection those cable system operator 
locations neither used to provide a dedicated service nor connected to 
a MetroE-capable node. CenturyLink argued the decision would ``result 
in a failure to account fully for robust and growing cable-based 
competition'' and the Bureau thus exceeded its delegated authority. 
ACA, NCTA, and Sprint opposed the CenturyLink application for review.
    297. Following the release of the Data Collection Implementation 
Order, the Bureau submitted the collection to OMB for review as 
required by the PRA, and after a lengthy review process, OMB approved 
the collection subject to modifications on August 15, 2014. The most 
notable modifications to the collection were: (1) Collecting data for a 
single year, 2013, instead of data for two years, 2010 and 2012; (2) 
reducing the mapping requirements for cable companies to report only 
fiber routes making up the local transport network and not reporting 
feeder routes to end user locations; (3) modifying the definition of 
purchasers required to respond to exclude entities spending less than 
$5 million dollars on business data services in 2013; and (4) making 
many of the questions directed at purchasers optional. On September 15, 
2014, the Bureau released the Data Collection Reconsideration Order, 
which implemented these changes to the collection.
    298. On October 24, 2014, USTelecom filed an application seeking 
Commission review of the Bureau's modification of the collection, in 
the Data Collection Reconsideration Order, to one year's worth of data 
as approved by OMB pursuant to the PRA. USTelecom asserted this change 
``exceeds the Bureau's delegated authority, and threatens to undermine 
the Commission's goals for the data collection effort.'' Oppositions to 
the USTelecom AFR were filed by Sprint and a coalition of competitive 
LECs, urging the Commission to reject the application as a meritless 
tactic to delay the proceeding.
    299. We first deny the CenturyLink AFR as moot in light of the 
reforms adopted in this Order. CenturyLink's concern was that the 
Bureau's decision would result in the Commission's failing to take into 
account the growing cable competition present in the business data 
services market. By using Form 477 data in addition to the 2015 
Collection data to craft the competitive market test, the Commission 
has ensured that the competitive market test fully takes cable 
competition into account, both in this initial test and in future 
updates.
    300. We also deny the US Telecom AFR. In the Data Collection Order, 
the Commission directed the Bureau that ``[t]o the extent the Bureau 
cannot obtain Office of Management and Budget approval for some portion 
of the data collection . . . to proceed with the remainder of the 
collection.'' The OMB approval restricted the data collection to one 
year. The Bureau thus properly proceeded pursuant to Commission 
delegation and continued with the data collection as allowed by OMB.

B. Addressing Motion to Strike

    301. On June 17, 2016, CenturyLink et al. filed a motion seeking to 
strike from the record the analysis contained in the Rysman Paper that 
was attached to the Further Notice and other analyses contained in the 
record and Further Notice that were based on the 2015 Collection. 
According to CenturyLink et al., the Rysman Paper and Further Notice 
were based on flawed data regarding cable entry and capability in the 
market, which massively distorted the competitive landscape evaluated 
by Dr. Rysman. USTelecom filed comments supporting the motion. In light 
of the reforms adopted in the Order, which rely on cable entry as 
reported in the Form 477 data, we conclude that the motion to strike is 
moot.
    302. CenturyLink et al.'s motion to strike is in response to 
various cable reporting errors contained in the 2015 Collection. After 
release of the Further Notice, the Commission discovered that four 
cable companies--Comcast, Charter, Cox, and Legacy TWC--had failed to 
report all locations connected to Metro-E capable headends. These 
companies did report in their original submissions each location to 
which they provided business data services in 2013. Subsequent to this 
discovery, these companies supplemented their submissions, as 
necessary, with information to indicate, or to allow the Commission to 
determine, those census blocks with non-residential locations

[[Page 25700]]

serviceable by Metro-E headends in 2013.
    303. Commission staff have already accounted for the supplemented 
cable information in the context of the rulemaking proceeding and 
updated its analysis accordingly. Moreover, the competitive market test 
relies heavily on data from the Form 477 to determine where cable 
competition is present in the business data services market and has 
based significant regulatory relief on the presence of a single cable 
provider located in 75 percent of the census blocks in a county. The 
arguments from CenturyLink et al. are based on the concern that the 
Commission would not have the appropriate evidence of cable competition 
in evaluating the business data services market. Because we have 
included the Form 477 data in our analysis and based significant 
regulatory relief on the presence of cable competition, we conclude 
that the motion to strike has been rendered moot and is therefore 
denied.

C. Addressing Previously-Filed Motion Seeking Additional Information on 
Fiber Maps

    304. The Bureau on September 18, 2015, released an order clarifying 
and modifying the Protective Order initially adopted for the 2015 
Collection. In that order, the Bureau declined to make available to 
authorized parties fiber mapping files showing ``the starting points 
for connections to end user locations,'' ``the transmission paths,'' or 
``the connections to end user locations'' in order to mitigate 
potential risks to critical communications infrastructure. The Bureau 
as an alternative offered to ``provide maps depicting the presence of 
fiber by listing all the providers with fiber facilities in a census 
block or by indicating a connected end-user location's distance to 
fiber without including information on the specific route of the 
fiber.''
    305. On March 17, 2016, AT&T filed a motion seeking access to the 
highly confidential fiber route maps submitted by competitive providers 
in response to the 2015 Collection. Denying access, according to AT&T, 
would violate the Administrative Procedure Act by not allowing it to 
refute claims by competitive LECs that competition only exists at the 
building level because AT&T could not ``show where the CLECs have 
actually deployed fiber.'' Specifically, AT&T asserted it could not 
refute arguments by showing ``precisely how many locations with special 
access demand are within the CLECs' own stated distances for lateral 
build-out from their fiber facilities'' or ``calculate the full reach 
of each competitor's network.''
    306. At the time AT&T filed its motion, the Commission staff had 
only made available a data file identifying the census blocks in which 
fiber routes reported by competitive providers were present. On March 
30, 2016, the Bureau made available an additional data file providing 
the distances from each unique reported location to each competitive 
provider's fiber network. AT&T, its economists, and other commenters 
have relied on this information in advocating their positions in this 
proceeding. We find the alternative data file that Commission staff 
provided addresses AT&T's identified concerns, and we therefore deny 
the motion.

D. Severability

    307. All of the rules and policies that are adopted in this Order 
are designed to work in unison to ensure that rates for business data 
services are just and reasonable while also encouraging facilities-
based competition and facilitating technology transitions. However, 
each of the separate reforms we undertake in this Order serves a 
particular function toward these goals. Therefore, it is our intent 
that each of the rules and policies adopted herein shall be severable. 
If any of the rules or policies is declared invalid or unenforceable 
for any reason, it is our intent that the remaining rules shall remain 
in full force and effect.

E. Directive to Bureau To Correct Errors and Omissions

    308. Given the complexities associated with modifying existing 
rules as well as other reforms adopted in this Order, we direct the 
Wireline Competition Bureau to make any further rule revisions 
extending only to technical and conforming edits to ensure that the 
reforms adopted in this Order are properly reflected in the rules. If 
any such rule changes are warranted, the Bureau shall be responsible 
for such changes. We note that any entity that disagrees with a rule 
change made by the Bureau will have the opportunity to file an 
Application for Review by the full Commission.
    309. This Order will require price cap incumbent LECs and their 
customers to make operational changes that will raise technical issues, 
many of which will only come to light as the Order begins to be 
implemented. We direct that, in resolving these issues, the Bureau 
shall make sure that the operational changes properly reflect the 
reforms adopted in the Order.
    310. In addition, we take this opportunity to make several non-
substantive rule amendments. We find that notice and comment is 
unnecessary for rule amendments to ensure consistency in terminology 
and cross references across various rules, correct inadvertent failures 
to make conforming changes when prior rule amendments occurred, and to 
delete references to rules governing past time periods that no longer 
are applicable.

VIII. Procedural Matters

A. Paperwork Reduction Act Analysis

    311. This document contains new information collection requirements 
subject to the PRA. It will be submitted to OMB for review under 
section 3507(d) of the PRA. OMB, the general public, and other Federal 
agencies will be invited to comment on the new information collection 
requirements contained in this proceeding. In addition, we note that 
pursuant to the Small Business Paperwork Relief Act of 2002, we 
previously sought specific comment on how the Commission might further 
reduce the information collection burden for small business concerns 
with fewer than 25 employees. We describe impacts that might affect 
small businesses, which includes most businesses with fewer than 25 
employees, in the Final Regulatory Flexibility Analysis.

B. Congressional Review Act

    312. The Commission will send a copy of this Report and Order to 
Congress and the Government Accountability Office pursuant to the 
Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).

C. Final Regulatory Flexibility Analysis

    313. As required by the Regulatory by the Regulatory Flexibility 
Act of 1980, as amended (RFA) an Initial Regulatory Flexibility 
Analysis (IRFA) was incorporated into the Further Notice of Proposed 
Rulemaking (Further Notice) for the business data services (BDS) 
proceeding. The Commission sought written public comment on the 
proposals in the Further Notice, including comment on the IRFA. The 
Commission received no comments on the IRFA. Because the Commission 
amends its rules in this Report and Order, the Commission has included 
this Final Regulatory Flexibility Analysis (FRFA). This present FRFA 
conforms to the RFA.
1. Need for, and Objectives of, the Rules
    314. In the Further Notice, the Commission proposed to replace the 
existing business data services

[[Page 25701]]

regulatory structure with a new technology-neutral framework and sought 
comprehensive comments on the proposed new framework. This Order, 
therefore, provides a new framework for business data services that 
minimizes unnecessary government intervention and allows market forces 
to continue working to spur entry, innovation and competition.
    315. Based on the 2015 Collection, the Commission makes findings as 
to the relevant market for analysis, trends in competition, and the 
presence of market power. Significantly, the Commission finds 
competition in the provision of the following business data services to 
be sufficiently widespread that pricing regulation would be 
counterproductive: Packet-based business data services, optical 
transmission services with bandwidths in excess of a DS3, and TDM 
transport services. The Commission, therefore, declines to adopt, and 
where applicable ends, ex ante pricing regulation for such services. 
With respect to the provision by price cap incumbent LECs of DS1 and 
DS3 end user channel terminations, the Commission adopts the following 
competitive market test. For a particular county if: 50 percent of the 
buildings in that county are within a half mile of a location served by 
a competitive provider based on the 2015 Collection or 75 percent of 
the census blocks in a county have a cable provider present based on 
Form 477 data, the Commission finds that ex ante pricing regulation of 
that county would be counterproductive. The services relieved of ex 
ante pricing regulation will be subject to permissive detariffing for a 
period of 36 months at which time they will be subject to mandatory 
detariffing.
    316. For counties that do not meet the competitive market test, the 
Commission will retain price cap regulation for incumbent LEC provision 
of DS1 and DS3 end user channel terminations, and certain other 
business data services, and apply the principles of Phase I pricing 
flexibility to these counties, which will permit the carriers to offer 
volume and term discounts, as well as contract tariffs. These services 
will also be subject to a productivity-based X-factor of 2.0 percent 
and restrictions on the incumbent LEC's use of non-disclosure 
agreements.
2. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA
    317. The Commission did not receive comments specifically 
addressing the rules and policies proposed in the IRFA.
3. Response to Comments by the Chief Counsel for Advocacy of the Small 
Business Administration
    318. The Chief Counsel did not file any comments in response to 
this proceeding.
4. Description and Estimate of the Number of Small Entities to Which 
the Rules Will Apply
    319. 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).
a. Total Small Entities
    320. 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, as of 2013, the SBA estimates there are 
an estimated 28.8 million small businesses nationwide--comprising some 
99.9% of all businesses. 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 1,621,315 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 2012 indicate that there were 90,056 local 
governmental jurisdictions in the United States. We estimate that, of 
this total, as many as 89,195 entities may qualify as ``small 
governmental jurisdictions.'' Thus, we estimate that most governmental 
jurisdictions are small.
b. Wireline Providers
    321. 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.
    322. 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.
    323. 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 NAICS Code category is Wired 
Telecommunications Carriers, as defined in paragraph 6 of this FRFA. 
Under that size standard, such a business is small if it has 1,500 or 
fewer employees. U.S. Census data for 2012 indicate that 3,117 firms 
operated during that year. Of that number, 3,083 operated with fewer 
than 1,000 employees. Based on this data, the Commission concludes that 
the majority of Competitive LECs, CAPs, Shared-Tenant Service 
Providers, and Other Local Service Providers, are small entities. 
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

[[Page 25702]]

have 1,500 or fewer employees. Also, 72 carriers have reported that 
they are Other Local Service Providers. Of this total, seventy have 
1,500 or fewer employees. Consequently, based on internally researched 
FCC data, 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.
    324. Interexchange Carriers. Neither the Commission nor the SBA has 
developed a definition specifically for providers of interexchange 
services. The closest NAICS Code category is Wired Telecommunications 
Carriers as defined in this FRFA. The applicable size standard under 
SBA rules is that such a business is small if it has 1,500 or fewer 
employees. U.S. Census data for 2012 indicates that 3,117 firms 
operated during that year. Of that number, 3,083 operated with fewer 
than 1,000 employees. According to internally developed Commission 
data, 359 carriers have reported that their primary telecommunications 
service activity was the provision of interexchange service. Of this 
total, an estimated 317 have 1,500 or fewer 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.
    325. 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.
    326. Prepaid Calling Card Providers. Neither the Commission nor the 
SBA has developed a small business definition specifically for prepaid 
calling card providers. The most appropriate NAICS code-based category 
for defining prepaid calling card providers is Telecommunications 
Resellers. This industry comprises establishments engaged in purchasing 
access and network capacity from owners and operators of 
telecommunications networks and reselling wired and wireless 
telecommunications services (except satellite) to businesses and 
households. Establishments in this industry resell telecommunications; 
they do not operate transmission facilities and infrastructure. Mobile 
virtual networks operators (MVNOs) are included in this industry. Under 
the applicable SBA size standard, such a business is small if it has 
1,500 or fewer employees. U.S. Census data for 2012 show that 1,341 
firms provided resale services during that year. Of that number, 1,341 
operated with fewer than 1,000 employees. Thus, under this category and 
the associated small business size standard, the majority of these 
prepaid calling card providers can be considered small entities. 
According to Commission data, 193 carriers have reported that they are 
engaged in the provision of prepaid calling cards. All 193 have 1,500 
or fewer 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.
    327. 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. Census data for 2012 show that 1,341 firms provided resale 
services during that year. Of that number, 1,341 operated with fewer 
than 1,000 employees. Under this category and the associated small 
business size standard, the majority of these local resellers can be 
considered small entities. 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. 
Consequently, the Commission estimates that the majority of local 
resellers are small entities that may be affected by rules adopted 
pursuant to the Order.
    328. Toll Resellers. The Commission has not developed a definition 
for Toll Resellers. The closest NAICS Code Category is 
Telecommunications Resellers, and the SBA has developed a small 
business size standard for the category of Telecommunications 
Resellers.\1\ Under that size standard, such a business is small if it 
has 1,500 or fewer employees. Census data for 2012 show that 1,341 
firms provided resale services during that year. Of that number, 1,341 
operated with fewer than 1,000 employees. Thus, under this category and 
the associated small business size standard, the majority of these 
resellers can be considered small entities. 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. Consequently, the Commission estimates that the majority of 
toll resellers are small entities that may be affected by rules adopted 
pursuant to the Order.
    329. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a definition 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 as defined in paragraph 6 of 
this FRFA. Under that size standard, such a business is small if it has 
1,500 or fewer employees. Census data for 2012 shows that there were 
3,117 firms that operated that year. Of this total, 3,083 operated with 
fewer than 1,000 employees. Thus, under this category and the 
associated small business size standard, the majority of Other Toll 
Carriers can be considered small. According to internally developed 
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. 
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.
    330. 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 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

[[Page 25703]]

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.
c. Wireless Providers--Fixed and Mobile
    331. The rules adopted in the Report and Order may affect wireless 
providers. 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.
    332. Wireless Telecommunications Carriers (except Satellite). This 
industry comprises establishments engaged in operating and maintaining 
switching and transmission facilities to provide communications via the 
airwaves. Establishments in this industry have spectrum licenses and 
provide services using that spectrum, such as cellular services, paging 
services, wireless internet access, and wireless video services. The 
appropriate size standard under SBA rules is that such a business is 
small if it has 1,500 or fewer employees. For this industry, Census 
data for 2012 show that there were 967 firms that operated for the 
entire year. Of this total, 955 firms had fewer than 1,000 employees. 
Thus under this category and the associated size standard, the 
Commission estimates that the majority of wireless telecommunications 
carriers (except satellite) are small entities. Similarly, according to 
internally developed Commission data, 413 carriers reported that they 
were engaged in the provision of wireless telephony, including cellular 
service, Personal Communications Service (PCS), and Specialized Mobile 
Radio (SMR) services. Of this total, an estimated 261 have 1,500 or 
fewer employees. Thus, using available data, we estimate that the 
majority of wireless firms can be considered small.
    333. 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.
    334. 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.
    335. 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.
    336. 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.
    337. 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.
    338. 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 claimed small business status and won 277 licenses.
    339. 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

[[Page 25704]]

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.
    340. 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.
    341. 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.
    342. 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.
    343. 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.
    344. 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.
    345. 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.
    346. 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 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

[[Page 25705]]

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.
    347. 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.
    348. 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.
    349. 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.
    350. 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.
    351. 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.
    352. 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 
2012, which are the most recent Census data available, show that there 
were 967 firms that operated that year. Of those 967, 955 had fewer 
than 1,000 employees, and 12 firms had more than 1,000 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.
    353. 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 
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

[[Page 25706]]

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.
    354. 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.
    355. 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.
    356. 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 
2012, which are the most recent Census data available, show that there 
were 967 firms that operated that year. Of those 967, 955 had fewer 
than 1,000 employees, and 12 firms had more than 1,000 employees. Thus, 
under this category and the associated small business size standard, 
the majority of firms can be considered small.
    357. 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.
    358. 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.
    359. 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 claimed entrepreneur 
status won six licenses.
    360. 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

[[Page 25707]]

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.
    361. 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.
    362. 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.
    363. 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.
    364. 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.
d. Satellite Service Providers
    365. Satellite Telecommunications Providers. Two economic census 
categories address the satellite industry. The first category has a 
small business size standard of $32.5 million or less in average annual 
receipts, under SBA rules. The second has a size standard of $30 
million or less in annual receipts.
    366. The first category comprises firms ``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

[[Page 25708]]

telecommunications.'' The category has a small business size standard 
of $32.5 million or less in average annual receipts, under SBA rules. 
For this category, Census Bureau data for 2012 show that there were a 
total of 333 firms that operated for the entire year. Of this total, 
299 firms had annual receipts of less than $25 million.\1\ 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 rules adopted pursuant to the Order.
    367. 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.
e. Cable Service Providers
    368. The description above of wireline providers should encompass 
cable service providers that also provide business data services. Out 
of an abundance of caution, we describe cable service providers below 
as well as other types of firms that may provide broadband services, 
including MDS providers and utilities, among others.
    369. Cable Companies and Systems (Rate Regulation). The Commission 
has 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 indicate that there are currently 4,600 active cable 
systems in the United States. Of this total, all but nine cable 
operators nationwide are small under the 400,000-subscriber size 
standard. In addition, under the Commission's rate regulation rules, a 
``small system'' is a cable system serving 15,000 or fewer subscribers. 
Current Commission records show 4,600 cable systems nationwide. Of this 
total, 3,900 cable systems have fewer than 15,000 subscribers, and 700 
systems have 15,000 or more subscribers, based on the same records. 
Thus, under this standard as well, we estimate that most cable systems 
are small entities.
    370. 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.'' There are approximately 52,403,705 cable video 
subscribers in the United States today. Accordingly, an operator 
serving fewer than 524,037 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 nine 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. Although it seems certain that some of 
these cable system operators are affiliated with entities whose gross 
annual revenues exceed $250 million, we are unable at this time to 
estimate with greater precision the number of cable system operators 
that would qualify as small cable operators under the definition in the 
Communications Act.
    371. 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.
f. Electric Power Generators, Transmitters, and Distributors
    372. 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 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.
5. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities
    373. Recordkeeping and Reporting. The rule revisions adopted in the 
Order include changes that will necessitate affected carriers to make 
various revisions to business data service tariffs and Tariff Review 
Plans. For example, packet-based BDS, transport services, and DS1 and 
DS3 end user channel terminations in counties that are deemed 
competitive will be relieved of

[[Page 25709]]

price cap regulation and will be subject to permissive detariffing for 
a period of 36 months at which time they will be subject to mandatory 
detariffing. The Order also requires price cap incumbent LECs to freeze 
the rates for DS1 and DS3 end-user channel terminations in newly 
deregulated counties for six months. This freeze does not apply to 
services that are detariffed.
    374. In addition, the Commission amends the price cap rules to 
allow all price cap LECs in non-competitive counties to lower their 
rates through contract tariffs and volume and term discounts in a 
manner consistent with the Commission's current Phase I pricing 
flexibility rules. These incumbent LECs will be required to maintain 
generally available tariffed price cap regulated rates available to all 
subscribers. For the small number of counties that had received Phase 
II pricing flexibility that are now treated as non-competitive by the 
Order's competitive market test, those price cap carriers will be 
permitted to retain Phase II relief for those counties but will be 
required to offer generally available rates for those services as long 
as those services remain under tariff.
    375. The Commission also incorporates a productivity-based X-factor 
of 2.0 percent for DS1 and DS3 end user channel terminations, and 
certain other business data services, subject to price cap regulation 
on a going-forward basis. Affected LECs will be required to revise 
their rates and tariff review plans, including adjustments to price cap 
indices, for business data services in filings with the Commission to 
reflect the new X-factor. These revisions are required of all affected 
carriers, regardless of entity size. The adopted rule revisions will 
facilitate Commission and public access to the most accurate and up-to-
date tariffs as well as lower rates paid by the public for the affected 
services.
6. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities and Significant Alternatives Considered
    376. 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.
    377. Competitive Market Test. The Commission proposed to replace 
the existing framework for granting regulatory relief to incumbent LECs 
in price cap areas with a multi-dimensional competitive market test to 
identify specific markets as competitive or non-competitive, thereby 
dictating the level of applicable regulation for both circuit-based and 
packet-based business data services. The Commission also sought comment 
on the separate but related issue of whether in non-competitive 
markets, heightened regulation, including possible restrictions on 
rates, terms and conditions, should apply to just the market leader or 
additional providers, which could have potentially included a 
substantial number of small businesses.
    378. In the Order, the Commission explains why it adopts a test 
that departs from the proposals in the Further Notice. Rather than 
intrusive pricing regulation, it takes a dynamic and forward-looking 
approach to evaluating the benefits and costs of regulation. It 
identifies specific markets as competitive or non-competitive and 
applies regulation only where competition is expected to materially 
fail to ensure just and reasonable rates. The result is a simple, 
sustainable framework that is far less complicated than the market test 
proposal originally contemplated. The Commission adopts a structure 
that eliminates unnecessary pricing regulation for a significant 
portion of the business data services provided by price cap incumbent 
LECs to allow competition to promote increased efficiencies, 
investment, and growth in new technologies and services to benefit 
consumers and business. Additionally, the Commission declines to impose 
rate regulation on other business data services providers besides the 
market leader. In particular, unnecessary regulation exacts 
administrative compliance costs on carriers that reduce capital 
available for building new networks and infrastructure, inhibiting 
competitive entry and deployment.
    379. Packet-based Services. The Commission declines to re-impose 
any form of price cap or benchmark regulation on packet-based business 
data services. The market analysis does not show compelling evidence of 
market power in incumbent LEC provision of packet-based business data 
services, particularly for higher bandwidth services. Moreover, even if 
the record demonstrated insufficiently robust competition, proposals to 
apply price cap regulation to packet-based services were complex and 
not easily administrable and did not reflect the fact that costs to 
serve individual customers vary.
    380. Anchor or Benchmark Pricing. The Commission minimizes the 
economic impact of its rules on small entities first by declining to 
impose anchor or benchmark pricing regulation on incumbent LEC packet-
based business data services. This eliminates the proposed requirement 
to calculate anchor or benchmark prices for a wide range of packet-
based business data services, and to post publicly generally applicable 
rates, terms and conditions. Because our market analysis shows that 
packet-based business data services are subject to competition, anchor 
or benchmark pricing would be unnecessary and could actually inhibit 
investment in this dynamic market.
    381. X-factor. Incumbent LECs that file tariffs under the price cap 
ratemaking methodology are required to file revised annual access 
charge tariffs every year, which become effective on July 1. The annual 
filings include submission of tariff review plans that are used to 
support revisions to the rates, including revisions that pertain to the 
X-factor. The Commission requires revised tariff review plans 
implementing the X-factor to be filed with the Commission to become 
effective on December 1, 2017. To ease the burden on the industry in 
connection with this filing, and because base period demand and the 
value of GDP-PI reflected in the price cap indices typically are not 
updated during a tariff year, the Commission permits incumbent LECs to 
use, in their filings implementing the 2.0 percent X-factor, the same 
base period demand and value of GDP-PI as in the July 1, 2017 annual 
filing.
    382. Price Cap Regulation. The Commission applies price cap 
regulation in the form of Phase I pricing flexibility to DS1 and DS3 
end user channel termination services provided by incumbent LECs in 
counties that we have determined are non-competitive. Requiring Phase I 
pricing will enable incumbent LECs, including those that may be small 
entities, to respond to any competition that develops in these markets 
through contract tariffs and volume and term discounts. In addition, 
incumbent LECs, including any small entities that previously received 
Phase II pricing flexibility in counties we now deem non-competitive 
will not be subject to ex ante rate regulation for end user channel 
terminations and other special access services in those

[[Page 25710]]

counties, and thus will avoid incurring the significant costs of trying 
to recreate price caps.
    383. Periodic Data Collection. Related to the competitive market 
test proposal, the Commission also proposed a future periodic data 
collection to allow for market test updates for determining competitive 
and non-competitive areas. The periodic collection could have resulted 
in a significant reporting burden on small entities. Instead, the 
Commission adopts a process for updating the competitive market test 
every three years using the data from Form 477 that is already 
routinely filed by providers and thus entails no additional burden.
    384. Wholesale Pricing. The Commission also minimized the impact of 
its rules on small entities by declining to adopt rules proposed by 
certain parties that would have required business data services 
providers to comply with detailed requirements regarding the pricing of 
their wholesale business data services.
    385. Forbearance. To help level the playing field and promote 
regulatory parity for all business data services providers, the 
Commission extends the forbearance from section 203 of the 
Communications Act of 1934, as amended. This expands forbearance 
previously accorded certain price cap LECs to all price cap LECs, 
including those that may be small entities, in the provision of any 
packet-based business data service or circuit-based business data 
service above the DS3 bandwidth level. The Commission also forbears 
from the application of section 203 to DS1 and DS3 end user channel 
terminations, and certain other business data services, in competitive 
counties. These actions are also taken to promote competition and 
broadband deployment. To level the playing field among price cap LECs 
providing packet-based and optical transmission business data services, 
the Commission conforms the forbearance deemed granted to Verizon and 
its successors in interest to that provided other price cap carriers.
    386. Detariffing. To minimize economic impact, the Commission 
provides a transition period to provide price cap incumbent LECs, 
including those that may be small entities, with sufficient time to 
adapt their business data services operations to a detariffing system. 
The Commission does not intend its actions to disturb existing 
contractual or other long-term arrangements, which must continue to be 
adhered to for the length of the contract, and the Commission adopted a 
grandfathering rules for such contracts.

D. Report to Congress

    387. The Commission will send a copy of the Report and Order, 
including this FRFA, in a report to be sent to Congress pursuant to the 
Congressional Review Act. In addition, the Commission will send a copy 
of the Report and Order, including this FRFA, to the Chief Counsel for 
Advocacy of the SBA. A copy of the Order and FRFA (or summaries 
thereof) will also be published in the Federal Register.

E. Data Quality Act

    388. The Commission certifies that it has complied with the Office 
of Management and Budget Final Information Quality Bulletin for Peer 
Review, 70 FR 2664 (2005), and the Data Quality Act, Public Law 106-554 
(2001), codified at 44 U.S.C. 3516 note, with regard to its reliance on 
influential scientific information in the Report and Order in WC Docket 
Nos. 16-143, 15-247, 05-25, and RM-10593.

IX. Ordering Clauses

    389. Accordingly, it is ordered that, pursuant to sections 1, 2, 
4(i)-(j), 10, 201(b), 202(a), 214, 303(r), 403, of the Communications 
Act of 1934, as amended, and section 706 of the Telecommunications Act 
of 1996, 47 U.S.C. 151, 152, 154(i)-(j), 160, 201(b), 202(a), 214, 
303(r), 403, 1302, this Report and Order is adopted and shall be 
effective sixty (60) days after publication in the Federal Register, 
except to the extent expressly addressed below.
    390. It is further ordered that parts 0, 1, 61, 63, and 69 of the 
Commission's rules, 47 CFR parts 0, 1, 61, 63, and 69, are amended, and 
that such rule amendments shall be effective sixty (60) days after 
publication of this Report and Order in the Federal Register, except 
for sections 1.776, 61.45, 61.201, 61.203, and 69.701, 47 CFR 1.776, 
61.45, 61.201, 61.203, 69.701, which contain information collections 
that require approval by the Office of Management and Budget under the 
Paperwork Reduction Act and shall become effective after announcement 
in the Federal Register of their approval by the Office of Management 
and Budget, and on the effective dates announced therein. The Federal 
Communications Commission will publish documents in the Federal 
Register announcing the effective dates.
    391. It is further ordered that pursuant to sections 201(b) and 
202(a) of the Communications Act of 1934, as amended, 47 U.S.C. 201(b), 
202(a), price cap incumbent LECs shall freeze the tariffed rates for 
end-user channel terminations that any price cap incumbent LEC 
continues to tariff in newly deregulated counties for six (6) months 
after the effective date of this Report and Order.
    392. It is further ordered that pursuant to section 61.45(b)(1)(iv) 
of the Commission's rules, 47 CFR 61.45(b)(1)(iv), price cap incumbent 
LECs must file with the Commission, revised tariffs and tariff review 
plans implementing the X-factor for end user channel terminations and 
other special access services subject to price cap regulation, to 
become effective on December 1, 2017.
    393. It is further ordered that pursuant to section 1.115 of the 
Commission's rules, 47 CFR 1.115, the CenturyLink and USTelecom 
Applications for Review are denied.
    394. It is further ordered that pursuant to sections 4(i) and 4(j) 
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 
154(j), the CenturyLink et al. Motion to Strike is denied.
    395. It is further ordered that pursuant to sections 4(i) and 4(j) 
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 
154(j), the AT&T Motion Seeking Additional Information on Fiber Maps is 
denied.
    396. It is further ordered that the Commission's Consumer & 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order to Congress and the Government 
Accountability Office pursuant to the Congressional Review Act, see 5 
U.S.C. 801(a)(1)(A).
    397. It is further ordered, that the Commission's Consumer & 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order, including the Final Regulatory 
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small 
Business Administration.
    398. It is further ordered that, with regard to Docket Nos. 16-143, 
05-25, and RM-10593, should no petitions for reconsideration or 
petitions for judicial review be timely filed, these proceedings shall 
be terminated and the dockets closed.

List of Subjects

47 CFR Part 0

    Classified information, Freedom of information, Government 
publications, infants and children, Organization of functions 
(Government agencies), Postal Service, Privacy, Reporting and 
Recordkeeping requirements, Sunshine Act.

[[Page 25711]]

47 CFR Part 1

    Administrative practice and procedure, Civil rights, Communications 
common carriers, Cuba, Drug abuse, Environmental impact statements, 
Equal access to justice, Equal employment opportunity, Federal 
buildings and facilities, Government employees, Income taxes, Indemnity 
payments, Individuals with disabilities, Investigations, Lawyers, 
Metric system, Penalties, Radio, Reporting and recordkeeping 
requirements, Telecommunications, Television, Wages.

47 CFR Part 61 and 69

    Communications common carriers, Radio, Reporting and recordkeeping 
requirements, Telegraph, Telephone.

47 CFR Part 63

    Cable television, Communications common carriers, Radio, Reporting 
and Recordkeeping requirements, Telegraph, Telephone.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR parts 0, 1, 61, 63, and 69 as 
follows:

PART 0--COMMISSION ORGANIZATION

0
1. The authority citation for part 0 continues to read as follows:

    Authority: Secs. 5, 48 Stat. 1068, as amended; 47 U.S.C. 155, 
unless otherwise noted.


Sec.  0.291  [Amended]

0
2. Amend Sec.  0.291 by removing and reserving paragraph (h).

PART 1--PRACTICE AND PROCEDURE

0
3. The authority citation for part 1 continues to read as follows:

    Authority: 15 U.S.C. 79 et seq.; 47 U.S.C. 151, 154(i), 154(j), 
155, 157, 225, 227, 303(r), 309, 1403, 1404, 1451, and 1452.


Sec.  1.774  [Removed and Reserved]

0
4. Remove and reserve Sec.  1.774.

0
5. Add Sec.  1.776, before the center heading ``Contracts, Reports, and 
Requests Required to be Filed by Carriers,'' to read as follows:


Sec.  1.776  Pricing flexibility limited grandfathering.

    Special access contract-based tariffs that were in effect on or 
before August 1, 2017 are grandfathered. Such contract-based tariffs 
may not be extended, renewed or revised, except that any extension or 
renewal expressly provided for by the contract-based tariff may be 
exercised pursuant to the terms thereof. During the period between 
August 1, 2017 and the deadline to institute mandatory detariffing 
under Sec.  61.201(b), upon mutual agreement, parties to a 
grandfathered contract-based tariff may replace it at any time with a 
new contract-based tariff or with a new or amended contract that is not 
filed as a contract-based tariff.

PART 61--TARIFFS

0
6. The authority citation for part 61 continues to read as follows:

    Authority: Secs. 1, 4(i), 4(j), 201-205 and 403 of the 
Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i), 
154(j), 201-205 and 403, unless otherwise noted.

0
7. Amend Sec.  61.45 by revising paragraph (b)(1)(iv) to read as 
follows:


Sec.  61.45  Adjustments to the PCI for Local Exchange Carriers.

* * * * *
    (b) * * *
    (1) * * *
    (iv) For the special access basket specified in Sec.  61.42(d)(5), 
the value of X shall be 2.0% beginning December 1, 2017, 
notwithstanding any language in Sec.  61.45(b)(1)(i).
* * * * *

0
8. Amend Sec.  61.55 by revising paragraph (a) to read as follows:


Sec.  61.55  Contract-based tariffs.

    (a) This section shall apply to price cap local exchange carriers 
permitted to offer contract-based tariffs under Sec.  1.776 or Sec.  
69.805 of this chapter.
* * * * *

0
9. Add subpart K, consisting of Sec. Sec.  61.201 and 61.203, to read 
as follows:

Subpart K--Detariffing of Business Data Services


Sec.  61.201  Detariffing of price cap local exchange carriers.

    (a) Price cap local exchange carriers shall remove from their 
interstate tariffs:
    (1) Any packet-based business data service;
    (2) Any circuit-based business data service above the DS3 bandwidth 
level;
    (3) Transport services as defined in Sec.  69.801 of this chapter;
    (4) DS1 and DS3 end user channel terminations, and all other 
tariffed special access services, in any market deemed competitive as 
defined in Sec.  69.801; and
    (5) DS1 and DS3 end user channel terminations, and all other 
tariffed special access services, in any grandfathered market as 
defined in Sec.  69.801 for which the price cap local exchange carrier 
was granted Phase II pricing flexibility prior to June 2017.
    (b) The detariffing must be completed thirty-six months after 
August 1, 2017, but detariffing can take place at any time before the 
thirty-six months is completed.


Sec.  61.203  Detariffing of competitive local exchange carriers.

    (a) Competitive local exchange carriers shall remove all business 
data services from their interstate tariffs.
    (b) The detariffing must be completed thirty-six months August 1, 
2017.

PART 63--EXTENSION OF LINES, NEW LINES, AND DISCONTINUANCE, 
REDUCTION, OUTAGE AND IMPAIRMENT OF SERVICE BY COMMON CARRIERS; AND 
GRANTS OF RECOGNIZED PRIVATE OPERATING AGENCY STATUS

0
10. The authority citation for part 63 continues to read as follows:

    Authority: Sections 1, 4(i), 4(j), 10, 11, 201-205, 214, 218, 
403 and 651 of the Communications Act of 1934, as amended, 47 U.S.C. 
151, 154(i), 154(j), 160, 201-205, 214, 218, 403, and 571, unless 
otherwise noted.


Sec.  63.71  [Amended]

0
11. Amend Sec.  63.71 by removing and reserving paragraph (d).

PART 69--ACCESS CHARGES

0
12. The authority citation for part 69 continues to read as follows:

    Authority: 47 U.S.C. 154, 201, 202, 203, 204, 218, 220, 254, 
403.


0
13. Revise Sec.  69.701 to read as follows:


Sec.  69.701  Application of the rules in this subpart.

    The rules in this subpart apply to all incumbent LECs subject to 
price cap regulation, as defined in Sec.  61.3(bb) of this chapter, 
seeking pricing flexibility on the basis of the development of 
competition in parts of its service area for switched access services 
only.
0
14. Add subpart I, consisting of Sec. Sec.  69.801, 69.803, 69.805, 
69.807, and 69.809, to read as follows:

[[Page 25712]]

Subpart I--Business Data Services

Sec.


Sec.  69.801  Definitions.


Sec.  69.803  Competitive market test.


Sec.  69.805  Prohibition on certain non-disclosure agreement 
conditions.


Sec.  69.807  Regulatory relief.


Sec.  69.809  Low-end adjustment mechanism.

Subpart I--Business Data Services


Sec.  69.801  Definitions.

    (a) Business data services. The dedicated point-to-point 
transmission of data at certain guaranteed speeds and service levels 
using high-capacity connections.
    (b) Competitive market test. The competitive market test is defined 
in Sec.  69.803.
    (c) County. A county or county equivalent as defined in Sec.  10.10 
of this chapter. County-equivalents include parishes, boroughs, 
independent cities, census areas, the District of Columbia, and various 
entities in the territories.
    (d) End user channel termination. A dedicated channel connecting a 
local exchange carrier end office and a customer premises, offered for 
purposes of carrying special access traffic.
    (e) Grandfathered market. A county that does not satisfy the 
competitive market test set forth in Sec.  69.803 for which a price cap 
local exchange carrier obtained Phase II relief pursuant to Sec.  
69.711(c).
    (f) Market deemed competitive. A county that satisfies the 
competitive market test set forth in Sec.  69.803.
    (g) Market deemed non-competitive. A county that does not satisfy 
the competitive market test set forth in Sec.  69.803.
    (h) Non-disclosure agreement. A non-disclosure agreement is a 
contract, contractual provision, or tariff provision wherein a party 
agrees not to disclose certain information shared by the other party.
    (i) Special access data collection. The special access data 
collection refers to the data and other information the Commission 
collected from business data services providers and purchasers pursuant 
to its December 18, 2012 Report and Order in WC Docket 05-25.
    (j) Transport includes interoffice facilities, channel terminations 
between the serving wire center and point of presence, and all special 
access services that are described in Sec.  69.114 other than end user 
channel terminations.


Sec.  69.803  Competitive market test.

    (a) The competitive market test is used to determine which counties 
served by a price cap local exchange carrier, as defined in Sec.  
61.3(bb) of this chapter, are deemed competitive and therefore warrant 
relief from price cap regulation and detariffing of DS1 and DS3 end 
user channel terminations, and certain other business data services, 
sold by such carriers.
    (b) Initial test. A county is deemed competitive in the initial 
competitive market test if:
    (1) Either 50 percent of the locations with business data services 
demand within the county are within one half mile of a location served 
by a competitive provider based on data from the special access data 
collection, or 75 percent of the census blocks within the county are 
reported to have broadband connection availability by a cable operator 
based on Form 477 data as of December 2016. Lists of counties deemed 
competitive, non-competitive or grandfathered by the initial 
competitive market test are published on the Commission's Web site.
    (2) The DS1 and DS3 end user channel terminations sold by price cap 
local exchange carriers in counties deemed competitive are no longer 
subject to price cap regulation and are detariffed according to Sec.  
61.201.
    (c) Subsequent tests. The results of the initial competitive market 
test will be updated every three years following the effective date of 
the initial test.
    (1) A county will be deemed competitive in a subsequent competitive 
market test if 75 percent of the census blocks within the county are 
reported to have broadband connection availability by a cable operator 
based on Form 477 data as of the date of the most recent collection.
    (2) No later than three years following the effective date of the 
previous test, the Wireline Competition Bureau will conclude a 
subsequent test and will publish a revised list of counties deemed 
competitive at the conclusion of the test.
    (3) A county deemed competitive in the competitive market test will 
retain its status in subsequent tests.


Sec.  69.805  Prohibition on certain non-disclosure agreement 
conditions.

    (a) In markets deemed non-competitive, buyers and sellers of 
business data services shall not enter into a tariff, contract-based 
tariff, or commercial agreement, including but not limited to master 
service agreement, that contains a non-disclosure agreement as defined 
in Sec.  69.801(g), that restricts or prohibits disclosure of 
information to the Commission, or requires a prior request or legal 
compulsion by the Commission to effect such disclosure.
    (b) Confidential information subject to a protective order as 
defined in Sec.  0.461 of this chapter in effect as of the effective 
date of a tariff, contract-based tariff, or commercial agreement must 
be submitted pursuant to the terms of that protective order or 
otherwise pursuant to the Commission's rules regarding submission of 
confidential data in Sec. Sec.  0.457(d) and 0.459.


Sec.  69.807  Regulatory relief.

    (a) Price cap local exchange carrier transport and end user channel 
terminations in markets deemed competitive and in grandfathered markets 
for a price cap carrier that was granted Phase II pricing flexibility 
prior to June 2017 are granted the following regulatory relief:
    (1) Elimination of the rate structure requirements in subpart B of 
this part;
    (2) Elimination of price cap regulation; and
    (3) Elimination of tariffing requirements as specified in Sec.  
61.201 of this chapter.
    (b) Price cap local exchange carrier end user channel terminations 
in markets deemed non-competitive are granted the following regulatory 
relief:
    (1) Ability to offer volume and term discounts;
    (2) Ability to enter into contract-based tariffs, provided that:
    (i) Contract-based tariff services are made generally available to 
all similarly situated customers;
    (ii) The price cap local exchange carrier excludes all contract-
based tariff offerings from price cap regulation pursuant to Sec.  
61.42(f) of this chapter;
    (3) Ability to file tariff revisions on at least one day's notice, 
notwithstanding the notice requirements for tariff filings specified in 
Sec.  61.58 of this chapter.
    (c) A price cap local exchange carrier that was granted Phase II 
pricing flexibility prior to June 2017 in a grandfathered market must 
retain its business data services rates at levels no higher than those 
in effect as of April 20, 2017, pending the detariffing of those 
services pursuant to Sec.  61.201 of this chapter.


Sec.  69.809  Low-end adjustment mechanism.

    (a) Any price cap local exchange carrier or any affiliate of any 
price cap local exchange carrier that had obtained Phase II pricing 
flexibility under Sec.  69.709 or Sec.  69.711 for any service in any 
MSA in its service region, or for the non-MSA portion of any study area 
in its service region, shall be prohibited from making any low-end 
adjustment pursuant to Sec.  61.45(d)(1)(vii) of this

[[Page 25713]]

chapter in all or part of its service region.
    (b) Any price cap local exchange carrier or any affiliate of any 
price cap local exchange carrier that exercises the regulatory relief 
pursuant to Sec.  69.807 in any part of its service region shall be 
prohibited from making any low-end adjustment pursuant to Sec.  
61.45(d)(1)(vii) of this chapter in all or part of its service region.
    (c) Any price cap local exchange carrier or any affiliate of any 
price cap local exchange carrier that exercises the option to use 
generally accepted accounting principles rather than the uniform system 
of accounts pursuant to Sec.  32.11(g) of this chapter shall be 
prohibited from making any low-end adjustment pursuant to Sec.  
61.45(d)(1)(vii) of this chapter in all or part of its service region.

[FR Doc. 2017-10713 Filed 6-1-17; 8:45 am]
BILLING CODE 6712-01-P