‘Rotten’ Special Access Market Needs Stronger Reform

The business data services (BDS), or “special access” market is plagued by illegal cost allocations, overcharges and excess profits, and the Federal Communications Commission’s initial order addressing it is “merely a baby step” toward real reform.

That’s according to joint comments filed Tuesday by the Consumer Federation of America (CFA) and the New Networks Institute (NNI) with the FCC. The organizations said their research shows the market for BDS is “rotten to the core.”

BDS is “extremely concentrated,” resulting in the pervasive abuse of market power, as evidenced by prices that are far above costs and “astronomical” profits, according to the filing. Also, there has been a “massive, illegal cross-subsidy in which local service has been forced to bear much of the cost of BDS, effectuated by the misallocation of network equipment and operating costs,” it said.

BDS is riddled with anti-competitive terms in contracts that have undermined the ability of competitors to enter the market, which “exhibits a near-cartel like behavior in which the local franchise monopoly core of the industry has been maintained because local telephone companies have failed to overbuild and compete with one another,” according to the joint filing.

“When dominant incumbent local exchange carriers contract for out-of-region BDS (to support their nationwide wireless and multi-market business offerings) they always contract with the other incumbent local exchange companies – rather than new entrant competitors,” the groups said. “This reciprocity has the effect of severely reducing the potential market for new entrants.”

Every penny of this “pricing abuse” comes out of the pockets of consumers, the filing said.

“There has been clear evidence of these abuses for over a decade, but the FCC consistently turned a blind eye,” it said. “Rather than admit that competition had failed to develop as it theorized, the Commission just stopped gathering and publishing the data that could demonstrate the magnitude of market failure.”

This spring, the FCC proposed a new “technology-neutral framework” to regulate the market for BDS. Under its proposed framework, the FCC would classify a market as either competitive, in which service providers would be subject to little oversight, or noncompetitive. In a noncompetitive market, providers would be subject to “one set of tailored rules” that would include “the use of price regulation and the prohibition of certain tying arrangement that harm competition,” according to the FCC’s May 2 further notice of proposed rulemaking.

The CFA and NNI are recommending the FCC: assert its regulatory oversight over special access services as they move closer and closer to the end-user to accommodate higher levels of traffic; conduct a full, audited review of special access costs before it sets future rates for regulated services; and ensure that any transition away from a copper network does not adversely affect the small businesses that are the engine of “job growth in our economy.”

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