Last Friday, FCC Chairman Tom Wheeler began circulating a draft order among his fellow commissioners outlining a new regulatory framework for “special access” or business data services (BDS) that would bring all incumbent local exchange carrier (ILEC) circuit-switched TDM services under price cap regulation while phasing in a one-time, 11% cut in the price cap for such services over the next three years.

Valued at $45 billion, the national BDS market sources the high-capacity broadband connections used by thousands of businesses to facilitate ATM and credit card transactions and a host of other essential services.  In an April 28 further rulemaking notice (FNPRM), the agency sought public input on ways in which the BDS market could be modernized and reformed, noting that “competition in this essential market is uneven, and . . . the FCC’s existing rules have failed to identify markets where competition is lacking, even as they have failed to identify competitive markets.”  While proposing that “tariffs should not be used in the future as part of the regulation of [BDS] in either competitive or non-competitive markets,” the FNPRM also proposed to extend the new regulatory framework to cable and other non-ILEC BDS providers in the name of technology neutrality.

In a departure from April’s FNPRM, price cap and other rules contained in the draft order would apply exclusively to ILECs and not to cable companies.  Explaining the FCC’s shift in stance, an unnamed FCC official remarked that the provision of TDM services by cable operators and other non-ILECs is relatively rare.  Although the draft order would exempt packet-switched Ethernet BDS from price cap regulation, the draft rules offer guidelines and set discovery and mediation requirements for the resolution of complaints concerning the reasonableness of Ethernet BDS pricing.  While affirming that packet-based BDS is “largely” a telecommunications service as defined by Title II of the Telecommunications Act, the draft order, in the words of an FCC fact sheet, would “level the playing field for packet-based and circuit-based BDS providers delivering speeds in excess of 45 Mbps by granting uniform forbearance to certain provisions of Title II.”  Because current price caps have not been adjusted since 2004, the draft rules would subject affected ILECs to a one-time, 11% downward adjustment in the price cap that would be implemented next year at 3%, then in annual 4% increments during the next two years.  Thereafter, affected ILECs would be subject to an annual productivity adjustment of 3%. 

Industry reaction to the draft order was mixed.  As a Verizon executive applauded Wheeler and the FCC for “creating a consistent framework,” a spokesman for Sprint welcomed the draft order as one that takes “an important step to reform this broken market.”  U.S. Telecom Association President Walter McCormick, however, voiced concern that the draft order “appears to apply indiscriminate price regulation to legacy TDM services without regard to the state of competition in the local market.”  Communications Workers of America President Chris Shelton predicted that adoption of the draft rules “will have a devastating effect on the investment necessary for broadband expansion.”  The FCC is expected to vote on the draft order on October 27.