Verizon joins ILEC chorus against special access, saying Ethernet services should not be regulated

Verizon (NYSE: VZ) has told the FCC in a new filing that the commission should not revoke regulatory forbearance on Ethernet-based services because businesses and wholesale CLEC customers have a larger pool of sources to get these services.

In its latest FCC filing, the service provider said that businesses have a greater number of choices for Ethernet services from a number of sources, including CLECs (competitive local exchange carriers) and cable operators.

The telco added that the FCC does not have the authority to put new regulatory requirements onto just the ILECs (incumbent local exchange carriers) "by singling them out for regulation of their enterprise broadband services after years of forbearance."

"Regulating only ILEC Ethernet services -- but not cable and other providers' services competing for the same business customers -- would give those other providers an unfair advantage and would deter competition and constrain investment incentives to the detriment of customers who benefit from the many high-capacity broadband services cable and others offer, services that have thrived free from unnecessary rate regulation," Verizon said.

Verizon said that while the FCC collected data from 2013, it also must look at developments that took place in the competitive services market with new builds from cable operators and CLECs in 2014 and 2015 to conduct new competitive analysis of the special access market.

"These companies' public statements reconfirm that competition for special access and high-capacity services is robust and increasing," Verizon said.

In particular, Verizon points out how the business units of the four largest cable operators -- 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.

Comcast Business recently formed a new business unit that will focus on providing services to Fortune 1000 customers. In its most recent 10-K filing, Comcast said that it saw "continued growth in the number of customers receiving [its] Ethernet network and cellular backhaul services."

Besides cable operators, Verizon points out how competitive carriers like Level 3 Communications and XO Communications have continued to enhance their Ethernet services standings.

Level 3, which overtook Verizon as the second largest Ethernet service provider on Vertical Systems Group's Leaderboard, reported 10 percent growth for its core network services to enterprise in 2014. Likewise, XO began a $500 million project to expand its nationwide network and is reporting that more businesses are signing up for its Ethernet services as it brings fiber into more buildings.

Verizon said that in order to adopt new rules for Ethernet services, the FCC would have to show that new enterprise broadband regulation is "is necessary to further the Communications Act's goals based on a new record reflecting the current state of competition for these services."

It added that new data, including Comcast's movement into the Fortune 1000 business space, illustrates that "the marketplace for enterprise broadband services is competitive and that it has grown only more competitive since incumbent LECs received forbearance and that there is "no basis to reverse course and confer a benefit on cable and other competitors in this marketplace while disadvantaging ILECs through new rate and other regulations on their enterprise broadband services."

However compelling Verizon's arguments are, Windstream, which still rents TDM-based ILEC facilities to satisfy off-net customer locations, said it and other competitors are at a disadvantage to the ILECs in the markets they serve.

The service provider acknowledged that while providers such as Level 3 and XO have made progress in expanding their respective fiber networks, the ILECs still own the majority of the last mile facilities in U.S. buildings. According to GeoResults' Q3/2014 GeoAnalytic Report, 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.

"With more last-mile ownership, the ILECs hold far greater control of the local wholesale transport market: in 2013 ILECs and their affiliates made up nearly 82 percent of the local wholesale transport market, which includes last-mile connectivity for wireless cell towers, commercial building connections, and data center and aggregation point connections," Windstream said.

Windstream said that the FCC should also look at whether large ILECs like Verizon and AT&T (NYSE: T) are not tariffing certain services that they did not initially receive forebearance from.

"When the FCC granted forbearance, it did so only with respect to packet switched services that the requesting ILEC offered at the time of forbearance and specified in its petition," Windstream said. "The Commission should ensure that the large ILECs have not now engaged in "self-help" with respect to newer technologies and service offerings (including service tiers targeted at small and medium businesses and other lower bandwidth users) that did not exist at the time forbearance was granted, or with respect to any other types or levels of services that were not specifically addressed in the large ILECs' forbearance petitions."

Another issue is the IP transition.

While Windstream is also keen to transition its business customers to IP-based services, the service provider still has a large majority of customers that still use TDM-based DS1 services. It said that CLECs would have to pay hefty fees in transitioning from TDM special access to Ethernet.

"As an example of these restrictive and cost-raising conditions, Windstream explained that competitive carriers may be penalized under large ILECs' volume commitments when transitioning purchases from TDM special access to IP-based Ethernet services," the carrier said in an FCC filing. "For example, Verizon tariffs do not permit competitive carriers' wholesale Ethernet purchases to count toward meeting these commitments if Ethernet is purchased to serve a new customer or location."

Although it still needs to use special access circuits to provision off-net customers, Windstream is keen to reduce its dependence on special access services.

Tony Thomas, Windstream's CEO, recently told investors that has set a goal to reduce spending on special access fees by $1 billion to the ILECs like AT&T and Verizon where it does not have its own last mile network facilities.

Special access will continue to come into the CLEC and ILEC regulatory battleground. The Wireline Competition Bureau recently made available for public review industry data gathered about special access services.

For more:
- see the Verizon FCC filing (PDF)
- and the Windstream FCC filing (PDF)

Related articles:
Sprint, Windstream, industry groups applaud public availability of special access data
Windstream's Thomas: We see an opportunity to reduce $1B in special access spending
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
Windstream amps up special access chorus against AT&T, other ILECs

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