Economics and Technology, Inc. -- Views and News, December 2010

December 2010

Continue reading ETI Views and News at econtech.com, or download a printer-friendly version.

Will the ILECs delay the FCC’s latest effort to collect data on special access competition in one of the longest-running FCC dockets?

The major ILECs have long contended that their Special Access services face extensive competition from CLECs, and that if the FCC would only collect data on just how many buildings were “lit” by CLEC-owned facilities, the ILECs’ claim would be borne out. So on October 28, the FCC went ahead and issued a Public Notice seeking voluntary data submissions from CLECs detailing the facilities they own that are capable of providing services that compete with ILEC Special Access. Faced with the prospect that such CLEC hard data might actually refute the ILECs’ claims, the ILECs now appear to be setting the stage to argue that the CLEC data being sought by the FCC will not provide an adequate basis for a decision in the long-running Special Access proceeding, and on December 1 the ILECs, through their trade organization US Telecom, made an ex parte submission purportedly to ask that the FCC expand and clarify the outstanding data request.

The ILECs now claim that “the data the FCC receives [in response to the data request] will quickly become outdated and will miss significant competitive activity” and that the Commission should collect data about CLEC operational plans two years out (through the end of 2013). After having spent a decade claiming (but without any evidence) that competition was robust and thereby attempting to direct the FCC’s gaze away from the hundreds of filings and thousands of pages of evidence documenting ILEC market power and the abuse thereof as it relates to special access services, it seems that the ILECs fear that a complete view of existing CLEC facilities will confirm that in many places that competition is all but nonexistent. Since delaying the decision has proven to be enormously profitable for the ILECs over the last decade, it is no surprise that the groundwork for further delay of a decision has now been laid.

Successful delaying tactics for almost a decade

Back in 2002, it was the enterprise customer members of the Ad Hoc Telecommunications Users Committee, not competitors, that first directed the FCC’s attention to evidence demonstrating that the level of competition in the special access market was insufficient to discipline ILEC pricing in those areas that had recently been granted pricing flexibility. Shortly thereafter, (the old, pre-merger-with-SBC) AT&T filed a Petition for Rulemaking with the FCC asking it to reform the regulation of ILEC Special Access. Customers and competitors filed reams of evidence supporting the AT&T Petition and documenting the lack of competition. The ILECs’ response was simply to claim that competition from CLECs was intense. SBC’s comments referencing “the hundreds of competitors that provide special access services in markets across the country” and claiming that CLEC’s were generating “as much as 40%” of total special access revenues were typical both as to their overstatement and their lack of quantitative support. By 2004, pre-merger AT&T had filed a Mandamus Petition with the courts asking them to force the FCC to act. Facing intervention by the court, the FCC promised that it was about to take action and in January 2005 it issued a new Special Access NPRM, CC Docket 05-25. Five years on, that case is still pending and is, in fact, the proceeding in which the new FCC data request and US Telecom’s ex parte earlier this month were submitted.

What the FCC didn’t tell the court back in 2004 was that its action would not include a decision on any of the issues that were the subject of the Mandamus, only a repeat of the same questions that had originally been included in the old AT&T Rulemaking. In the summer of 2005, parties on both sides of the issue submitted comments and data. The ILEC claims at the time were the same as before: Just look – competitors are on every corner. In 2007, more than two years after the initial submissions in 05-25 and with no evidence that the 2005 record had even been reviewed, the FCC issued a Public Notice indicating that the record compiled in 2005 may have become stale, and asking parties to “refresh the record.” Again, parties complied and submitted voluminous data to the Commission.

Fast-forward two more years to November 2009 (almost five years after the original NPRM) and the FCC once again turned its attention to Special Access, this time seeking comment on the “Analytic Framework” it should use to evaluate and decide the issues in the docket. In the meantime, the vast majority of the reporting tools and cost accounting requirements that had applied to the largest ILECs had been eliminated in other proceedings, leaving the FCC with little or no current cost or operational data related to special access – not even how much revenue was being generated by the ILECs from these services.

Faced with vastly different pictures of the special access market being painted by the opposing sides, the FCC has now offered specifics as to the data it believes it needs to evaluate market conditions for special access services. The voluntary data request would collect data designed to evaluate the levels of actual and potential competition. Assuming compliance by competitive providers with the FCC’s requests, the responses should once and for all nail down whether or not customers at the vast majority of commercial locations around the county have any alternatives to ILEC special access. And if prior efforts at compiling this type of information (including a 2006 report by the Government Accountability Office) are any indication, it should be evident that the longstanding ILEC monopoly over service at the vast majority of commercial buildings is as entrenched as ever.

Delay translated into massive ILEC profits

For nearly a decade, the ILECs have successfully fended off any finding (either for or against them) by the FCC as to the level of competition in special access. In its latest ex parte submission, US Telecom seems to confirm that this tactic of delay will most certainly continue. In addition to a few valid requests for “clarification,” US Telecom has asked for a number of changes and expansions in the data to be collected. Here’s one example:

The FCC had requested data from carriers as of year-end 2009. In response, US Telecom states: “We also emphasized that by requesting data that will be more than a year old at the time of its filing, it will not be possible for responses to the current data request to reflect the very dynamic changes currently happening in this marketplace.” Considering that for more than a decade now the ILECs have been portraying the special access market as intensely competitive, why would the use of 2010 rather than 2009 data make any difference? Are they now saying there was no competition as of the end of 2009 but by the end of 2010 all that will have changed? Could it be that the ILEC's are afraid that the data collection effort will reveal that just one year ago CLEC-owned facilities connected to embarrassingly few commercial locations around the country? Are they saying they had market power at the end of 2009 - but not now? Are they really trying to convince the FCC that in this capital-constrained, down economy the CLECs have suddenly been able to finance and connect to so many more locations in this single year than they have in the previous decade that the competitive picture has drastically changed? It is hard to reconcile the ILECs’ newest claim that data for year end 2009 will be too old to adequately demonstrate the level of competition with their decade-old claims of robust special access competition from “hundreds” of CLECs generating “as much as 40%” of special access revenues. Moreover, since the FCC has made clear that it will be releasing a second, compulsory data request sometime in the middle of 2011 – wouldn’t it make sense to ask for the more recent data at that time, instead of delaying the current process?

Using data from the last year (2007) for which the ILEC data necessary to evaluate the profitability of special access was provided to the FCC, we determined that special access prices were roughly double what they would have been under prior FCC regulated pricing rules, and were generating in the range of $7- to $8-billion per year in excess profit, translating into close to $10-billion in annual overcharges once tax effects are taken into account (see our January 2010 report, Longstanding Regulatory Tools Confirm RBOC Market Power: A Defense of ARMIS (available here.)

Prices have increased since that time (as certain price reductions required as conditions for approval of the SBC/AT&T and Verizon/MCI mergers have expired), and financial results as presented in ILEC 10-K filings and other reports to investors confirm substantial growth for high capacity special access services. That, together with steady prices and cost savings from productivity gains and work force reductions that have occurred over that same time frame, leaves little doubt that the level of annual overcharges is greater today than in 2007 – perhaps as much as $1-billion per month.

We estimate that cumulatively over the past ten years the nonregulation of ILEC special access services has generated some $50-billion in overcharges for these critical inputs to businesses, institutions and governments across all sectors of the US economy. Additional delay in completing this docket will mean more bloated profits on what is, in many places, a monopoly service; those trying to compete against the ILECs’ long distance and wireless affiliates will continue to be hamstrung by inflated prices for critical inputs; and American businesses will keep having to spend too much on special access instead of using those funds to create jobs (something the ILECs are not doing), foster overall economic growth, and make the US more competitive internationally. Delay, for whatever reason, inures to the ILECs’ benefit and keeps the drag on the US economy from such overcharges firmly in place.

As long as the FCC permits them to do so, the ILECs will no doubt pursue these same delaying tactics and raise spurious objections to any data that demonstrates their continued market power, tactics that have produced billions in excess profits. The FCC must not allow this to continue, as further delay will serve only to extend the substantial economic harms that have already occurred.

If you would like more information on this subject, please contact Susan M. Gately.

Read the rest of Views and News, December 2010.

About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.