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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 1

[WC Docket No. 05-25; RM-10593; FCC 12-92]

Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking To Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services

AGENCY: Federal Communications Commission.
ACTION: Final rule.
SUMMARY: In this Report and Order, the Commission suspends, on an interim basis, the Commission's rules allowing for automatic pricing flexibility grants for special access services, pending adoption of new rules. The Commission suspends its pricing flexibility rules in light of evidence that the proxies for measuring actual and potential special access market competition, which are based on collocation by competitive carriers within a Metropolitan Statistical Area (MSA), do not accurately predict whether competition is sufficient to constrain special access prices and deter anticompetitive practices by price cap local exchange carriers. In the Report and Order, the Commission also initiates a process to obtain data needed to conduct a special access market analysis. Based on this forthcoming data collection, the Commission will undertake a robust special access market analysis to determine the extent to which the special access market is competitive and develop special access pricing flexibility rules to replace the collocation-based competitive showings.
DATES: Effective October 18, 2012,
FOR FURTHER INFORMATION CONTACT: Jamie Susskind, Wireline Competition Bureau, Pricing Policy Division, (202) 418-1520 or (202) 418-0484 (TTY), or via email atJamie.Susskind@fcc.gov.
SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Report and Order in WC Docket No. 05-25, RM-10593, FCC 12-92, adopted on August 15, 2012 and released on August 22, 2012. The summary is based on the public redacted version of the document, the full text of which is available electronically via the Electronic Comment Filing System athttp://fjallfoss.fcc.gov/ecfs/or may be downloaded athttp://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0823/FCC-12-92A1.pdf.The full text of this document is also available for public inspection during regular business hours in the Commission's Reference Center, 445 12th Street SW., Room CY-A257, Washington, DC 20554. The complete text may be purchased from Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC 20554. To request alternate formats for persons with disabilities (e.g.Braille, large print, electronic files, audio format, etc.) or reasonable accommodations for filing comments (e.g.accessible format documents, sign language interpreters, CARTS, etc.), send an email tofcc504@fcc.govor call the Commission's Consumer and Governmental Affairs Bureau at (202) 418-0530 (voice) or (202) 418-0432 (TTY).

I. Introduction

1. In this Report and Order, we suspend, on an interim basis, our rulesallowing for automatic grants of pricing flexibility for special access services in light of significant evidence that these rules, adopted in 1999, are not working as predicted, and widespread agreement across industry sectors that these rules fail to accurately reflect competition in today's special access markets. We set forth a path to update our rules to better target regulatory relief to competitive areas, including extending relief to areas that are likely competitive but have been denied regulatory relief under our existing framework. We provide for targeted relief in the interim through the forbearance process set forth in sec. 10 of the 1996 Act, and will soon issue a comprehensive data collection order that will help craft permanent replacement rules.

2. Special access continues to play a critical role in our economy. Four of the largest incumbent LECs recently reported that their combined 2010 revenues from sales of DS1s and DS3s exceeded $12 billion. Competitive carriers rely heavily on special access to reach customers; a large competitive local exchange carrier (LEC) that offers enterprise services to businesses using special access services as a critical input has reported that it purchases [REDACTED] times as many special access as Ethernet circuits. Enterprise customers across the country rely on special access—directly or indirectly—to conduct their business. Schools, libraries, and other institutions of state and local government depend on special access to provide services to their constituents.

3. We continue to strongly believe, consistent with the goals set forth in thePricing Flexibility Order,that regulation should be reduced wherever evidence demonstrates that actual or potential competition is acting as a constraint to ensure just and reasonable rates, terms and conditions for special access services. In the record of this proceeding, however, there is compelling evidence that our current pricing flexibility rules are not properly matching relief to such areas, combined with allegations that this mismatch is causing real harm to American consumers and businesses and hindering investment and innovation. Price cap carriers argue that they are still subject to burdensome regulation in areas where it is apparent that competition is thriving. The United States Small Business Administration asserts that “promoting competition in the business broadband market is essential in order to provide small businesses with affordable access and choice regarding the services they need to grow and create new jobs.” The American Petroleum Institute expresses concern that, because its member companies' facilities are frequently located in isolated locations where facilities-based competition is scarce, they are highly sensitive to incumbent LECs extracting supra-competitive profits. Competitive carriers argue that the terms and conditions of special access contract tariffs “lock up” demand, preventing competitors from entering markets and investing in new facilities. Wireless providers argue that high special access prices hinder their ability to hire employees, invest in their networks, and conduct research and development. While we cannot yet evaluate these claims of competitive harm based on the evidence to date in the record, our finding that the competitive showings the Commission adopted as a proxy for competition are not working as predicted leads us to suspend the triggers and further evaluate the marketplace.

4. The approach we take is based on our evaluation of our 1999 rules, the predictive judgments upon which they were based, and market developments since their adoption. As discussed in greater detail below, the Commission decided in 1999 to use an administratively simple proxy for the presence of actual or potential competition in special access markets—the extent of collocation within broad geographic regions. The Commission predicted that certain levels of collocation within a Metropolitan Statistical Area (MSA) would serve as an accurate indicator of competitive pressure sufficient to constrain prices throughout that area.

5. Based on the evidence in the record and thirteen years of experience with this regime, we now conclude that the Commission's existing collocation triggers are a poor proxy for the presence of competition sufficient to constrain special access prices or deter anticompetitive practices throughout an MSA. We therefore suspend, on an interim basis, the operation of those rules pending adoption of a new framework that will allow us to ensure that special access prices are fair and competitive in all areas of the country.

6. Although we currently lack the necessary data to identify a permanent reliable replacement approach to measure the presence of competition for special access services, we emphasize that the forbearance process set forth by Congress in the 1996 Act provides an avenue for targeted relief based on a complete analysis of competitive conditions in a geographic area.

7. Going forward, in the absence at this time of clear evidence to establish reasonable and reliable proxies to determine where regulatory relief is appropriate, we will collect necessary data and undertake a robust competition analysis that may identify reliable proxies for competition in the market for special access services going forward. We will issue a comprehensive data collection order within 60 days to facilitate this market analysis. We anticipate that during the pendency of the data request, we will continue to analyze the information submitted in the record, and may issue further decisions as warranted by the evidence. Nonetheless, the record in this proceeding demonstrates that a comprehensive evaluation of competition in the market for special access services is necessary, and that further data to assist us in that evaluation is needed with respect to establishing a new framework for pricing flexibility.

II. Background A. History of Price Cap Regulation

8. Through the end of 1990, interstate access charges were governed by “rate-of-return” regulation, under which incumbent LECs calculated their access rates using projected costs and projected demand for access services. An incumbent LEC was limited to recovering its costs plus a prescribed return on investment. It also was potentially obligated to provide refunds if its interstate rate of return exceeded the authorized level. However, a rate of return regulatory structure bases a firm's allowable rates directly on the firm's reported costs and was thus subject to criticisms that it removed the incentive to reduce costs and improve productive efficiency.

9. Consequently, in 1991 the Commission implemented a system of price cap regulation that altered the manner in which the largest incumbent LECs (often referred to today as price cap LECs) established their interstate access charges. The Commission's price cap plan for LECs was intended to avoid the perverse incentives of rate-of-return regulation in part by divorcing the annual rate adjustments from the cost performance of each individual LEC, and provide for sharing efficiency gains with customers in part by adjusting the cap based on industry productivity experience.

10. In contrast to rate-of-return regulation, which focuses on an incumbent LEC's costs and fixes the profits an incumbent LEC may earn based on those costs, price cap regulation focuses primarily on the prices that an incumbent LEC maycharge. The access charges of price cap LECs originally were set at levels based on the rates that existed at the time the LECs entered the price cap regime. Increases in their rates have, however, been limited over the course of price cap regulation by price indices that are adjusted annually pursuant to formulae set forth in Part 61 of our rules. Price cap regulation is a form of incentive regulation that seeks to “harness the profit-making incentives common to all businesses to produce a set of outcomes that advance the public interest goals of just, reasonable, and nondiscriminatory rates, as well as a communications system that offers innovative, high quality services.” A core component of our price cap regulation is the Price Cap Index (PCI). As the Commission has explained previously, the PCI is designed to limit the prices LECs charge for service. The PCI provides a benchmark of LEC cost changes that encourages price cap LECs to become more productive and innovative by permitting them to retain reasonably higher earnings. The PCI has three basic components: (1) A measure of inflation, i.e., the Gross Domestic Product (chain weighted) Price Index (GDP-PI); (2) a productivity factor or “X-Factor,” that represents the amount by which LECs can be expected to outperform economy-wide productivity gains; and (3) adjustments to account for “exogenous” cost changes that are outside the LEC's control and not otherwise reflected in the PCI.

B. Pricing Flexibility

11. Pursuant to the pro-competitive, deregulatory mandates of the 1996 Act, the Commission in 1996 began exploring whether and how to remove price cap LECs' access services from price cap and tariff regulation once they are subject to substantial competition. Three years later, in 1999, the Commission adopted thePricing Flexibility Orderin an effort to ensure that the Commission's interstate access charge regulations did not unduly interfere with the operation of interstate access markets as competition developed in those markets. The Commission developed competitive showings (also referred to as “triggers”) designed to measure the extent to which competitors had made irreversible, sunk investment in collocation and transport facilities. Price cap carriers that demonstrated the competitive showings were met in their serving areas could obtain so-called “pricing flexibility,” namely the ability to offer special access services at unregulated rates through generally available and individually negotiated tariffs (i.e.,contract tariffs). The operation of the pricing flexibility rules is discussed in greater detail in section 0 below.

C. The CALLS Order

12. In 2000, after a comprehensive examination of the interstate access charge and universal service regulatory regimes for price cap carriers, the Commission adopted the industry-proposed CALLS plan. This plan represented a five-year interim regime designed to phase down implicit subsidies and (as it pertained to switched and special access charges) to move towards a more market-based approach to rate setting. In adopting the CALLS plan, the Commission offered price cap carriers the choice of completing the forward-looking cost studies required by theAccess Charge Reform Orderor voluntarily making the rate reductions required under the five-year CALLS plan. The Commission permitted carriers to defer the planned forward-looking cost studies in favor of the CALLS plan because it found the plan to be “a transitional plan that move[d] the marketplace closer to economically rational competition, and it [would] enable [the Commission], once such competition develops, to adjust our rules in light of relevant marketplace developments.” All price cap carriers opted for the CALLS plan.

13. The CALLS plan separated special access services into their own basket and applied a separate X-factor to the special access basket. The X-factor under the CALLS plan, unlike under prior price cap regimes, is not a productivity factor. Rather, it represents “a transitional mechanism * * * to lower rates for a specified period of time for special access.” The special access X-factor was 3.0 percent in 2000 and 6.5 percent in 2001, 2002, and 2003. In addition to the X-factor, access charges under CALLS are adjusted for inflation as measured by the GDP-PI. For the final year of the CALLS plan (July 1, 2004-June 30, 2005), the special access X-factor was set equal to inflation, thereby freezing rate levels. Thus, in the absence of a new price cap regime post-CALLS, price cap LECs' special access rates have remained frozen at 2003 levels (excluding any necessary exogenous cost adjustments). The Commission hoped that, by the end of the five-year CALLS plan, competition would exist to such a degree that deregulation of access charges (switched and special) for price cap LECs would be the next logical step.

D. AT&T's Petition for Rulemaking and 2005 Special Access NPRM

14. On October 15, 2002, AT&T Corp. filed a petition for rulemaking requesting that the Commission revoke the pricing flexibility rules and revisit the CALLS plan as it pertains to the rates that price cap LECs, and the BOCs in particular, charge for special access services. AT&T claimed that the competitive showings required to obtain pricing flexibility failed to predict price-constraining competitive entry and, rather, that significant competitive entry had not occurred. It further contended that, based on Automated Reporting Management Information System (ARMIS) data, the BOCs' interstate special access revenues had more than tripled, from $3.4 billion to $12.0 billion, between 1996 and 2001 and that the BOCs' returns on special access services were between 21 and 49 percent in 2001. Further, AT&T stated that, in every MSA for which pricing flexibility was granted, BOC special access rates either remained flat or increased. Thus, AT&T contended both that the predictive judgment at the core of thePricing Flexibility Orderhad not been confirmed by marketplace developments, and that BOC special access rates exceeded competitive levels and hence were unjust and unreasonable in violation of § 201 of the Communications Act. Because the predictive judgment had proven wrong, AT&T asserted, the Commission was compelled to revisit its pricing flexibility rules in a rulemaking proceeding.

15. Price cap LECs generally opposed theAT&T Petition for Rulemaking.They claimed that their special access rates were reasonable and therefore lawful, that there was robust competition for special access services, that the collocation-based competitive showings were an accurate metric for competition, and that the data relied upon by AT&T were unreliable in the context used by AT&T. SBC noted that AT&T only provided (and could only provide) data from a single year (2001) that post-dated the initial implementation of Phase II pricing flexibility in 2001, and SBC and Verizon claimed that ARMIS data were not designed to evaluate the reasonableness of rates. The BOCs contended, moreover, that special access revenues per line declined between 1996 and 2001.

16. On January 31, 2005, the Commission released theSpecial Access NPRM.TheSpecial Access NPRMinitiated a broad examination of what regulatory framework to apply to price cap LECs' interstate special accessservices following the expiration of the CALLS plan, including whether to maintain or modify the Commission's pricing flexibility rules for special access services. As part of our review of the pricing flexibility rules, which were adopted, in part, based on the Commission's predictive judgment, the Commission sought to examine whether the available marketplace data supported maintaining, modifying, or repealing these rules. The Commission noted its commitment to re-examine periodically rules that were adopted on the basis of predictive judgments to evaluate whether those judgments are, in fact, corroborated by marketplace developments. Accordingly, the Commission sought data and comments on whether actual marketplace developments supported the predictive judgments used to support the special access pricing flexibility rules.

17. TheSpecial Access NPRMalso responded to AT&T's request for interim relief. AT&T asked, in addition to initiating a rulemaking, that the Commission reinitialize Phase II pricing flexibility special access rates at an 11.25 percent rate of return, and impose a temporary moratorium on further pricing flexibility applications. These requests were denied; however, the Commission sought comment on whether to adopt any interim requirements in the event that the Commission was unable to conclude the NPRM in time for any adopted rule changes to be implemented in the 2005 annual tariff filings.

E. Recent Actions in the Proceeding 1. Refresh Record

18. In July 2007, the Commission invited interested parties to update the record in the special access rulemaking in light of a number of recent developments in the industry, including several “significant mergers and other industry consolidation,” “the continued expansion of intermodal competition in the market for telecommunications services,” and “the release by GAO [the Government Accountability Office] of a report summarizing its review of certain aspects of the market for special access services.” While the special access rulemaking was pending, the Commission also addressed special access regulation for price cap carriers in several other proceedings. A petition for forbearance from dominant carrier regulation of enterprise broadband special access services (i.e., packet-based switched, high-speed telecommunications services for businesses) filed by Verizon was deemed granted in 2006. In orders issued in October 2007 and August 2008, the agency granted petitions filed by AT&T, Embarq, Frontier, and Qwest under 47 U.S.C. § 160 seeking similar forbearance relief, and, in August 2008, granted Qwest's petition for similar relief from regulation of enterprise broadband special access.

2. Analytical Framework

19. In November 2009, the Commission sought comment on the appropriate analytical framework for examining the issues that theSpecial Access NPRMraised. In July 2010, the Commission's Wireline Competition Bureau (Bureau) held a staff workshop on the economics of special access to gather further input from interested parties on the analytical framework the Commission should use—and the data it should collect—to evaluate whether the current special access rules are working as intended.

3. Voluntary Data Requests

20. In October 2010, the Bureau issued a public notice inviting the public to submit data on the presence of competitive special access facilities to assist the Commission in evaluating the issues that theSpecial Access NPRMraised. Explaining that data “would need to be reviewed” before the Commission could address the issues raised by the proceeding, the Bureau asked that the requested data be submitted by January 27, 2011. The Bureau also noted that while it continued to develop an analytical framework, it would “ask for additional voluntary submissions of data in a second public notice.”

21. On September 19, 2011, the Bureau issued a second public notice requesting the submission of special access data. In this request, the Bureau sought detailed data on special access prices, revenues, and expenditures, as well as the nature of terms and conditions for special access services. The Bureau requested that the data be submitted to the Commission by December 5, 2011.

III. The “Competitive Showings” Adopted in 1999 Have Not Worked as Expected

22. In thePricing Flexibility Order,the Commission adopted rules intended to allow price cap LECs to show, in an administratively workable way, that certain parts of the country were sufficiently competitive to warrant pricing flexibility for special access services. As discussed in greater detail below, we find that the record indicates that the administratively simple competitive showings we adopted in 1999 have not worked as intended, likely resulting in both over- and under- regulation of special access in parts of the country. We therefore suspend the pricing flexibility competitive showings, on an interim basis, until we obtain the requisite data and conduct the market analysis required to craft replacement rules.

A. Background 1. Rationale for Competitive Showings

23. In thePricing Flexibility Order,the Commission adopted rules that allow price cap LECs to obtain relief from pricing regulations as competition for special access services increased. The Commission concluded that relief should be granted in two phases. Phase I relief permits price cap LECs the ability to lower their rates through contract tariffs and volume and term discounts, but requires that they maintain their generally available price cap-constrained tariff rates to “protect those customers that lack competitive alternatives.” Phase II relief permits price cap LECs to raise or lower their rates throughout an area, unconstrained by the Commission's part 61 and part 69 rules.

24. The Commission found that different levels of collocation in an area would justify different levels of relief. Specifically, the Commission held that Phase I deregulatory relief would be appropriate in areas where the price cap LEC was able to show that competitors had made irreversible, sunk investment sufficient to “discourage[e] incumbent LECs from successfully pursuing exclusionary strategies,” such as “ `locking up' large customers by offering them volume and term discounts.”

25. The Commission held that Phase II deregulatory relief would be appropriate only in areas where a price cap LEC could show there was a higher level of collocation—specifically, that “competitors have established a significant market presence,i.e.,that competition for a particular service within the [area] is sufficient to preclude the incumbent from exploiting any monopoly power over a sustained period.” That is, competitors would have “sufficient market presence to constrain prices throughout the” area because “almost all special access customers have a competitive alternative” and “[i]f an incumbent LEC charges an unreasonably high rate for access to an area that lacks a competitive alternative, that rate will induce competitive entry, and that entry will in turn drive rates down.”

2. How the Competitive Showings Work

26.Geographic Area of Relief.The Commission chose to grant pricing flexibility relief on an MSA basis, finding that, among the proposed alternatives “MSAs best reflect the scope of competitive entry, and therefore are a logical basis for measuring the extent of competition” and avoiding the “increased expenses and administrative burdens associated with” proposals to grant relief in smaller geographic areas, such as wire centers. The Office of Management and Budget (OMB) defines MSAs as geographic entities that contain a core urban area of 50,000 or more population, and often includes adjacent counties that have a high degree of social and economic integration with the urban core, as measured by commuting to work. MSAs were developed not for the purposes of competition policy, but to meet the Federal Government's need to have “nationally consistent definitions for collecting, tabulating and publishing Federal statistics for a set of geographic areas.” OMB may add counties or principal cities to an MSA, remove them, or even create new MSAs if census and population estimates indicate changes in social and economic integration between outlying areas and the urban core.

27. In thePricing Flexibility Order,the Commission adopted a list of 306 MSAs based largely on data compiled from the 1980 census, and froze that list for use in all pricing flexibility petitions. Therefore, even if OMB subsequently expanded the geographic area of an MSA, a price cap LEC's grant of pricing flexibility remains within the borders of the applied-for MSA. The Commission also recognized that some price cap LEC study areas fall outside of MSA boundaries, and held that it would “grant price cap LECs pricing flexibility within the non-MSA parts of a study area if” they were able to make the required showings “throughout that area.”

28. MSAs can be geographically extensive and, in many cases, may encompass areas with vastly different business density within their borders. Some illustrative examples include the Pensacola, Florida MSA and the Atlanta, Georgia MSA.

29.Proxies for Competitive Showings.For the sake of administrative convenience, the Commission adopted proxies for competition designed to allow price cap LECs to make the required showings, “with a minimum of administrative burden for the industry and the Commission.” Specifically, the Commission chose to “rely on collocation as a proxy for irreversible, sunk investment” in special access facilities and services. Collocation—as used in the competitive showing rules—is an offering by an incumbent LEC whereby a requesting telecommunications carrier's transmission equipment is located, for a tariffed charge, at the incumbent LEC's central office. The Commission predicted that collocation by competitors in incumbent LEC wire centers would be a reliable indicator of competition because collocation typically represented a financial investment by a competitor to establish facilities within a wire center. The Commission predicted that the collocation-based competitive showings would “provide a bright-line rule to guide the industry” and “an administratively simple and readily verifiable mechanism for determining whether competitive conditions warrant the grant of pricing flexibility.”

30. The Commission established bright line “triggers” based on the extent of collocation within an MSA that it expected would allow a price cap LEC to demonstrate that market conditions in a given MSA would warrant relief. Specifically, the Commission held that price cap LECs would need to demonstrate

either that (1) competitors unaffiliated with the incumbent LEC have established operational collocation arrangements in a certain percentage of the incumbent LEC's wire centers in an MSA, or (2) unaffiliated competitors have established operational collocation arrangements in wire centers accounting for a certain percentage of the incumbent LEC's revenues from the services in question in that MSA. In both cases, the incumbent also must show, with respect to each wire center, that at least one collocator is relying on transport facilities provided by a transport provider other than the incumbent LEC.

The specific level of collocation required varies depending on whether a price cap LEC is seeking Phase I or Phase II relief and whether it is seeking relief for channel terminations or other special access services.

31. On February 2, 2001, the U.S. Court of Appeals for the DC Circuit upheld thePricing Flexibility Order,finding that the Commission made a reasonable policy determination and sufficiently explained its basis for adopting the competitive showing requirements.

B. Subsequent Evidence Undermines the Commission's Previous Decision To Measure Competitive Showings and Grant Relief on an MSA-Wide Basis and Justifies Suspension of Rules 1. Original Rationale for Granting Pricing Flexibility in MSAs and Non-MSA Portions of Study Areas

32. The Commission's 1999Pricing Flexibility Orderchose MSAs as the basis for competitive analysis because the record at the time indicated “that MSAs best reflect the scope of competitive entry, and therefore are a logical basis for measuring the extent of competition.” The Commission rejected larger geographic areas such as states and LATAs “[b]ecause competitive LECs generally do not enter new markets on a statewide basis.” Accordingly, “granting pricing flexibility over such a large geographic area would increase the likelihood of exclusionary behavior by incumbent LECs, by granting them flexibility in areas where competitors have not yet made irreversible investment in facilities.”

33. The Commission rejected concerns from some parties that “competition may exist in only a small part of an MSA,” finding that “[t]he triggers we establish * * * are sufficient to ensure that competitors have made sufficient sunk investment within an MSA.” The Commission therefore rejected smaller geographies, such as wire centers, concluding that “the record does not suggest that this level of detail justifies the increased expenses and administrative burdens associated with these proposals.”

34. The Commission received little guidance from commenters on how to establish an appropriate geographic area for grants of pricing flexibility in areas that fall outside of MSAs. In the absence of such guidance, the Commission allowed price cap LECs to make a competitive showing for the entirety of the non-MSA portions of a study area for which they sought relief. It decided against requiring competitive showings at a more granular level—such as on a rural service area (RSA) basis, stating that

* * * we expect competitors to enter MSA markets first and then to extend their networks into less densely populated areas. Because rural areas by definition do not have large concentrations of population comparable to urban areas, we expect that competitive entry into rural areas will be less concentrated than in urban areas. Therefore, we do not expect that pricing flexibility will enable an incumbent to engage successfully in exclusionary pricing behavior with respect to one RSA because competitive entry is limited to another RSA.

The Commission therefore placed more weight on administrative ease, and chose to allow price cap LECs to apply for pricing flexibility for the entirety of the non-MSA components of a study area. 2. The Record Now Suggests That Entry Occurs in Smaller Areas

35. The record in this proceeding suggests that, contrary to the Commission's prediction in 1999, MSAs have generally failed to reflect the scope of competitive entry. Rather, in many instances, the scope of competitive entry has apparently been far smaller than predicted.

36. In the sections that follow, we evaluate whether record evidence supports the Commission's prediction that MSAs and non-MSA sections of incumbent LEC study areas best reflect the scope of competitive entry. Entry is one of the many elements the Commission and antitrust agencies analyze when evaluating competition. As a general principle, firms are likely to enter a geographic area to compete “if the entrant generates sufficient revenue to cover all costs apart from the sunk costs of entry. Such entry succeeds in the sense that the entrant becomes and remains a viable competitor in the market.” In order to gauge whether entry would be profitable, firms are more likely to focus on areas with high demand for their services, relative to the cost of providing those services. Our review of the evidence suggests that demand varies significantly within any MSA, with highly concentrated demand in areas far smaller than the MSA. This leads us to conclude that competitive entry is considerably less likely to be profitable and hence is unlikely to occur in areas of low demand throughout an MSA, regardless of whether the MSA also contains areas with demand at sufficient levels to warrant competitive entry. This conclusion is confirmed by the available data, including the record of pricing flexibility grants since the Commission's 1999 Order, and data on subsequent competitive developments in these areas.

a. Business Demand Varies Significantly Within MSAs

37. The Commission sought to define the geographic areas for which pricing flexibility requests would be considered “narrowly enough so that the competitive conditions within each area are reasonably similar, yet broadly enough to be administratively workable.” Our analysis of business establishment density indicates that business demand can vary significantly across an MSA. This suggests that competitive conditions within an MSA are also likely to vary significantly, since areas with higher demand tend to be more capable of supporting competition and are more attractive to potential entrants than low demand areas. These data provide context for our analysis of evidence about grants of pricing flexibility petitions and how competitive entry has occurred since adoption of thePricing Flexibility Order.

38. The plots in Figures 1 and 2 below illustrate that business demand varies significantly within MSAs. They show the distribution of business establishment density by ZIP code in 12 of the sample of 24 MSAs for which we sought data in our voluntary data requests. Figure 1 shows the six MSAs with the least variance in business establishment density across ZIP codes—Fayetteville, North Carolina; Johnstown, Pennsylvania; Phoenix, Arizona; Ocala, Florida; Greenville-Spartanburg, South Carolina; and Lima, Ohio. The distributions show that, even within these relatively homogeneous MSAs, dense pockets of business establishments exist, as well as areas in which business establishments are few and far between. Johnstown, Pennsylvania is an extremely concentrated example. In Johnstown, seventy-five percent of the ZIP codes (from the minimum observation, represented by an upside-down “T” shape, to the top of the box) are clustered near the bottom of the scale with densities close to zero, while the remaining twenty-five percent (from the top of the box to the maximum observation, represented by a “T” shape) are scattered along the vertical axis between about five establishments per square mile and 230 establishments per square mile. The most dense ZIP code (15901), which covers the central business district of Johnstown, is 23 times more dense than the average zip code in the area. Phoenix is much larger and somewhat more uniform than Johnstown, but is nonetheless characterized by a few very dense ZIP codes amid a majority of less dense ZIP codes: while the Phoenix MSA has three ZIP codes with over 300 establishments per square mile, over half of the ZIP codes in the MSA have fewer than 40 establishments per square mile. Overall, these MSAs are similar in that a small number of ZIP codes are far more dense than the rest.

39. The distributions shown in Figure 2 demonstrate more extreme examples of intra-MSA variance of competitive conditions. Figure 2 depicts business establishment density variation for the six MSAs with the most business establishment density variation across ZIP codes: Chicago, Illinois; New Orleans, Louisiana; New York, New York; Seattle-Everett, Washington; Washington, DC; and Los Angeles, California. Except for New York, half of the ZIP codes in each MSA contain fewer than 100 establishments per square mile, whereas other areas within each MSA have upwards of 1,000 establishments per square mile.

BILLING CODE 6712-01-P ER18SE12.070 ER18SE12.071 Billing Code 6712-01-C

40. This variance of competitive conditions within an MSA is an artifact of the way MSAs are defined. The resulting statistical entity can be large, including the entirety of distant counties if those counties contain exurban areas linked to the core by commuting behavior. The Atlanta, Georgia MSA, for example, includes Butts County, Georgia (see Figure 3 below). Of the three ZIP codes within that county, the densest (Jackson, Georgia 30233) has on average about 2.3 business establishments per square mile. This contrasts to the density level of the central business district of Atlanta's MSA, which contains thousands of business establishments per square mile. This kind of variation is common across the 12 MSAs we have examined for these purposes.

ER18SE12.072

41. Given the foregoing evidence that MSAs do not have “reasonably similar” competitive conditions across their geographic areas, and as discussed fully below, when such competitive conditions are considered together with the evidence of how relief has been granted and how some competitive entry has occurred, we can no longer conclude that MSAs “best reflect the scope of competitive entry” by LECs.

b. Prior Grants of Relief Suggest That Competitive LEC Entry Occurred at a Smaller Geographic Level Than the MSA

42. Though the Commission acknowledged that demand for special access services might be concentrated in certain areas, it designed the competitive showings with the intent of ensuring that price cap LECs could not obtain pricing flexibility throughout an MSA in instances of extremely concentrated demand. While recognizing that “a few wire centers may account for a disproportionate share of revenues for a particular service,” the Commission attempted to set its revenue based collocation triggers at levels designed to “ensure that competitors have extended their networks beyond a few revenue-intensive wire centers.” Our analysis indicates that the 1999 rules have not effectively fulfilled this intent. This provides further evidence that MSAs likely do not reflect the actual scope of competitive entry.

43. As noted above, the Commission adopted two types of rules by which price cap LECs could make the competitive showings required to obtain relief. The first type of rule permitted price cap LECs to obtain relief by showing the presence of collocators in a certain percentage of its wire centers within an MSA. The second type, the revenue-based rule described above, reflected the Commission's concession that demand for special access services is often concentrated. Despite this concession, however, the Commission cautioned that the revenue-based threshold for dedicated transport services would need to be set high enough “to ensure that competitors have extended their networks beyond a few revenue-intensive wire centers.” With respect to channel terminations to end users, which the Commission noted were less competitive than dedicated transport, it doubled the revenue requirement for limited pricing flexibility and increased by almost a third the requirement for full relief. In short, the Commission made the revenue-based rule more difficult to meet specifically to protect against grants of pricing flexibility based on extremely concentrated demand.

44. We have analyzed the 217 incumbent LEC areas for which pricing flexibility relief for channel terminations to end users was granted by order of the Bureau, representing all such grants associated with pricing flexibility petitions available in the Commission's Electronic Tariff Filing System. These grants cover 199 MSAs and five non-MSAs. The majority of those grants were based exclusively on the revenue-based rule. Because the revenue-based rule has different revenue thresholds for each type of special access service, the Commission restricted its analysis to one type,channel terminations to end users, to keep the analysis consistent.

45. This analysis shows that our rules permitted MSA-wide relief on the basis of extremely concentrated demand in many instances. For example, as detailed in the chart below, 72 of the 212 grants for MSAs were based on revenues of no more than a quarter of the relevant wire centers within the MSA. For example, AT&T obtained Phase II pricing flexibility in the Pensacola MSA based on the revenues of three out of 12 wire centers. Further, 30 of those 72 grants were based on the revenues of only one wire center, 12 were based on the revenues of only two, and 5 were based on the revenues of only three.

Table 4—MSA-Wide Grants Based on Extremely Concentrated Demand MSA Carrier name Current At time of grant Competitive Showing WCs with
  • collocation
  • Total WCs Percent of wire centers with
  • collocation
  • Alexandria, LA AT&T Bell South 1 10 10 Anderson, IN AT&T Ameritech 1 5 20 Anderson, SC AT&T Bell South 1 5 20 Asheville, NC AT&T Bell South 1 9 11 Bangor, ME Fairpoint Verizon 1 14 7 Burlington, NC AT&T Bell South 1 5 20 Columbus, GA-AL AT&T Bell South 1 7 14 Evansville, IN-KY AT&T Bell South 1 4 25 Evansville-Henderson, IN-KY AT&T Ameritech 1 13 8 Gainesville, FL AT&T Bell South 1 6 17 Harrisburg, PA CenturyLink Sprint 1 14 7 Jackson, MI AT&T Ameritech 1 6 17 Joplin, MO AT&T SWBT 1 6 17 Kalamazoo, MI AT&T Ameritech 1 8 13 Lawton, OK AT&T SWBT 1 4 25 Lima, OH CenturyLink Embarq 1 16 6 Medford, OR CenturyLink Qwest 1 7 14 Memphis, TN-AR-MS AT&T SWBT 1 5 20 Muncie, IN AT&T Ameritech 1 5 20 Ocala, FL CenturyLink Sprint 1 10 10 Owensboro, KY AT&T Bell South 1 9 11 Panama City, FL AT&T Bell South 1 5 20 Pittsburgh, PA CenturyLink Sprint 1 14 7 Pueblo, CO CenturyLink Qwest 1 5 20 Salem, OR CenturyLink Qwest 1 7 14 Sioux City, IA-NE CenturyLink Qwest 1 8 13 St. Cloud, MN CenturyLink Qwest 1 8 13 St. Joseph, MO AT&T SWBT 1 5 20 Waco, TX AT&T SWBT 1 14 7 Waterloo-Cedar Falls, IA CenturyLink Qwest 1 6 17 Battle Creek, MI AT&T Ameritech 2 8 25 Boise City, ID CenturyLink Qwest 2 8 25 Clarksville-Hopkinsville, TN/KY AT&T Bell South 2 12 17 Eugene-Springfield, OR CenturyLink Qwest 2 13 15 Fargo-Moorehead, ND-MN CenturyLink Qwest 2 8 25 Fort Smith, AR-OK AT&T SWBT 2 11 18 Manchester, NH Frontier Verizon 2 13 15 Oxnard-Simi Valley-Ventura, CA AT&T Pac Bell 2 9 22 Provo-Orem, UT CenturyLink Qwest 2 10 20 Springfield, IL AT&T Ameritech 2 11 18 Springfield, MO AT&T SWBT 2 12 17 Wilmington, NC AT&T Bell South 2 8 25 Augusta, GA AT&T Bell South 3 13 23 Bloomington-Normal, IL Frontier Verizon 3 20 15 Chattanooga, TN-GA AT&T Bell South 3 13 23 Pensacola, FL AT&T Bell South 3 12 25 Portland, ME Fairpoint Verizon 3 22 14

    46. In sum, more than a third of the cases in which pricing flexibility was granted were premised on the existence of collocations where 65 percent or more of the special access revenue generated within the MSA came from 25 percent or fewer of the wire centers in the MSA. This is consistent with extreme variations in business density. Qualitatively, this suggests that MSA-wide grants of pricing flexibility have encompassed areas in which little or no competitive entry would be expected.

    47. Even with more relaxed standards for what constitutes extremely concentrated demand, the data shows that 97 grants were based on revenues from less than a third of the wire centers, and 144 were based on revenues from less than half of the wire centers. Conversely, only 28 grants were based on revenues of two-thirds or more of the wire centers within the applied-for MSA.

    c. Data Indicates That Competitive LEC Entry Occurs Only in Areas of High Business Demand

    48. Whereas our bright-line competitive showings suggested that some MSAs would soon be, or already were, competitive more than a decade ago, recent data indicates that competitors have a strong tendency to enter in concentrated areas of high business demand, and have not expanded beyond those areas despite the passage of more than a decade since the grant of Phase II relief. This provides further evidence that an MSA is probably a much larger area than a competitor would typically choose to enter.

    49. For example, data about the Atlanta MSA, where BellSouth was granted Phase II relief in 2000, demonstrates the importance of geographic business establishment density as a driver of competitive entry. In 2011, staff collected data, on a voluntary basis, about the presence of competitive special access facilities for channel terminations to end users in 24 MSAs. The following providers submitted data indicating that they provide facilities-based competition in parts of the Atlanta MSA: [REDACTED]. The first of these carriers is [REDACTED], another is the [REDACTED], and three are among the nation's [REDACTED]. According to those data, only 40 percent of the ZIP codes in the Atlanta MSA had competitive access facilities supplied by even one of the [REDACTED] reporting competitors.

    50. The ZIP codes in which the reporting carriers in Atlanta offered facilities-based competition were those with the highest average business establishment densities. This is reflected in Table 5, which compares average business establishment density between ZIP code areas in which reporting carriers compete and ZIP codes areas in which they do not (and includes similar data for the Miami and Norfolk MSAs). Because the data submissions that serve as the basis for Table 5 were voluntary, the reporting competitors do not necessarily represent all competition in the three MSAs discussed above, and it is possible that competitors have higher market shares than our data show. However, Table 5 does not show market shares, but rather the geographic breadth of coverage by competitors within the MSA. Further analysis of these data indicates that the reporting carriers had a tendency to enter the same areas within the MSA. We have no reason to believe that the competitors' focus on high business establishment density indicated by these data would change if we were able to obtain data from any other competitive providers with access facilities in the Atlanta, Miami and Norfolk MSAs. Thus, despite the fact that our competitive showings rules were designed to predict competitive entry across an MSA, these data suggest a strong tendency for competitive LECs to deploy channel termination facilities to end users only in ZIP codes with the highest density of business establishments.

    Table 5—Average Business Establishment Density in MSAs by ZIP Codes With vs. Without Facilities-Based Competition From Reporting Carriers MSA and status of incumbent provider Number of ZIP codes in MSA with reported facilities-based competition Percent of ZIP codes in MSA with reported facilities-based competition Average
  • establishment density in ZIP codes with
  • reported
  • facilities-based competition
  • (units: estab. per square mile)
  • Average of
  • establishment density in ZIP codes without reported
  • facilities-based competition
  • (units: estab. per square mile)
  • Atlanta, GA (2000 AT&T/BellSouth Phase II Pricing Flexibility) 59 40 175 41 Miami, FL (2000 AT&T/BellSouth Phase II) 41 31 390 181 Norfolk, VA (2001 Verizon Phase II) 36 78 106 59

    51. Chart 6 displays the distribution of establishment density for ZIP codes in the three MSAs of Table 5. The distribution at the top of Chart 6 is for ZIP codes in which no reporting carrier offered facilities-based competition for end-user channel terminations and the distribution at the bottom is for ZIP codes in which one or more reporting carriers did offer facilities-based competition for end-user channel terminations. The chart indicates that the reporting carriers had a greater tendency to offer competition in ZIP codes with business establishment density greater than 100 establishments per square mile than they did in ZIP codes with lower establishment densities. Based on an analysis of the individual ZIP code areas, the probability that the carriers' location decisions in these metropolitan areas were not tied to business establishment density is exceedingly small. The findings from this analysis are consistent with other evidence in the record.

    ER18SE12.073

    52. The fact that there may be other competitors in these MSAs that are not reflected in our data, that more competitors may enter in the future, or that current competitors may build out to other parts of the MSA with high business density does not diminish our finding that competitors typically enter in areas of high business establishment density. Commenters rightly point out that we do not have comprehensive facilities data for the MSAs above. We recognize the limitations of our existing data set and, as described below, we intend to collect additional data in the coming months that will help inform our analysis. However, even this partial data provides insight into where competitors choose to enter within an MSA, and reinforces evidence we have received in this record.

    53. Incumbent LECs generally concede that competitors have focused on areas in which demand for special access services is very concentrated. As SBC noted:

    Demand for special access services is highly concentrated in a relatively small number of dense urban wire centers and ex-urban wire centers containing office parks and other campus environments. Indeed, more than[REDACTED]percent of SBC's special access demand in Phase II MSAs is concentrated in[REDACTED]percent of its wire centers. To meet this demand, competitors have deployed myriad competitive facilities—including fiber connected directly to end-user premises—in markets across SBC's territory, particularly in dense, metropolitan areas and large campus environments.

    Verizon states that more than 80 percent of demand is generated in 8 percent of its wire centers, “enabling competitors to address a large portion of demand through targeted investments.” This is consistent with the Commission's earlier finding that communities within an MSA share a center of commerce, but not necessarily common economic characteristics relating to telecommunications deployment. This record also demonstrates that demand exists for special access services outside of these areas and it raises concerns regarding the availability of competitive alternatives to meet such demand.

    54. Some commenters also allege that extending new facilities is sufficiently easy that competitors could reach all parts of an MSA if warranted even if they only have facilities in part of an MSA today. SBC, for example, states that a large percentage of its demand for DS1 and DS3 services runs within 1,000 feet, or about three city blocks, of existing alternative fiber. Thus, incumbent LECs argue that potential competition exists throughout an MSA even if competitive facilities are only present in a small area. In contrast, competitive carriers assert that entry is far more difficult than incumbents describe in the record. Such commenters state that, as compared to incumbent providers who have achieved economies of scope and scale in the provision of telecommunications services, it is not economical for competitors to deploy their own facilities to serve all special access demand. Competitive carriers note that construction costs, the costs of fiber and electronics, backhaul costs, transaction costs involved in negotiating withsuppliers, and other recurring costs such as rent, utilities, and maintenance are typically too large to justify provisioning a building with relatively low levels of demand. Covad and XO, for example, estimate the costs of deploying a building lateral to be[REDACTED], and tw telecom estimates that[REDACTED]. Commenters, including Covad, XO, BT Americas, and tw telecom, also point to important barriers to entry, including the delays in or impossibility of securing municipal franchise agreements, rights-of-way agreements, building access agreements, and building and zoning permits.

    55. We need not resolve this controversy here, however, for data provided by incumbent LECs demonstrate that, even if competitors could easily deploy fiber to serve customer demand within 1,000 feet of incumbents' facilities, many parts of an MSA would still not be served by competitive fiber. For instance, a 2007 AT&T map depicting competitive fiber deployment in the Austin, Texas MSA appears to indicate that, out of the 24 AT&T wire centers in the MSA, competitive fiber does not extend to[REDACTED]. Maps submitted by SBC in 2005 provide similar data. For instance, SBC estimates that in the San Diego MSA,[REDACTED]. This cuts against assertions that the majority of special access demand could be easily and quickly served by proximate competitive alternatives.

    d. Analysis of Multi-Incumbent LEC MSAs Also Suggests That MSAs Do Not Correspond to the Scope of Entry

    56. As discussed above, the Commission selected the MSA because it decided the MSA best reflected the scope of