April 3, 2017 12:21 PM
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.
June 30, 2016 4:45 PM
Earlier this week, I had a post
explaining just how far afield the Tariff Investigations Order
portion of the FCC's special access, now "business data services" ("BDS"), Tariff Investigations Order and Further Notice of Proposed Rulemaking ("FNPRM")
strayed from rational decision-making. Unfortunately, since Chairman Tom Wheeler has taken the helm of the FCC, irregular departures from reasoned--and, more importantly, fair--decision-making have become the norm for this proceeding. Procedurally Fair?
Yesterday, AT&T posted a statement
on its public policy blog once again
drawing attention to the lack of procedural due process with which AT&T believes the FCC has conducted its BDS inquiry. AT&T's Senior Vice President--Federal Regulatory, Bob Quinn provided a detailed description of the Commission's latest procedural irregularity: the Commission's introduction into the record of this 228 page filing
containing previously-unseen revisions/critiques/analyses of the work of the FCC's 3d party economic expert--on the same day that public comments were due
. AT&T concludes that,
the [FCC's] lack of due process only reinforces that this agency is driving to reach a pre-ordained outcome.
See, AT&T Public Policy Blog
. AT&T's statement was its second
this year (previously here
AT&T's charges deserve more attention than "ordinary" criticisms of adversely-affected parties, because not only do AT&T's complaints refer to procedural fairness
(not whether the FCC agrees with AT&T), and its previous complaint about this issue came 2 months before the company suffered an adverse decision
. Finally, AT&T's concerns--that the Commission is driving toward a pre-ordained outcome--seem to be supported by independent events (from those cited by AT&T) taking place in the FNPRM
proceeding this week.The INCOMPAS-Verizon Proposal Advances
As mentioned in a previous post
, on April 7th, INCOMPAS (the CLEC trade association) and Verizon started combining
their BDS regulatory advocacy. Chairman Wheeler lauded
the proposal immediately, as did the most politically influential
lobbying/interest group here
, and the FCC prominently mentioned the proposal in the first paragraph of its pending FNPRM. See Order/FNPRM
at para. 159.
Earlier this week, on June 27th, INCOMPAS and Verizon sent in another joint letter
("INCOMPAS-Verizon June 27th Letter")--elaborating on the parties' previous "compromise" proposal. Chairman Wheeler seems unlikely to share Adam Smith's skepticism
[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Thus, we can expect the Commission to take direction from this second, more specific, appeal for greater regulation.Despite Contradicting the FCC's Own "Findings"
The INCOMPAS-Verizon proposal clearly has traction with the Chairman's Office, at a minimum. This is in no way more apparent than in the fact that the principle point of the letter would require the Commission to immediately renounce one of the "key findings" in its FNPRM
--yet, the parties feel no obligation to address, or explain, this apparent inconsistency with the market realities, as seen by the Commission.
In its FNPRM
, the FCC lists as one of its "key geographic market findings" the observation that,
[p]otential competition is important, that is, nearby suppliers can constrain BDS prices. For example, we find that fiber-based competitive supply within at least half a mile generally has a material effect on prices of BDS with bandwidths of 50 Mbps or less, even in the presence of nearby UNE-based and HFC-based competition.
at para 161. In other words, the FCC observes that many areas of the country exhibit competitive characteristics
, notwithstanding the number of actual competitors offering service in these census blocks
. Instead, the Commission observes, the presence of a potential competitor within a half mile of a building will constrain the prices of every other competitor actually serving the building--even for the smallest capacities of bandwidth (50 Mbps and below).
Compare, however, the "compromise" offered by INCOMPAS and Verizon that,
we agree that all Business Data Services at or below a specified threshold should be deemed non-competitive in all census blocks. We agree that the specified threshold should be no lower than 50 Mbps.
See, INCOMPAS-VZ June 27th Letter
at p. 2 (point 2). And, in case you're wondering what a "non-competitive" designation means, the parties "support ex ante price regulation for all Business Data Services deemed non-competitive." Id
. (point 6).
Thus, while the FCC makes a "key finding" that prices are constrained--even at the lowest capacity levels--without regulation
in many parts of the country (notwithstanding the number of actual competitors
selling service in these areas), INCOMPAS and Verizon urge the Commission to adopt a nationwide presumption that the opposite is true. Given the apparent influence of these parties with this Commission (and the undisputed clout of those supporting this compromise), I'd be willing to bet that the Commission ends up believing the advocacy of INCOMPAS and Verizon over "its own lyin' eyes."
It's easy to dismiss the protestations of parties that don't prevail in a Commission matter as "sour grapes." But, it's harder to ignore complaints--before a party has even lost
--that they won't get a fair chance to be heard, then the integrity of the system is called into question and we should all be interested. Finally, concerns about the FCC moving toward a pre-ordained outcome are worse still when any casual observer can notice that some parties have a map to that pre-ordained destination--and others, including the public, are just along for the ride.
June 27, 2016 10:53 AM
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." 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.
, 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.