Verizon, Incompas call truce in special access regulation war

Verizon (NYSE: VZ) and Incompas have developed a proposal to regulate special access services, signaling that at least one large ILEC wants to come to an agreement following a decade long debate.

As incumbent local exchange carriers like Verizon and AT&T (NYSE: T) migrate to IP-based networks and services, the FCC has been working on proposals to regulate TDM-based access circuits. Competitive providers like Level 3 and Sprint (NYSE: S) use ILECs' last mile network facilities to bring services to areas where they can't build a business case to deploy their own network facilities.

In a letter to the FCC, Verizon said its proposal would result in a technology-neutral policy framework for all dedicated services, including TDM and Ethernet services. 

"Verizon has maintained that demand for business data services is shifting away from legacy services to providers of all kinds, in particular cable companies. In this marketplace, our priority has always been a regulatory framework that ensures a level playing field for all providers that offer the same or similar services," Verizon said in a letter to the FCC. "We have advocated for a regulatory structure that takes into account all of the various competitors for business data services and regulates all competitors evenhandedly."

As an advocate of competitive providers, Incompas said that the FCC should develop a new set of rules that takes into account the mix of TDM and IP-based services offered to businesses.

"Despite these differences, Incompas and Verizon both agree that it is time for the FCC to move beyond this decade-old debate by adopting a permanent regulatory framework that is legally sustainable, that recognizes the changes in the marketplace over the last ten years, that is flexible enough to accommodate new technology and new competitive circumstances going forward, and that will encourage the transition from legacy services to IP and more advanced communication services," Incompas said in a letter to the FCC.

Under the jointly proposed plan, which encompasses all dedicated services including TDM special access services and packet-based Ethernet, Verizon and Incompas laid out three main tenets:

Technology neutral regulatory framework: Any provider offering the same or similar services would be subject to the same overall regulatory framework. This would include not only ILECs, but also cable operators and other wireline competitive providers.

Complying with Title II of the Communications Act : Providers offering dedicated services should be subject to Title II of the Communications Act, including Sections 201 and 202. Verizon said that, with regard to Ethernet services, it would not oppose an order placing it on the same footing as cable companies, CLECs and other ILECs that have received forbearance relief from dominant carrier regulation, if it is adopted at the same time as an order adopting a permanent framework.

Technology-neutral price regulation: In the new model, the FCC should apply price regulation on a technology-neutral basis in relevant markets that have insufficient competition. Rate regulation would constrain prices and ensure that providers cannot abuse their market positions by imposing rates, terms or conditions that are unjust or unreasonable, or discriminatory.

Alternatively, in markets where there is sufficient competition, the FCC would not need to apply rate regulation but could instead rely primarily on market forces to discipline prices and ensure a dynamic marketplace. Service providers offering dedicated services in these competitive markets would still be subject to Title II, including Sections 201 and 202 of the Communications Act.

Verizon and Incompas said that there should be a relationship between wholesale and retail pricing for all dedicated services, including TDM-based special access services and packet-based services such as Ethernet.

News of the pact was applauded by Sprint, which uses ILEC special access services for wireless backhaul and providing services to its business customer base.

"Sprint is pleased that Verizon and INCOMPAS are calling for a new regulatory framework to address the decades old issue of special access reform," said Charles McKee, VP of federal and state regulatory government affairs for Sprint, in a statement. "Sprint has argued for many years that the current market for dedicated broadband circuits, a.k.a. special access, is broken.  Indeed, data that the FCC just allowed to become public demonstrates that 73% of these locations are served by a monopoly and a staggering 97% have a duopoly at best. Establishing a forward-looking, sustainable framework to address these non-competitive markets is critical to the future of broadband services in the United States."

Not everyone is happy about this agreement.

Matt Polka, CEO of the American Cable Association, said in a statement that the proposed framework would undo 35 years of regulatory precedent that facilitated entry by a facilities-based competitor.

"This is a private agreement between a dominant provider (Verizon) and providers who have chosen not to build their own facilities that proposes to subject new, facilities-based entrants to regulation in their provision of dedicated services," Polka said. "That will impose costs on these new entrants -- many of whom are small providers that have no experience with common carrier rate regulation -- slowing their entry and their efforts to bring competition and innovative services to market.  That is clearly not in the public interest, and ACA intends to oppose this private deal."

Interestingly, the joint Verizon-Incompas letter statement was made public the same day as the release of a study by industry group USTelecom suggesting the business broadband market is competitive and no further price regulation by the FCC is needed. The report, which was written by Georgetown adjunct professor Hal Singer, said that the regulation could hold back investment and the rollout of fiber networks.

The FCC will consider a Tariff Investigation Order and a Further Notice of Proposed Rulemaking proposing a new regulatory framework for the provision of special access services in its April monthly meeting.

For more:
- see this joint Verizon, Incompas letter (PDF)

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