Nearly a year after it ordered sweeping deregulation of the business data services (“BDS”) market, the Federal Communications Commission (“FCC”) proposed new rules that would allow certain small rural carriers to move from longstanding rate-of-return regulation to price cap regulation for their BDS offerings. The transition would reduce the regulatory obligations of such carriers, including the need to prepare and file complex cost studies, which the FCC stated would allow carriers to rededicate resources to building and maintaining networks in underserved areas. The FCC also proposed removing pricing restrictions on lower-speed BDS offerings in areas with sufficient competition and sought input on whether pricing restrictions for higher-speed DBS offerings also should be eliminated.

Unlike prior BDS actions, where the issue was hotly contested for years and deregulation passed on a party-line vote, the proposed rulemaking was supported by all five Commissioners, at least for purposes of gathering a record. It’s not clear if this unanimity will hold throughout the proceeding, but the FCC may be on the verge of turning a page in its focus on these services, which are a bedrock for both retail offerings and for competitive carriers extending their networks.

BDS are dedicated point-to-point transmissions at guaranteed speeds over high-capacity connections used by major businesses, governments, and other large institutions to move their data. Last year, the FCC generally deregulated BDS and eliminated price controls in areas that satisfied a new competitive market test. However, these actions did not extend to the more than 200 smaller carriers predominately located in rural areas that received universal service funding under the Alternative Connect America Model (“A-CAM”). A-CAM carriers previously operated under rate-of-return regulation, where they reported costs annually to the FCC and received a specified return based on those costs. This system required the carriers to prepare and submit complex cost studies to the FCC to justify their returns. However, these carriers elected in 2016 to move to price cap regulation under the A-CAM, which sets the price that the carriers can charge for services. With a cap on prices, the A-CAM carriers possessed strong incentives to become more efficient and reduce costs to increase profits. However, the price cap regulation of A-CAM carriers did not cover their BDS offerings and these carriers continued to be obligated to conduct cost studies for BDS.

The FCC’s proposed rules eliminate this disparity and take additional steps to lessen the regulatory oversight of A-CAM carriers and other BDS providers:

First, the FCC proposed allowing all A-CAM carriers to move their BDS offerings to price cap incentive-based regulation, creating regulatory uniformity among their services and eliminating the time and resources spent on annual cost studies. The FCC proposed that carriers would move to incentive regulation at the holding company level in all states where they receive A-CAM support. Under the proposal, the election would take effect on the July 1st following the FCC’s adoption of a final order setting out the incentive regulation transition rules. As a result, it is likely that the move to incentive regulation may not take place until next year. The FCC intends to use A-CAM carriers’ current rates and demand levels as the basis for the initial DBS rates under incentive regulation, but sought comment on alternative price-setting methodologies.

Second, the FCC proposed eliminating price restrictions for lower-speed DBS offerings in areas with sufficient competition. As with its BDS reforms last year, the FCC plans to adopt a competitive market test that dictates, on a county-by-county basis, whether a carrier will still be subject to price cap restrictions and tariffing obligations. The FCC sought comment on the specifics of the competitive market test and asked whether it should apply the two-pronged test it adopted last year, which looked at whether 50 percent of the locations with BDS demand in a county were within a half mile of a location served by a competing provider or, alternatively, whether a cable provider offered sufficiently fast broadband service in 75 percent of the census blocks in the county. The competitive market test adopted last year drew considerable fire from critics alleging that it deregulated BDS offerings in areas lacking meaningful consumer choice. These concerns certainly will be raised again, especially because the A-CAM carriers generally serve rural areas with limited competition. The FCC also asked whether it should remove pricing restrictions from higher speed BDS offerings and whether it should allow other carriers still operating under rate-of-return regulation to move their services to incentive regulation.

The FCC requested input on how to best transition A-CAM carriers to incentive regulation and ensure consumers do not see a flash cut to increased prices. Specifically, the FCC proposed a three-year transition period during which carriers may (but are not required to) de-tariff their BDS offerings, a six-month freeze of tariffed rates in areas newly deregulated under the competitive market test, and a grandfathering of existing contractual or other long-term BDS arrangements. Consequently, the FCC’s proposed rules mark just the first step in what potentially will be a years-long transition of the BDS offerings of A-CAM carriers.

Comments on the FCC’s planned BDS reforms will be due 30 days after publication of the proposed rulemaking in the Federal Register, with reply comments due 45 days after the proposed rulemaking’s publication.