Level 3: Freeing CLECs from ILEC lock-up plans for special access can spur $86M revenue boost

Level 3 says that incumbent local exchange carriers' demand lock-up plans for DSn-based special access services will have a number of harmful effects on competitive carriers. More practically, though, easing restrictions on who they buy bandwidth from could boost competitive carriers' revenues by as much as $86 million combined.

The provider purchases such services to satisfy business customers in locations where it has not been able to build out fiber.

Demand lock-up requires wholesale buyers like Level 3 and other competitive local exchange carriers (CLECs) to commit to long-term purchases of incumbents' special access services.

In an FCC filing, the service provider said that the ILECs' practice has three effects on their competitors: it stifles competition, slows fiber deployments, and inhibits the transition from TDM-based DSn services to Ethernet.

"Incumbents have set their undiscounted rates for DSn-based special access services at levels that are unreasonably high and cost-prohibitive for wholesale buyers like Level 3 that wish to serve retail business customers," Level 3 said in an FCC filing. "In order to obtain discounts off of the incumbents' rates, buyers must commit to purchasing the incumbents' services for long periods of time (often 5-7 years). Large early termination fees ('ETFs') apply if a buyer stops purchasing a service prior to the end of the commitment term. Incumbent LECs waive these fees (i.e., offer 'circuit portability') only if purchasers agree to buy a large percentage of their historic purchase volumes from the incumbent LEC for several years."

This has been an issue for Level 3 in AT&T's (NYSE: T) West Coast legacy Pacific Bell and its Southwestern Bell territories.

Because it has to purchase under the AT&T Term Payment Plan ("TPP"), Level 3 has to purchase the majority of its circuits on longer-term plans to avoid paying what it says are "unreasonable and cost-prohibitive rates for service on a month-to-month or one-year-term basis."

If it does not meet the terms of the TPP's portability commitments, which requires Level 3 to maintain 80 percent of its DS1 purchase volume in service with AT&T for a period of three years, Level 3 could face penalties of up to $900 in California, for example. However, as more of Level 3's business customers want faster speed Ethernet services it has to buy more Ethernet versus DS1 circuits from AT&T.

Regardless of the transition it is making for its customers to Ethernet, AT&T's TPP does not let Level 3 or other wholesale customers count Ethernet circuit purchases toward TPP volume commitments in the territories it serves.

"The monthly per-circuit shortfall penalties are far higher than the monthly cost of a typical circuit, whether purchased from a competitive LEC or even an incumbent LEC. AT&T maintains this position even while telling the FCC that the special access marketplace is 'undergoing rapid and fundamental change,' that customers are 'systematically' switching to Ethernet services, and that 'the decline in TDM-based DSn-level special access services has become irreversible,' Level 3 said.

A similar issue exists in Verizon's (NYSE: VZ) Bell Atlantic and NYNEX territories. Verizon's Commitment Discount Plan (CDP) requires that customers maintain 90 percent of their purchase volume with Verizon for 2-7 years.

"If a customer misses its commitment level, Verizon imposes a substantial shortfall penalty," Level 3 said. "Verizon purports to allow customers to upgrade DSn-based special access services to Ethernet services without penalty, but its tariff provisions governing Ethernet adoption contain such stringent conditions that competitors and businesses are rarely able to use them."

Due to the incumbents' lock-up plans, Level 3 can't purchase a large amount of circuits from other competitive wholesale providers in areas where it purchases circuits from an ILEC. Today, Level 3 said it pays the ILEC about $103 million per year, while a comparative service from a competitive carrier would be about $86 million a year.

Level 3 said that freeing it "from these lock-up plans and permitting it to purchase from these lower cost suppliers would benefit Level 3 individually and the marketplace as a whole."

By gaining these savings, Level 3 claims it could redirect capital to enhance its network and other parts of its business, while foregoing early termination penalties would give the company "greater certainty and flexibility for Level 3 to continue to invest and grow."

As a result, competitive providers would be able to gain an additional $86 million in annual revenues by providing services to Level 3, a factor that would drive new investments in their own networks, including the deployment of new fiber to serve Level 3 and other providers that need last mile access.  

For more:
- see the FCC filing (PDF)

Related articles:
Verizon joins ILEC chorus against special access, saying Ethernet services should not be regulated
Level 3, Birch and BT Americas say FCC has power to regulate ILEC special access rates
BT Americas' Burger says AT&T, Verizon have too much control over special access pricing
Wheeler: Transparency critical in IP, copper network transition

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