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Searching for a true BDS compromise

The FCC is ready to compromise on the business data services market.

FCC Chairman Tom Wheeler recently put out a fact sheet outlining a revised approach to reforming the $45 billion BDS market used, among other things, to connect ATM machines and credit card readers, and to off-load calls and data from wireless networks. Wheeler's new approach seemingly draws on a proposal previously put forward by Verizon Communications Inc. and the trade group INCOMPAS, but it also differs from the industry proposal in a number of ways.

Specifically, the chairman proposes to tailor the FCC's new regulations to target time division multiplexing-based, or TDM-based, business data services. TDM is essentially the older alternative to packet-based Ethernet technology. It is generally offered by incumbent telephone companies.

Under the new proposal, TDM services would continue to be governed by “price cap” regulation, where the FCC would set new price caps through a downward adjustment of 11%, phased in over 3 years beginning in July 2017. This would mean a 3% reduction in year one, 4% in year two and 4% in year three. This 11% adjustment accounts for the "regulatory inaction" that has plagued the BDS market, Wheeler said, noting that current price caps have not been adjusted since 2004.

Going forward, price caps would be reduced annually by 3%, offset by inflation, beginning in July 2017, in addition to the 11% adjustment. The annual reduction reflects an "X factor" from efficiency gains.

The FCC would also bar new “all-or-nothing” plans, which force users to make all of their purchases under one plan rather than splitting them among more tailored options, and it would protect against excessive penalties for early termination or failure to purchase a minimum capacity amount.

As for newer packet-based services, whereas the Verizon/INCOMPAS proposal suggested a "benchmarking approach" involving a complicated formula for regulating prices, Wheeler proposes taking more of a "light touch."

The chairman's proposal applies no price caps, benchmarking, or other forms of ex ante pricing regulation for these services. Instead, the FCC will oversee a "robust" complaint process whereby the commission will scrutinize any instances where rates for low-bandwidth Ethernet services are materially higher than rates for the nearest-bandwidth TDM rates. Wholesale rates will be deemed unreasonable if they exceed retail rates for like services.

Notably, the proposal would reaffirm that both TDM-based and packet-based business data services are largely “telecommunications services,” and thus have common carriers status under Title II of the Communications Act. This gives the FCC the authority to intervene and ensure operators are dealing on "reasonable and nondiscriminatory terms."

At the same time, Wheeler acknowledged that the commission previously granted incumbent telephone companies providing Ethernet BDS services varying degrees of forbearance — or exemptions — from Title II of the Communications Act. The chairman proposes to "level the playing field" for all packet-based BDS providers delivering speeds greater than 45 Mbps by granting uniform forbearance to certain portions of Title II, including dominant carrier and tariffing requirements.

Wheeler's revised proposal is largely good news for cable companies offering Ethernet BDS services. The industry as a whole had objected to the Verizon/INCOMPAS proposal, arguing that expanding rate regulation for both incumbents and new entrants like cable made no sense and would hurt competition.

But the fact sheet may be a temporary reprieve. Wheeler said he would launch a second further notice of proposed rulemaking seeking comment on "what administrable means can be developed, if necessary, to deal with any concerns that may emerge with respect to pricing for packet-based BDS."

Not surprisingly, a number of companies — including AT&T Inc. and Frontier Communications Corp. — expressed concerns following the fact sheet's release. Bob Quinn, AT&T's senior executive vice president of external and legislative affairs, argued that the fact sheet does not seem to take into account whether a TDM-based services provider is operating in a competitive market.

“While the Commission has correctly determined (for the time being) not to re-regulate the Ethernet market, there is no evidence in the record to support the Commission’s proposal to re-regulate all legacy TDM-based service without regard to the number of competitors operating in a markets," Quinn said in a statement online.

AT&T warned that should the proposal be adopted, "It will result in less fiber investment and contribute to mounting job losses at a time when our country needs just the opposite."

Frontier CEO Dan McCarthy warned of something similar, noting in a statement that while the fact sheet indicates less severe rate reductions than proposed by Verizon/INCOMPAS, Frontier continues to oppose "rigid rate changes mandated for all carriers without regard to the resulting impact on smaller price-cap carriers."

The company estimated that the proposed reductions, if implemented on July 1, 2017, as planned, would have a revenue impact of approximately $10 million in 2017 and $20 million in 2018 and 2019, with subsequent annual impacts declining.

“As we have previously stated to the FCC, we intend to mitigate the potential effect of all rate reductions with incremental reductions in our expenses,” Frontier said — the implication, of course, being either less deployment or layoffs.

Thus far, the BDS proposal is not on the agenda for the FCC's Oct. 27 meeting.