June 27, 2016 10:53 AM

Inside the Looking Glass: the FCC's BDS Order

In his Dissenting Statement from the FCC's recent Business Data Services Order and Further Notice of Proposed Rulemaking ("BDS Order"), FCC Commissioner Ajit Pai compares the FCC's decision to expand its regulation of the "business data services" market to the world Alice encountered in  "Through the Looking Glass, and What Alice Found There."  In order to give you some idea of what Commissioner Pai was talking about, let's just look at some of the most obvious errors the FCC makes in its wholesale abandonment of rational decision-making.
 
Background

Business data services ("BDS") are dedicated circuits that transmit data at speeds of 1.5Mbps or 45Mbps between the customer's location and another point on the incumbent LEC ("ILEC") network.  After the break-up of AT&T in 1982, the FCC set prices for the competitive "long-distance" inputs (supplied by the ILECs) of switched and "special" access.  Almost 35 years later, in its BDS Order, the Commission renames "special access" as BDS, but continues price regulation.

In its BDS Order, the FCC makes a finding that certain provisions in the legacy incumbent telephone company discount tariffs for business data services are "unjust and unreasonable." Notably, the FCC made no finding as to the "just and reasonable" nature of the ILECs' basic "month-to-month" retail rates for BDS. 

The Commission found only that certain terms and conditions the ILECs required in order for a customer to qualify for the largest discounts off the retail rate were "unjust and unreasonable."  Moreover, the Commission also found that the some of the penalties (for the customer failing to meet purchase volume, or contract term, commitments) allowed the ILECs to recover more from a "breached" contract than the ILEC would have received if the customer had fully performed. 

The Threshold Fallacy

From the outset, we can readily see that the FCC has a bit of a logic problem that it needs to explain, before it can resolve the tariff complaints.  The "month-to-month" BDS rates have not been challenged as unjust/unreasonable, nor do these rates require a purchaser to agree to buy any specific number of circuits or hold the circuits for any period of time. 

Given that any customer can purchase BDS on "just and reasonable" rates, terms, and conditions, then wouldn't any rates below the "month-to-month" BDS rates--regardless of terms and conditions--have to be, by definition, just and reasonable rates?  The Commission never explains how it can rationally determine that any terms and conditions--which result in lower prices than the already-established-just-and-reasonable-prices--can be "unjust and unreasonable."

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Where's the Law?

When you read the BDS Order, one of the first things you'll notice--as opposed to every other FCC Order--is that the Commission never explains the prevailing legal standard.  Of course, the FCC notes that Section 201(b) of the Communications Act requires that,

[a]ll charges . . . for and in connection with such communication service, shall be just and reasonable, and any such charge . . . that is unjust or unreasonable is declared to be unlawful . . .
See 47 U.S.C. Sec. 201, but this tells us nothing about what the "just and reasonable" requirement means

Moreover, because "just and reasonable" is an unambiguous, statutory term, the Commission will get no deference from the Court of Appeals.  So, why wouldn't the Commission at least get the precedent it wants to rely on in its Order?  

What the Law Says

In Verizon v. FCC, 535 U.S. 467 (2002), the Supreme Court's review of its Iowa Utilities Board remand to the 8th Circuit, Justice Souter, writing for the majority, offers a historical summary of the evolution of the "just and reasonable" standard with respect to rates between businesses (vs. rates between the utility and the public).

When commercial parties did avail themselves of rate agreements, the principal regulatory responsibility was not to relieve a contracting party of an unreasonable rate . . . but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.

See, Verizon, at p. 479 (internal citations omitted).  Justice Souter also notes that, with respect to rates/terms set by contract between two commercial providers, the Court has previously stated that,

the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest--as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden or be unduly discriminatory.

Id. at pp. 479-480 (citing FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956)). 

Thus, Supreme Court precedent, with respect to "just and reasonable," would limit the Commission's ability to step in and void a contract tariff rate/term between two sophisticated entities to situations where the rate was too low, and reflected an improvident "giveaway" to a commercial customer, at the expense of other customers. 

Competition Cannot Be Harmed By Limitations on BDS Discount Availability

In its BDS Order, the FCC states that it has previously expressed concerns about the "potential anticompetitive nature" of the ILECs' term and volume discount plans. Order at para 92.  The latest expression of concern the FCC cites is from 1996--when Congress gave the FCC a much more effective tool for determining prices/terms between ILECs and their competitors--the Telecommunications Act of 1996, which allows the FCC to order ILECs to provide access to "unbundled network elements" ("UNEs"), at rates much lower than BDS tariff rates, if the FCC believes that competitors would be impaired in their ability to compete "but for" access to the UNEs. 

But, the Commission knows the CLECs/wireless carriers cannot credibly make such a claim.  In 2004, the D.C. Circuit pointed out,

[a]s we noted with respect to wireless carriers' UNE demands, competitors cannot generally be said to be impaired by having to purchase special access services from ILECs, rather than leasing the necessary facilities at UNE rates, where robust competition in the relevant markets belies any suggestion that the lack of unbundling makes entry uneconomic.
U.S. Telecom Ass'n. v. FCC, 359 F.3d 554, 591 (D.C. Cir. 2004) (emphasis added) .

***

The FCC and the ILECs' wholesale BDS customers have known for quite a while that the FCC couldn't credibly require ILECs to give them access to UNEs, because BDS availability has stimulated, not thwarted, competition in related markets.  But, the statutory term, "just and reasonable," sort of sounds like an unbounded grant of Goldilocks-level discretion.  The FCC, seeing saw no reason to reflect on logic, or precedent, moved ahead with its plans to help another privileged class of competitors. And that is how the FCC went Through the Looking Glass.
 

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