Special-access proceeding wastes FCC's time and companies' capital

Anna-Maria Kovacs

Anna-Maria Kovacs

America's wireline telecommunications services market has changed radically in the last few years. Cable, wireless, and voice-over-IP providers have won nearly two thirds of the residential market. Numerous competitors have taken a third of the traditional business market. In the fast-growing Internet Protocol (IP) world which is displacing traditional technologies, Level3 is the largest carrier of Internet traffic, and new players like Google and Comcast have entered the top-ten. Enterprises can also select from an array of providers of the newest technologies, like Ethernet over fiber: Nearly sixty percent of that market is served by names like tw telecom, Cox and Time Warner Cable, XO, Level3, and Cogent. Yet heavy regulation of the traditional phone companies continues.

One exception is the limited flexibility that the largest phone companies--AT&T, Verizon, CenturyLink--have in pricing some special access services in some cities, where they have demonstrated that they have effective competitors. Most of these less-regulated circuits operate at 1.5 megabits per second (Mbps), well below the broadband goals the FCC established in 2010 and below the prevalent speeds in a market which is rapidly moving to Gigabit Ethernet. In other words, these circuits are relics of another age, increasingly obsolete but still used because of various short-term considerations. Yet the Federal Communications Commission (FCC) has been asked to reregulate them.

To its credit, the FCC prides itself on its focus on data, and the current special access proceeding has exemplified that. The FCC held a workshop and made two comprehensive data requests. Unfortunately, because these requests were voluntary, many in the industry have not been responsive, so that the FCC lacks the fundamental data it needs to make an informed decision. The record relies heavily on 2007 cost data that was badly flawed at the time and is completely obsolete today. Contradictions abound, within the record itself as well as with parties' statements to their own investors.

While a coalition of enterprise customers claims prices are too high, Level3 and others claim they can't compete against the heavily discounted term plans already in the market. TW telecom and Level3 protest that the phone companies should not be allowed to lock-in customers with multiyear contracts, while telling investors that their own customer base is locked in. In fact, 60 percent of tw telecom customers are on contracts of three or more years according to a May 2012 investor presentation, and the average length of Level3's contracts for private line and fiber circuits is 11.5 years according to its 2012 10K filing.

Sprint and T-Mobile want lower prices for special access they use for backhaul. i.e., circuits that carry traffic to their cell-sites, claiming they can't afford to build their own. But they told investors in presentations as far back as 2010 that they will replace all of these circuits with Ethernet- or IP-over-fiber by the end of 2013, combining leases from a variety of providers with their own build-out. In other words, they demand that the phone companies invest capital in facilities that are so obsolete, they will be useless and unused by the end of 2013--and they demand to lease those without contracts that might help ensure recovery of that capital. They demand the right to waste the phone companies' capital on obsolete facilities, so they can spend their own on building state-of-the-art facilities.

But it is not only the phone companies' capital they are wasting. Given that many of the parties demanding special access at lower prices have made it clear they will abandon these circuits within a year or two, their demands are also a waste of the FCC's resources.

The FCC is focused on bringing broadband to all Americans, on increasing broadband adoption by groups that are still lagging, on making spectrum available to improve the wireless experience for consumers, on building an IP-based interoperable wireless public-safety network--and these efforts require its full resources. But if the FCC must spend its time on this proceeding, it should at least get full cooperation from all parties when it makes its third data request, so that it can have the facts it needs to finally put this issue to rest.

Anna-Maria Kovacs is a Visiting Senior Policy Scholar at Georgetown University's Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.