Regulatory News - Spring Training

Posted: 06/2001

Regulatory News

Spring Training
New Pricing Flexibility Decision Previews FCC's Game Strategy, Puts Competitors on Alert
By Kim Sunderland

For the first time, the FCC (www.fcc.gov) has come out of the dugout with orders according switched-access pricing flexibility to ILECs, ensuring that, starting this spring, the telecom game will be played somewhat differently. A price cap ILEC that obtains this approval can offer, on a day's notice, contract tariffs, as well as volume and term discounts. This leaves precious little room for competitors to respond, sources say.

Specifically, the commission granted in part and denied in part a petition of BellSouth Corp. (www.bellsouth.com) seeking pricing flexibility for various switched-access services in 10 metropolitan statistical areas (MSAs) within its region. The FCC denied such pricing flexibility for two MSAs but approved the other eight.

The action is noteworthy not only for what it gives BellSouth, but it also "may be a precursor for pro-ILEC policies that can be expected from the new FCC," says Andy Regitsky, a regulatory affairs specialist with Lynch Associates (www.lynch-associates.com) in Fairfax, Va.

To recover the costs of providing interstate access services, price cap LECs to date have charged IXCs and end users for access services under the FCC's access charge rules. But the commission says it long has recognized that it should allow price cap LECs progressively greater pricing flexibility as they face increasing competition. The commission since has set up certain guidelines in subsequent access charge orders.

Although portions of these rules were challenged in court, the United States Court of Appeals for the District of Columbia Circuit earlier this year upheld these rules "as a reasonable exercise of the commission's policy- making discretion."

The pricing flexibility framework the commission adopted in its fifth access charge order in 1999 ensures that:

(1.) Price cap LECs don't use pricing flexibility to deter efficient entry or engage in exclusionary pricing behavior; and

(2.) Price cap LECs don't increase rates to unreasonable levels for customers that lack competitive alternatives.

These reforms were designed to remove services from price cap regulation as competition develops in the marketplace, without imposing undue administrative burdens on the FCC or the industry, the commission says.

In keeping with these goals, the FCC set up a framework for granting price cap LECs greater pricing flexibility of interstate access services once they satisfy "triggers" demonstrating competitive market conditions in a particular MSA. Such pricing relief is granted in two phases and on a MSA basis.

Currently, price cap LECs are eligible only for Phase I pricing flexibility for the provisioning of common-line and traffic-sensitive switched-access services and the traffic-sensitive components of tandem-switched transport service.

To obtain Phase I relief for common-line and traffic-sensitive switched-access services, a price cap LEC must meet a trigger demonstrating that competitors have made irreversible financial investments in the facilities needed to provide these services.

In particular, to receive Phase I pricing flexibility for common-line and traffic-sensitive switched-access services, and the traffic-sensitive components of tandem-switched transport service, a price cap LEC must provide convincing evidence that all of its unaffiliated competitors offer service to at least 15 percent of the price cap LEC's customer locations.

To do this, a price cap LEC cannot rely on service that the competitors provide solely by reselling the price cap LEC's services, or provide through the purchase of the price cap LEC's UNEs. A price cap LEC can rely on service the competitors provide through the use of the price cap LEC's unbundled loops.

A price cap LEC that obtains Phase I relief for these switched-access services is allowed to offer, on one day's notice, contract tariffs and volume and term discounts, so long as the services provided pursuant to a contract tariff are removed from price caps, the FCC says.

To protect those customers that may lack competitive alternatives, a price cap LEC receiving Phase I flexibility must maintain its generally available price cap-constrained tariffed rates for these services. Thus, says Regitsky, no customer of a price cap LEC that has been granted this flexibility can be required to pay more than it would if the flexibility had not been granted.

In this order, the FCC approved Phase I increased switched-access pricing flexibility for BellSouth in the following MSAs: Atlanta; Columbus, Ga.; Jacksonville, Fla.; Lafayette, La.; Miami, Fort Lauderdale and Hollywood, Fla.; Montgomery, Ala.; Orlando and Panama City, Fla.

At the same time, the commission denied Phase I pricing flexibility in Augusta, Ga., and Charleston-North Charleston, S.C.

While the FCC granted Phase I switched-access pricing flexibility in its decision here, it hasn't yet created parameters for Phase II switched-access pricing flexibility.

There's also another interesting note. Since the FCC didn't create criteria on how a price cap LEC should demonstrate that competitors are offering competitive switched-access services to at least 15 percent of its customer locations, BellSouth used its internal records and intelligence from a research firm to identify customers that offered service through their own facilities and through a collocation arrangement, Regitsky says.

It used maps and postal ZIP code boundaries to relate competitive switch coverage to one or more BellSouth wire center service areas, based on the geographic location of the switch and the areas served, Regitsky says.

BellSouth also obtained information regarding competitor marketing activities through numerous sources, including unaffiliated research firms, Internet surveys, print ads, press releases, direct-mail ads and billboard ads, he notes.

"The remarkable part of BellSouth's competitive showing, and the commission's reaction to the showing, is the fact that BellSouth relied on competitors that use BellSouth special access circuits to connect their switches to customer locations, instead of either building their own facilities or using unbundled loops," Regitsky says.

When the fact that BellSouth was improperly using its own special access services as proof of switched-access competition was pointed out by AT&T Corp. (www.att.com) and WorldCom Inc. (www.worldcom.com), the commission said:

"A competitor's use of special access circuits in combination with its own switching and transport is neither providing service solely through resale nor through the use of UNEs. Therefore, reliance upon carriers that use special access circuits in order to satisfy the pricing flexibility triggers is not explicitly foreclosed by our rules."

The use of special access circuits also is consistent with the FCC's focus on the extent of competitive entry in a price cap LEC's market and whether the competitor has made an irreversible investment in facilities.

Whether a competitor has purchased special access or unbundled loops to reach a collocation site, it has made the same level of irreversible investment in its collocation facilities, its switch and its own transport facilities, Regitsky explains. Because the level of irreversible investment is the same whether special access circuits or unbundled loops are used, BellSouth may properly include competitors that use special access circuits to reach collocation facilities in its competitive analysis, according to Regitsky.

Analyst Ken Hoexter of the Emerging Broadband Team with Merrill Lynch & Co. Inc. (www.ml.com) says that the FCC's decision "will not have a material impact on the majority of CLECs in the approved MSAs, as BellSouth will most likely not utilize its pricing flexibility on small/medium-sized customers."

That's because once an ILEC offers a volume/term discount contract to a customer, it must make the terms available to all similarly situated customers, Hoexter explains.

"However, we believe BellSouth will target larger accounts where it has better economies of scale and the number of customers it would be required to offer similar pricing to would be limited," Hoexter said, adding that this is probably why WorldCom and AT&T opposed the ruling.

The fact that the commission has approved a switched-access competitive showing that includes ILEC special access as competition bodes well for other ILEC attempts to obtain switched-access pricing flexibility.

"Thus, switched-access pricing flexibility filings by other ILECs should be expected shortly," Regitsky says.