AT&T, Verizon, CenturyLink special access pricing practices face new FCC investigation

AT&T (NYSE: T), Verizon (NYSE: VZ), CenturyLink (NYSE: CTL) and other ILECs' special access pricing plans are facing a new FCC investigation over claims that these carriers are implementing unreasonable terms and conditions in their plans.

By freeing up the special access market -- which competitive local exchange carriers (CLECs) use where they don't have their own facilities to fulfill off-net business circuit requests for business customers, schools, libraries, hospitals and government offices -- competitive carriers say it will encourage additional competition.

In a filing, the FCC said that it has begun looking at claims cited by a number of competitive providers, including Birch, BT, Level 3, Windstream and XO that allege tariff pricing plans of AT&T, CenturyLink, Frontier, and Verizon "are unreasonable, anticompetitive, and lock up the vast majority of the demand for TDM-based business data services -- assertions that the incumbent ILECs have disputed."

The FCC's Wireline Competition Bureau said that in order to get a better understanding of the issue from the perspective of the CLECs and ILECs, "it intends to gather sufficient information to enable the full Commission to decide whether and how to resolve these allegations."

Its investigation will focus on TDM-based data services such as DS1 and DS3 that CLECs purchase from the ILEC to deliver services to business locations in areas where they could not prove out a business case to build out their own fiber facilities.

Although Ethernet services continue to grow, the FCC's own preliminary analysis of special access data illustrates that TDM-based service revenues "continue to make up in the range of sixty percent of the roughly $40 billion." Further, the FCC found that in 2013 incumbent telcos got about three-quarters of the $20 billion in annual revenues from DS1 and DS3 TDM sales and nearly "two-thirds of all revenue from TDM sales."

Cable operators like Comcast and Time Warner Cable and other wholesale providers like Level 3 and XO have been aggressively building out next-gen wholesale facilities.

Comcast recently announced that it created a new business unit focusing on Fortune 1000 businesses that can leverage its growing fiber-based Ethernet services.

Likewise, Level 3 through its acquisition of tw telecom surpassed Verizon as one of the largest Ethernet service providers on Vertical Systems Group's U.S. Ethernet Leaderboard. Meanwhile, Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC) and Cox -- are now the fifth, sixth and eighth largest Ethernet providers in the United States according to Vertical Systems Group's Ethernet Leaderboard.

Despite the growth competitive carriers have seen in the retail and wholesale Ethernet segments, the reality is these companies still lack the coverage ubiquity of the incumbent telco networks.

Citing GeoResults' Q3/2014 GeoAnalytic Report, Level 3 said in a filing that out of 20 million business buildings, which include 3.5 million that include more one business, CLECs' last mile facilities only reach a small portion of that figure. Level 3 currently has 30,000 lit fiber buildings, while XO has nearly 4,000, for example.

XO said in an earlier filing that "[i]n virtually all markets i which XO operates, price cap LEC facilities retain a unique level of network coverage such that the clear majority of XO's special access requirements must be obtained from the price cap LECs."

A key issue of concern for competitive providers is the incumbent local exchange carriers' so-called demand lock-up plans for DSn-based special access services.

Level 3 said in a filing that to be able to obtain discounts from the "incumbents' rates, buyers must commit to purchasing the incumbents' services for long periods of time (often 5-7 years)."

News of the FCC's special access investigation was embraced by competitive service providers like XO Communications and industry groups such as COMPTEL.

XO, which has taken a success-based approach to lighting buildings with fiber, launched an initiative in 2014 to invest up to $500 million to grow its nationwide network.

Chris Ancell, CEO of XO Communications, a nationwide CLEC that augments its growing fiber network with copper-based facilities to deliver Ethernet over Copper (EoC), said the investigation could potentially open up more competitive rates for competitive players.

"Special access is critical access for businesses," Ancell said in a statement.  "Today the FCC took an important step toward increased competition in the business broadband marketplace by addressing burdensome lock-up terms and conditions."

Chip Pickering, CEO of COMPTEL, agreed with XO and others, adding that by dealing with lock-up plans the FCC will foster new investments.

"These lock up plans are tethering customers to old technology and incumbent networks," Pickering said. "In order to speed the tech transitions, we must address these anti-competitive terms and conditions and unleash competition. This will be a fast, market-driven approach to opening new markets for investment."

Perhaps not surprisingly, AT&T was quick to criticize the FCC's investigation move, saying that CLECs have a wide array of choices for special access services besides the ILECs.

"Opening a tariff investigation on special access services is a step towards rate re-regulation in a space that is highly competitive and getting more so as cable companies and other new entrants aggressively compete," said Frank Simone, VP of federal regulatory for AT&T in a blog post. "The terms the Commission is reviewing are commonplace in most commercial contracts and in fact are being used by our competitors in their own contracts. Each day the Commission wastes investigating and interfering in commercial agreements between companies that build infrastructure and those that do not is a day it is not encouraging fiber investment or looking boldly towards the benefits those investments will provide to consumers."

For more:
- see this FCC filing (PDF)
- WSJ has this article
- see this AT&T blog post

Related articles:
Level 3, Birch and BT Americas say FCC has power to regulate ILEC special access rates
Level 3: Freeing CLECs from ILEC lock-up plans for special access can spur $86M revenue boost
Verizon joins ILEC chorus against special access, saying Ethernet services should not be regulated
Windstream says FCC's mobile broadband testing should mirror wireline broadband

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