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Divided FCC Adopts Special Access Order

August 23, 2012. The Federal Communications Commission (FCC) released a Report and Order [107 pages in PDF] that suspends the FCC's rules, which have been in effect for 13 years, that allow for automatic grants of pricing flexibility for special access services.

Introduction. This pertains to FCC price regulation for connections that provide voice and data for government entities and businesses. For example, mobile communications companies use these connections to link cell towers to wireline backbone networks.

This R&O states that its sets "a path to update our rules". It adds that "we currently lack the necessary data to identify a permanent reliable replacement approach". Nevertheless, this item contains no NPRM, NOI, or any request for "the necessary data". This R&O does state that the FCC will issue a "comprehensive data collection order within 60 days".

This action is controversial. The five member Commission divided along party lines, with Democrats voting for it, and Republicans against. Congressional Republicans condemned it. Congressional Democrats praised it. Price cap carriers who will lose pricing flexibility hate it.

How one concludes this will affect consumers, investment, competition, and innovation depends on one's economic analysis of communications and internet protocol networks. Such conclusions vary widely.

The FCC adopted this R&O on August 15, but did not release it until August 22, 2012. It is FCC 12-92 in WC Docket No. 05-25.

Historical Background. The FCC has long engaged price regulation, including special access line price regulation. The FCC employed traditional rate of return regulation of local exchange carriers' (LEC) special access lines until 1990, when the FCC introduced what it called an "incentive based system" of price regulation.

Then, in 1999, the FCC adopted the order [171 pages PDF] that contains the rules that the just released order suspends. That 1999 order, titled "Fifth Report and Order and Further Notice of Proposed Rulemaking", is also known as the "Pricing Flexibility Order" or "PFO". The FCC adopted the PFO on August 5, 2001. See, FCC release. The FCC released it on August 27, 1999. It is FCC 99-206 in CC Docket No. 96-262.

The 1999 order, among other things, provided for additional pricing flexibility once a LEC shows that certain competitive thresholds, or triggers, have been met in a given metropolitan statistical area (MSA). The concept was to provide relief from pricing regulations as competition for special access services increased.

While the 1999 order and its implementation have remained contentious, it has been in effect for 13 years.

The 1999 vote was nonpartisan. The Democratic Chairman, William Kennard, and two other Democrats (Susan Ness and Gloria Tristani) voted for it, as did Republican Michael Powell. Republican Harold Furchgott Roth dissented in part. However, he supported pricing flexibility, and dissented in part because he wanted more flexibility, and more deregulation.

The U.S. Court of Appeals (DCCir) upheld the PFO in its February 2, 2001 opinion in WorldCom v. FCC, 238 F.3d 449. That unanimous opinion, written by Judge David Sentelle, provides an explanation of the technology, issues, and PFO, See also, "Telecom Rulings" in TLJ Daily E-Mail Alert No. 116, February 5, 2001.

In 2000 the FCC adopted its CALLS plan to move towards a more market based approach to rate setting.

On January 31, 2005, the FCC released a document [49 pages in PDF] titled "Order and Notice of Proposed Rulemaking" in its proceeding titled "In the Matter of: Special Access Rates for Price Cap Local Exchange Carriers: AT&T Corp. Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services".

That 2005 NPRM started an examination of the regulatory framework to apply to price cap LEC's interstate special access services after June 30, 2005, when the CALLS plan expired. See, also, story titled "FCC Releases NPRM on Regulatory Framework to Apply to Price Cap LECs for Interstate Special Access Services" in TLJ Daily E-Mail Alert No. 1,067, February 1, 2005.

The FCC received comments, and more comments, and eventually held a workshop, but adopted no new rules, until the just released R&O.

The FCC wrote in a pleading filed with the U.S. Court of Appeals (DCCir) on October 6, 2011, that the FCC has not yet compiled "an evidentiary record that is sufficient to evaluate current conditions in the special access market". See, In Re Comptel, App. Ct. No. 11-1262.

Report & Order. The FCC vote broke down along party lines, with the three Democrats (Genachowski, Clyburn and Rosenworcel) voting yes, and Republicans (McDowell and Pai) voting no.

The R&O states that "we suspend, on an interim basis, our rules allowing for automatic grants of pricing flexibility for special access services in light of significant evidence that these rules, adopted in 1999, are not working as predicted, and widespread agreement across industry sectors that these rules fail to accurately reflect competition in today’s special access markets."

It continues that "We set forth a path to update our rules to better target regulatory relief to competitive areas, including extending relief to areas that are likely competitive but have been denied regulatory relief under our existing framework."

This R&O asserts that the FCC continues to support the goal of the 1999 order to reduce regulation. However, this R&O states that "there is compelling evidence that our current pricing flexibility rules are not properly matching relief to such areas, combined with allegations that this mismatch is causing real harm to American consumers and businesses and hindering investment and innovation."

Chairman Genachowski wrote in his statement that "Special access services -- services that provide dedicated, high-quality data connections -- are a vital input to our broadband economy. Mobile providers use these connections to link cell towers to wireline backbone networks. Banks, credit card, technology and insurance companies, and other large enterprises use special access links to communicate among their branch offices. Small businesses rely on these services for Internet access and have made clear that promoting competition in the market for special access is essential to helping them grow and create new jobs. And our nation’s schools, libraries, and government institutions use special access connections every day to provide services to their constituents."

Commissioner Jessica Rosenworcel wrote in her statement that 13 year ago the 1999 order "was a good and sensible system. But time and the evolution of technology has rendered these proxies increasingly ill-suited to discern between competitive and noncompetitive markets."

Commissioners McDowell and Pai. FCC Commissioner Ajit Pai wrote a 13 page dissent, unusual both for its length, and the bluntness of its criticism of the majority.

He began that "In Lewis Carroll's Alice's Adventures in Wonderland, the Queen of Hearts impatiently exclaims: ``Sentence first -- verdict afterwards.´´ Unfortunately, the Commission's approach today draws more inspiration from the Queen of Hearts than the Administrative Procedure Act. First, the Commission proclaims its ``sentence´´ by suspending our current pricing flexibility triggers. It then announces its intent to go about collecting the data necessary to reach a ``verdict´´ on the competitiveness of the special access market and the effect of the current rules on prices. In short, the Commission has reversed the steps that a data-driven agency should take. As a result, today’s action appears consistent with the Administrative Procedure Act only when viewed through the proverbial looking glass."

See, book [Amazon] and book [Apple] titled "Alice's Adventures in Wonderland".

Pai wrote that this R&O represents "the demise of the bipartisan deregulatory framework constructed by the Clinton Administration (and maintained by the Bush Administration) so that the Commission can travel down the rabbit hole of re-regulation. I do not expect that special access will be the only stop on this journey. Rather, today's order lays the predicate for the Commission to re-regulate fiber; a consistent regulatory philosophy demands as much. Industry players will likely draw the same conclusion. As a result, the Commission's decision will chill infrastructure investment, slow the deployment of next-generation networks, and impede job creation." (Parentheses in original.)

Commissioner Robert McDowell wrote in his dissent that "the majority has opted to suspend a thirteen-year-old special access regulatory framework without an adequate evidentiary record or market analysis, both of which are necessary to make such a sweeping rule change".

He also wrote that "By all appearances, the majority is wrapping its decision in the protective cloak of “interim” status merely to increase its odds of success during the inevitable appeal."