NARUC Study Urges Special Access Overhaul

Although the institute urged FCC and state action on special access, it concluded that competition varies depending on location, circuit capacity and other factors. “The evidence does not support a simple ’thumbs-up’ or ’thumbs-down’ judgement on market power for special access markets,” it said. However, incumbent local exchange carriers “still have strong market power in most geographic areas, particularly for channel terminations and DS-1 services,” it said.

Special access earnings by AT&T, Qwest and Verizon are “well above” the 11.25 percent benchmark set by the FCC, “even after adjustment for separations problems,” the institute said. “In the case of AT&T and Qwest, earnings are about three times that rate.” But an AT&T spokesman said the FCC benchmark is for rate-of-return carriers and shouldn’t be applied to price-cap providers like his company. Historically, big carriers have blamed outdated separations cost factors for the seemingly high profits cited by supporters of overhauling special access. Under the separations freeze, cost factors haven’t changed since the 1990s, the AT&T spokesman said.

As an interim measure, the FCC should reestablish price caps for DS-1 and DS-3 channel terminations sold by the three big carriers, the institute said. Meanwhile, the FCC should open a formal proceeding to reset rates, investigating carriers’ discount plans, it said. In its study, the institute found “a pattern of terms in some discount plans that may allow ILECs unreasonably to cement their market power by limiting buyers from shifting circuits to competitors who may have better products, lower prices, or both,” it said. In some cases, the institute found limits on buyers’ purchase of unbundled network elements, “a right guaranteed to some carriers under the 1996 Act.”

The institute found “some evidence for effective competition,” it said. “Frequent bidding by large customers, with multiple bid responses, is a positive indicator of increased competition, at least within the market sectors devoted to enterprise and wholesale customers,” it said. While competitors are gaining market share, they still lag behind incumbents, the Institute said. Wireline competitors “are unlikely ever to be a strong competitive force in channel determination markets outside of high-density downtown areas,” it said. Cable and fixed wireless “may be poised to become major competitors and are increasingly constraining ILEC behavior,” it said, “but they have not yet grown beyond fringe competitors in most markets.”

The FCC should regularly collect special access market concentration and pricing data, and location data about competitive providers’ facilities, the institute said. And the FCC should overhaul its current methods for determining effective competition, it said. The FCC’s current practice of equating competition to presence of collocation in ILEC central offices “consistently overestimates the competitiveness of the DS-1 and DS-3 channel termination markets,” the institute said.

Meanwhile, states should reduce intrastate special access rates to interstate levels, the institute said. “Such action likely would increase the volume of intrastate special access sales,” he said. “Jurisdiction over a larger share of the market would in turn give ILECs more intrastate revenue, which in turn might reduce pressure on other intrastate rates.”

The top three telephone carriers disputed the study’s accuracy. Qwest has “serious concerns with the manner in which [the study] was conducted,” said Steve Davis, Qwest senior vice president. “For example, it is our understanding that the competitive carriers refused to provide any details on the facilities they have deployed.” The report’s recommendations clash with its findings, an AT&T spokesman said. “Despite the inquiry’s findings that special access demand is increasing and prices are decreasing, the hallmarks of a competitive market, it erroneously recommends a return to pricing re-regulation.”

But Sprint Nextel believes the report “clearly describes the special access problem” and makes proper recommendations, said Sprint vice president Vonya McCann. Earlier this month, Sprint urged the Obama administration to take on special access reform (CD Jan 22 p9). CompTel, the Computer & Communications Industry Association and the AdHoc Telecommunications Users Committee also gave kudos. “Businesses that depend on broadband services to help cut costs, invest in innovation, and create jobs should not be forced to spend scarce dollars subsidizing the telecom companies’ build-out of video networks to compete with cable companies for entertainment services,” AdHoc said.