April 3, 2017 12:21 PM

BDS Returns from the Looking-Glass

Last Thursday, the FCC released its Draft Report & Order ("Draft R&O") in the Business Data Services ("BDS") (formerly "Special Access") proceeding.  At first glance, the Commission's Draft R&O does a lot of things right; not least of which is finding the needle of rational, targeted rules in a gigantic 15 year old haystack of a public record.  

As we've explained previously, then-Commissioner Pai's characterization of the previous Commission's "analysis" in its Tariff Investigations Order/FNPRM in this proceeding as "a trip through the looking-glass" was not wrong.  In the Lewis Carroll story, Alice escapes from the looking-glass world by imposing rationality (she grabs and shakes the Red Queen--who she blames for all the chaos of the day--which then places the Red King in "checkmate," thus ending her dream by ending the metaphorical "game").  See Wikipedia summary

Similarly, Chairman Pai returns the FCC's BDS proceeding to reality by seizing control of a chaotic record and wringing some logic out of the multiplicity of data in the Commission's possession (compiled at great cost to both BDS providers and the Commission).  Pai, thereby, places the previous Commission's focus on the preferred outcomes of specific parties in "checkmate," and returns the proceeding to reality. But, what does this mean?

Return to Procedural Integrity/Reliance on Public Record

While many are aware of Adam Smith's observation that, "[p]eople of the same trade seldom meet together . . . but the conversation ends in a conspiracy against the public," few are aware of how the paragraph ends:

But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
Wealth of Nations, Book I, Ch. 10, Para. 82 (emphasis added). Chairman Tom Wheeler's FCC was arrogantly dismissive of both Smith's initial concern--that competitors' collaborations might harm the public--as well as Smith's admonition that the "law" should not promote, much less condone, such assemblies between competitors.

Thus, Wheeler supported adopting a negotiated proposal between two self-interested parties that would have imposed across-the-board, nationwide price regulation on any service below 50Mbps.  Worse still, as we noted then, the Wheeler FCC was actively manipulating procedural rules in order to foreclose public comment (that the Commission's own evidence did not support this privately negotiated outcome).  By contrast, the current Commission's Draft R&O focuses entirely on the record evidence and getting its analysis correct.  

Eliminates Barriers to 5G Backhaul Investment

The FCC, on its 5G page, acknowledges that the many benefits of the projected speed/capacity advances (10X-100X LTE) of 5G are critically dependent on massive fiber investment to provide backhaul to the many more small cell sites that this technology requires.  Even former FCC Chairman, Tom Wheeler, acknowledged the necessity of increased fiber backhaul in this June 2016 speech. See p.6.

Wheeler, however, was prepared to disregard the consensus view of economists that governmental price controls generally have the paradoxical effect of reducing both the quality, and availability, of the product/service subject to price controls. See, e.g., experience w/rent control policies.  Instead, Wheeler embraced the idea (of interested parties) that the FCC should set price limits on all services below a certain threshold.  

This Multichannel News article from 9 months ago, notes that 50Mbps was considered "table stakes" and likely would have ultimately included even higher capacity services.  At this time, speculation about a radical change in regulatory policy was rampant, and it is almost certain that some plans for additional fiber investment were put on hold.

We can see further evidence of the chilling effect of previous threats of price regulation in the FCC's tentative decision (in its Draft R&O) to affirmatively classify certain new competitive services (Ethernet over legacy cable facilities) as "private carriage."  In doing so, the FCC rejects the previous Commission's desire to classify--as a predicate to expanded price regulation--all BDS services as common carrier telecommunications services.  See Draft R&O, paras 253-273. This classification allows these new entrants to participate in the provision of fiber transport/wireless backhaul without being subject to legacy common carrier regulations, like the obligation to serve all customers on similar terms.    

Rationally Protecting Consumers

The measure of good economic regulation is that it works to limit market power where competition does not yet exist.  In 2002, AT&T (the CLEC) filed its Petition for Rulemaking because, after only two years, the Commission's 1999 Pricing Flexibility Order allowed widespread deregulation (throughout the entire MSA) on the thinnest of theoretical evidence ("collocation" in a small number of ILEC central offices.)

In the Draft R&O, the FCC fixes this problem in two critical ways.  First, it reduces the size of the geographic market over which deregulation is granted.  On average, the Commission shows that an MSA is about 7X larger than the county-wide market that the FCC proposes.  

Second, the FCC demands real-world proof that effective competition exists in the county, before granting deregulation.  At least 50% of the locations in the county that use BDS must be within a half mile of a competitive network, or at least 75% of the census blocks in the county must be served by mass-market cable broadband service.  

The Commission estimates that, under present market conditions, most of the 3,100 counties in its initial market test computation (about 63%) will be considered "competitive," and deregulated entirely.  See Draft R&O, para 146.  Customers still in "non-competitive" counties, however, will now be even better protected by regulation, because the FCC re-imposed the dormant-since-2003 "productivity factor," which allows customers to benefit (in the form of lower rates) from expected ILEC cost declines. See Draft R&O, paras 190-248.

All Things Considered . . .

Chairman Pai deserves a lot of credit for coming close to the ideal of intelligent regulation: rules that are applied on a granular basis where needed, and eliminated entirely in those product/geographic markets where competition is sufficient to provide a superior result than regulation.  Not everyone will like the FCC's approach, but, it efficiently solves the problem identified by AT&T in 2002--and late is better than never.

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