Yesterday, Chairman Walden cautioned the FCC that instituting new regulations at this time is unnecessary, unwanted and unfair.  Yet next week, the FCC plans to vote on the sweeping nationwide re-regulation of TDM-based transport and access services.  The FCC’s proposal, as outlined in the Business Data Services (BDS) Fact Sheet released some weeks ago, picks regulatory winners and losers without regard to the significant factual and economic evidence presented in the docket.  Here’s our take on where that scoreboard currently stands.

Loser:  The Facts

The facts about the state of competition in the BDS market were invited to the party via the FCC’s data collection, but were then told to go stand in the corner and not talk to anyone.  The fundamental promise of this proceeding was that the FCC would actually measure competition and regulate only where it did not exist.  That promise was badly broken with the proposal to declare all legacy TDM access and transport facilities below 50 Mbps non-competitive.

If the facts were allowed to talk, they would tell you that ninety percent of AT&T’s sub-50 Mbps bandwidth is within a half mile of competitive fiber and fifty-five percent of CenturyLink’s low capacity bandwidth is in buildings that have two or more competitors within 1,000 feet.  In major urban markets, there are often more than a dozen fiber transport providers – in some of them two dozen.  Indeed, that the transport market is in fact robustly competitive was not disputed on this record and yet the FCC proposes to pull transport facilities fully into the new regulatory regime.

In short, the facts demonstrated that CLEC and cable facilities compete against low capacity BDS demand in the majority of markets.  But the facts have been dismissed and none of that was taken into consideration.

Loser:  Fiber Investment

Ethernet and TDM facilities compete in the real world, even if they don’t inside the FCC Building.  Lowering competitive TDM prices will force fiber providers to match those lower TDM rates and, if they don’t, the FCC could force them to in a complaint process.  In fact, the FCC’s proposed complaint process – with presumptions and procedures biased against the ILEC – appears to create a readily-available back door for Enforcement Bureau Ethernet rate regulation.  Lowering Ethernet rates even indirectly will make it less economically attractive to make fiber investments due to the lower returns.  At the same time, the proposal will incentivize providers to rely on below-market legacy access services instead of building fiber networks of their own.  Either way you slice it, fiber investment loses.

While telecoms like AT&T continue to lead the nation in infrastructure investment, more rigorous regulations have contributed to an over 11% decrease in AT&T’s domestic infrastructure investment compared to the previous year. Further limiting ILEC return on investment will only serve to depress these numbers further.

That’s why competitive fiber providers like Wilcon, Lumos, Unite Private Networks and UnitiFibe have all made clear just how disastrous this proceeding will be for their incentives to continue to build fiber.  And it also explains why Windstream, which despite downplaying the impact that price reductions could have on incentives to invest, felt the need to ask the Commission to protect its own ILEC affiliate from forced rate reductions on the ground that abrupt regulatory changes would negatively impact its operations.

Loser:  Jobs

CWA President Chris Shelton criticized the draft Order, predicting that it would lead to reduced investment and put downward pressure on jobs and living standards. As Mr. Shelton aptly observed, “The Chairman’s proposal ignores the reality of competition and the market, and will have a devastating effect on the investment necessary for broadband expansion, especially in rural areas.”

Loser:  Traditional ILECs

CenturyLink and Frontier are likely to feel the impact of the re-regulated BDS market the most.  Frontier, which relies exclusively on wireline revenues to support its business, lacks diverse lines of business that could help it absorb the losses this Order will drive.  In fact, Frontier has already warned of its intent to mitigate the impact of the reductions through incremental reduction of expense elsewhere (think jobs).  CenturyLink for its part has already announced one round of lay-offs because of declining wireline revenues.  And Frontier just announced that it’s following suit.  This Order certainly won’t help.

Winners:  INCOMPAS, Sprint and Windstream

These players have long sought broad re-regulation of the BDS marketplace in lieu of building their own fiber facilities and were quick to cheer the proposals outlined in the fact sheet.  Although the facts belied their claims of pervasive market power, they will be the beneficiaries of a substantial, unwarranted wealth transfer from the ILECs.  And while some of them have complained they didn’t get everything they put on their list of demands, they are clearly getting regulatory relief in specific markets and on specific services that the record amply demonstrates are competitive under any standard.

Winner:  Cable, maybe

Despite the best efforts by the Verizon-INCOMPAS team to regulate cable, cables’ fiber investments appear to have avoided the broad stroke of the FCC’s rate hatchet for now.  The Commission concluded, rightfully, that the Ethernet market is competitive.  But as noted above, as price floors are lowered for DS3 facilities, there will be pricing pressure on cable’s Ethernet facilities as well.  And the proposal’s new complaint process will apply heightened scrutiny to situations where packet-based BDS services are sold at a higher price than newly price-capped TDM facilities, and cable will no doubt need to rethink return on investment against that threat.

Regulatory pain means reduced investment, and whether you win or lose on this issue, that’s the wrong direction for industry, for investment and for the country.  Now is not the time to be instituting sweeping new regulations that are unnecessary and unfair.  Consideration of this item should be deferred.




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