Investigation of BDS tariff provisions, further data analysis lead to new standards and a proposed new regulatory regime

david-goliathThe market for special access service – also known by some (including the FCC) as “business data services” or “BDS” – is under the Commission’s regulatory microscope. In a sprawling, two-pronged decision, the FCC has (a) ordered the four largest BDS providers (among incumbent local exchange carriers, a/k/a ILECs) to revise their tariffs in significant respects and (b) proposed a new regulatory regime for BDS. The massive 288-page “Tariff Investigation Order and Further Notice of Proposed Rulemaking” arises from complaints raised by competitive local exchange carriers (CLECs) and other customers of special access service.

By way of background, BDS involves the dedicated point-to-point transmission of data at certain guaranteed speeds and service levels using high-capacity connections. It is used to create private or virtual private networks across a wide geographic area, and to enable the secure and reliable transfer of data between locations. For example, point-to-point BDS lines can provide dedicated access to the Internet and access to innovative broadband services; mobile wireless providers purchase BDS to backhaul voice and data traffic from cell sites to their mobile telephone switching offices. Carriers also utilize BDS to deliver their own customized, advanced service offerings to end users.

As noted, the FCC’s order has two distinct components. The first is a “Tariff Investigation Order” in which the Commission addresses complaints from various BDS customers. The complainants charged that the terms of service contained in ILEC tariffs – particularly mandatory volume and term commitments – have stifled competition and limited CLECs’ ability to, among other things, select more cost effective offerings from other providers. ILECs have historically been the primary wholesale suppliers of services and leased lines to competitive providers. Over the last decade, though, cable operators – including Comcast, Time Warner Cable, Charter Communications, Cox and Cablevision Systems – have emerged as a significant alternate source of BDS. But BDS customers’ ability to take advantage of the developing competitive market has been impeded by various provisions in the ILEC tariffs.

In 2015, the Wireline Competition Bureau initiated an investigation into a wide range of terms and conditions in 18 BDS tariff pricing plans offered by the four largest ILEC providers of BDS (i.e., AT&T, CenturyLink, Verizon, and Frontier). One particular concern of the complaining CLECs: “all-or-nothing” provisions in the tariffs requiring the CLECs to purchase services exclusively from the contracting ILEC. In the complainants’ view, these provisions unjustly and unreasonably locked them into long term exclusive contracts when better and cheaper offerings from cable providers were available. CLECs also alleged that shortfall and early termination penalties contained in certain pricing plans were similarly unjust and unreasonable because they required CLECs seeking an early out from their deals with the ILECs to pay more than what would they have been required to pay had the agreements run their full terms.

After investigating the CLECs’ allegations, the FCC found that CLECs in all-or-nothing pricing plans were precluded from selecting tariff purchase options generally available to all customers. All-or-nothing requirements limited customers’ ability to minimize the amount of their purchases subject to high percentage and longer term commitments, and restricted their ability to migrate purchases to alternative providers (or to self-provision using their own facilities).

With regard to early shortfall and early termination penalties, in the Tariff Investigation Order portion of its decision, the FCC has ruled that, to be reasonable, a shortfall penalty would allow the seller to recover from the purchaser only an amount capped at what the purchaser would have paid had it met its minimum commitment level for the service. After examining the shortfall and early termination penalties in various ILEC tariffs, the FCC determined that certain BDS plans in the tariffs for AT&T’s Southwestern Bell and Pacific Bell subsidiaries, Frontier, and Verizon (shortfall only) contained provisions that exceeded that measure of damages.

In order to address the all-or-nothing tariff provisions, the FCC directed AT&T, CenturyLink, Frontier and Verizon to amend their tariffs to remove the language requiring customers to aggregate all their purchases under a single plan. Appropriate tariff revisions will have to be submitted to the Commission within sixty (60) days from the release date the FCC’s Order to become effective on not less than one day’s but not more than fifteen (15) days’ notice. The FCC required application of the revised all-or-nothing provisions only prospectively; it declined to apply corrective action to existing all-or-nothing agreements. The FCC requested comment on how existing agreements should be handled to avoid unnecessary market disruptions.

The Commission also directed Southwestern Bell, Pacific Bell, Frontier and Verizon to remove certain shortfall and early termination tariff provisions within sixty (60) days from the release date of the Order to become effective on not less than one day’s but not more than fifteen (15) days’ notice. However, those ILECs could include in their tariffs shortfall and early termination penalties or fees no greater than the amount of revenue that a customer would have paid had it met its minimum commitment. The revised shortfall and early termination tariff provisions will apply to both existing and future customers.

The second component of the Commission’s order is a Further Notice of Proposed Rulemaking (FNPRM). There, the Commission proposes a new regulatory regime for BDS based on four fundamental principles: (1) regulations that foster competition are best; (2) regulations should be technology-neutral; (3) barriers that inhibit technology transitions should be removed; and (4) regulations should meet current and future market conditions. Underlying the new regulatory approach are data collected by the Commission relative to broadband services offered throughout the country. The FCC had collected those data in order to understand the BDS services offered in various geographic markets, and to perform an independent competition analysis of those markets. Other parties had also submitted their own analyses for the FCC’s consideration. Based on the data and other evidence relative to competitiveness in BDS markets, the FCC reached several tentative conclusions.

  • First, to identify the particular market in which to place BDS for competition purposes, it determined that: (a) BDS is in a separate and distinct product market from “best efforts” services (e.g., Internet service offered to residential customers); and (b) packet-based BDS and time division multiplexing (TDM)-based BDS are in the same market.
  • Second, the FCC determined that possible customer categories are retail purchasers of business data services and carrier purchasers. These groups, in turn, could be further subdivided into smaller subcategories, such as retail businesses, governmental and educational institutions, and other enterprises that require dedicated enterprise services.
  • Third, the FCC tentatively concluded that the BDS geographic market, even for lower bandwidth services, likely extends beyond the area of the average census block in which there is BDS demand, but is considerably smaller than a Metropolitan Statistical Area (MSA).
  • Fourth, the FCC found that geographic concentration of the BDS market is high, although itdid not suggest what the proper geographic unit for measuring concentration should be. The Commission merely expressed the view that geographic concentration was larger than a census block, but smaller than nationwide in scope.
  • Fifth, the FCC found that barriers to entry in the BDS market do not materially differ whether the technology being deployed is TDM- or IP-based, and that competition in the BDS marketplace is constrained.
  • Finally, the FCC determined that market power is concentrated in a few incumbent providers.

The FCC requested comments on the preliminary conclusions reached in its marketplace analysis.

For the new BDS regulatory framework, the FCC proposes to apply different rules to competitive markets and non-competitive markets. For competitive markets, a “hands off” approach would be used so that BDS in those markets would be subject to minimal regulation to protect consumers. The FCC requests comment on the criteria for the competitive market test, and how it should be applied.

Markets determined to be non-competitive would be subject to new rules including, among other things, the use of price regulation and the prohibition of certain tying arrangements that harm competition. The FCC also requests comment on the appropriate treatment under the new framework of the three types of contractual terms identified in the Tariff Investigation Order, as well as other contractual terms and conditions. Tariffs would be eliminated as part of the regulation of any BDS services, and future periodic data collection would be required to allow the Commission to periodically update its identification of competitive and non-competitive markets. The FCC generally raises a large number of questions and issues attendant to its proposals to regulate BDS services in non-competitive markets, and requests comments on how to best regulate BDS services in light of its goals outlined above.

The Tariff Investigation Order is significant because it requires certain ILECs to revise their current BDS offerings to enable customers to take advantage of better and more cost effective offerings. However, consistent with the tariff regulatory regime, the relief provided by the FCC is prospective in nature only, and in some cases, customers will have to wait until the FCC takes additional action regarding existing contracts. For parties interested in commenting on the many proposals contained in the FNPRM to implement a new regulatory regime for BDS services, the deadline for comments is June 28, 2016, with reply comments due by July 26. Comments and replies can be submitted at this FCC website; enter Proceeding Numbers 16-143, 15-247 and 05-25.