Ends Justifying Means: Inconsistencies Between FCC Special Access and Verizon-SpectrumCo Orders

by on August 27, 2012 · 1 comment

To summarize, on August 22, the FCC found it was appropriate to re-impose monopoly price cap regulations developed over twenty years ago because the FCC lacked “reliable” evidence that cable operators are competing in the special access market. On August 23, the very next day, the FCC found cable companies are “well-positioned” to compete in the special access market and are “increasingly successful” competing in that market. . . . It is impossible to reconcile these inconsistent findings.

Last week, the FCC issued two significant orders. Late Wednesday evening, the FCC issued an order suspending its pricing flexibility rules for special access services (“Special Access Order”), and on Thursday afternoon, it issued an order approving multiple transactions between Verizon Wireless and several cable companies (Comcast, Time Warner, Bright House Networks, and Cox) as well as mobile providers T-Mobile and Leap (“Verizon-Cable Order”).

The FCC addressed special access competition in both orders. One would assume two FCC findings regarding special access issued within a single 24-hour period would be consistent with one another, but that would be assuming too much. The findings in these two orders relied on evidence submitted by the same companies to reach contradictory conclusions.

August 22 Special Access Order. In its August 22 order, the FCC found that its pricing flexibility rules were harming consumers and hindering investment in facilities-based competition. To address this concern, the FCC suspended its pricing flexibility rules, which means that price-cap carriers (e.g., Verizon and AT&T) are presumed to be monopolists who are required to offer special access services at FCC regulated rates, while their competitors (e.g., Time Warner) can offer special access services at market rates.

Sprint and Time Warner were two of the most vociferous advocates for suspension of pricing flexibility. Both companies submitted numerous filings in the special access proceeding over a number of years, and the FCC cites their filings over 40 times in the Special Access Order. Neither company has the interests of consumers at heart. Sprint benefits from suspension of pricing flexibility by obtaining special access services at regulated rates when they are lower than market rates, and Time Warner benefits from suspension by gaining a competitive advantage in the special access market when it can undercut the regulated rates of price-cap carriers.

The FCC had no need to address the benefits of its ruling to either Sprint or Time Warner, however, because the FCC didn’t rely on data regarding special access services for wireless backhaul or the provision of special access on a competitive basis by cable operators. Instead, the FCC based its suspension finding solely on outdated data regarding the presence of special access competition collocated in price-cap carrier wire centers in a handful of geographic areas. As Commissioner Pai noted in his dissent, carriers are most likely to collocate if they intend to use the price-cap carrier’s last-mile facilities for retail services offered directly to consumers. Wireless carriers who rely on special access for mobile backhaul don’t offer retail services using price-cap carrier’s last mile facilities and often rely on cable operators or fixed wireless to meet their backhaul needs. Cable operators typically do not rely on the last-mile facilities of price-cap carriers to provide retail services either, and they don’t need to collocate their facilities in price-cap wire centers when they provide competitive special access services on a wholesale basis to wireless carriers for backhaul.

The FCC recognized these realities when it first adopted its pricing flexibility rules in 1999. The FCC always understood “collocation may underestimate the extent of competitive facilities within a wire center because it fails to account for the presence of competitors that do not use collocation and have wholly bypassed [price-cap carrier] facilities.” Since 1999, special access that bypasses price-cap facilities has increased dramatically. For example, Clearwire has since built an entirely new wireless broadband network that relies almost exclusively on self-provisioned, fixed wireless backhaul. The FCC nevertheless rejected evidence of such competition in its Special Access Order because the FCC lacks “reliable data on the extent or location of this [non-collocated] competition.”

August 23 Verizon-Cable Order. In the Verizon transactions proceeding, several commenters – including Sprint – argued that the commercial agreements between Verizon and the cable companies may lead the cable companies to engage in anticompetitive conduct in their provision of backhaul services to mobile wireless operators. Sprint argued that in many markets, its only sources for backhaul are Verizon and the cable company operating in that market. Sprint argued that Verizon’s commercial agreements with the cable operators would create an “effective monopoly,” which would harm “competition.” Implicit in this argument is Sprint’s belief that there is, at worst, a competitive duopoly in the special access market, not a monopoly. Yet, in the special access proceeding, Sprint convinced the FCC to re-impose monopoly price regulation on Verizon while leaving Verizon’s cable competitors completely unregulated.

In the Verizon-Cable Order, the FCC relied on pricing evidence submitted by Sprint to reject its arguments that a lack of competition in the special access market would raise consumer prices. The FCC found that “even a significant increase in [wireless] backhaul costs is unlikely to have a material impact on [wireless] subscriber rates. In other words, even if Verizon were able to raise the price of its special access services for backhaul unilaterally, consumers would not be harmed.

The FCC also found that cable operators are playing a very “successful” role in the special access market based on “evidence” from online analyst reports the FCC considered reliable.

“We find that, even if the Cable Companies had the ability to foreclose access to their backhaul service or charge significantly higher prices to Verizon Wireless’s competitors (thereby imposing a competitively significant cost on Verizon Wireless’s competitors), they would not have an incentive to do so. We find that such an action would reduce their own revenue and carry a very significant cost to the Cable Companies, given the large and growing nature of the backhaul services market and the evidence that Cable Companies are both well-positioned to compete in that market and increasingly successful when they do so. We conclude that any incentives the Commercial Agreements might create to favor Verizon Wireless or exclude its rivals in the provision of backhaul services are outweighed by the clear incentives against such behavior.”

To summarize, on August 22, the FCC found it was appropriate to re-impose monopoly price cap regulations developed over twenty years ago because the FCC lacked “reliable” evidence that cable operators are competing in the special access market. On August 23, the very next day, the FCC found cable companies are “well-positioned” to compete in the special access market and are “increasingly successful” competing in that market. The FCC found that cable companies had strong incentives to compete in the special access market, and would suffer “very significant cost[s]” if they were to forgo such competition. Finally, and most importantly, the FCC found that “even a significant increase” in the cost of wireless backhaul would be unlikely to harm consumers.

It is impossible to reconcile these inconsistent findings. Chairman Genachowski pledged the FCC would be a “fact-based, data-driven agency.” Yet, during a hot summer week in August when Congress was out of session, the FCC’s facts and data changed on a daily basis as required to support the FCC’s preferred policy outcome. That’s a data-driven approach of sorts – cherry-picking data to arrive at a predetermined outcome that picks winners and losers rather than protects consumers.

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