Sending the Wrong Signals on Special Access Deregulation…

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As both the courts and the Federal Communications Commission have consistently recognized, price regulation is “far from an exact science”.  For this reason, since the late 1980s, the FCC has slowly and steadily sought to eliminate the direct price regulation of communications services at nearly every possible opportunity.  (See, e.g., the FCC’s Competitive Carrier paradigm, which culminated in the total forbearance from tariffing requirements.)  Given this long-standing policy, it is indeed curious that the FCC is reportedly circulating an order among its Commissioners that not only would re-evaluate how the agency de-regulates special access services provided by incumbent local exchange companies (“ILECs”) but, more importantly, would also “temporarily suspend consideration of pricing flexibility pending the development of as new framework.”

As we demonstrated in our 2009 paper Market Definition and the Economic Effects of Special Access Price Regulation, the decade-old special access fight is nothing more than a “quibble over the rents” among large sophisticated entitles in a bilateral monopoly negotiation and, as such, continued price regulation will unambiguously reduce economic welfare.  Accordingly, given everything that the Commission currently has on its plate (e.g., voluntary incentive auctions for spectrum, implementation of USF reform, and, of course, developing process to review broadcast indecency complaints that can comply with the Supreme Court’s ruling in FCC v. Fox Television Stations this week), why is the Commission trying to move this item now?  Are they trying to regulate all high capacity circuits on all providers?  Are they trying to keep asymmetrical price regulation just over ILECs as a de facto price cap on unregulated carriers?  Until we see the actual text of the order, we do not know.

That said, the simple fact that the FCC is moving on special access after all these years nonetheless sends some troubling signals to the market.

At its most innocuous, the FCC’s intention to freeze special access de-regulation sends a confusing signal to the market about whether the FCC is serious about accelerating the much-needed transition to IP-based infrastructure from traditional “switched” service.  That is to say, when the FCC took the bold step to reform both the Universal Service Fund and intercarrier compensation last year, the FCC made a very deliberate and public choice to phase out subsidies for traditional switched telephone architecture; instead, the agency made the decision that if there were subsidies to be had, they should be directed exclusively to broadband infrastructure.  In so doing, the agency sent a clear signal to the market that the transition from switched access to IP networks has left the proverbial station, and so everybody better get on board with the program.  This bold step was in keeping with actual market, technology and consumer trends, a remarkably refreshing development for the agency.  Yet, despite this bold step, the agency has yet to provide a legitimate explanation as to why it is acceptable to lock-in antiquated technology at regulated rates for the foreseeable future.  The FCC can’t have it both ways:  either we are going to have policies that encourage the transition to next generation networks or we don’t.

At its most cynical, as Phoenix Center Chief Economist Dr. George Ford recently pointed out in a blog, the agency’s actions send a troubling signal of regulatory bias.   As George explained:

That is, the Commission has decided that in the presence of concerns about the effectiveness of its own regulatory rules, its proper response is to suspend deregulation and, in turn, embrace regulation.  As an initial matter, the 1996 Act was supposed “to promote competition and reduce regulation”—it was not to extend regulation.  If the agency does not like its own regulatory policies, then its bias should be to eliminate regulation rather than put deregulation in abeyance.

Moreover, the agency’s decision to suspend deregulation and extend regulation sends a clear signal to the firms doing the vast majority of the investment in broadband infrastructure that they can expect a more regulatory and not-less regulatory bent to policymaking.  As we demonstrated in our Broadband Credibility Gap paper, we can therefore expect the FCC’s approach on special access to reduce the broadband providers’ investment incentives.  So, while the Chairman consistently says he wants more investment, the FCC consistently adopts policies that discourage firms from making those investments.

Finally, to borrow a phrase from our friend Commissioner Robert McDowell, we have the disturbing signal of “regulatory hubris.”  As we explained in our paper entitled The Need For Better Analysis of High Capacity Services (published as 28 John Marshal Journal of Computer and Information Law 343), not only is the amount of data available woefully inadequate in make an informed decision as to whether the benefits of special access regulation outweigh the costs of continued implementation, but the economic arguments set forth for continued regulation by U.S. Government Accountability Office (“GAO”) and the National Regulatory Research Institute (“NRRI”)—i.e., (1) the market(s) for special access and similar services is unduly concentrated; (2) rates of return on special access services, computed using FCC ARMIS data, are very high; and (3) prices for special access services are lower in more heavily regulated markets than in markets with the most pricing flexibility—failed analytical scrutiny.

Again, until we can see the actual text of the order, we can only read the proverbial tea leaves.  That said, given what we have seen so far, the FCC appears to be putting up more roadblocks on the road to deregulation and broadband investment.