[Federal Register Volume 77, Number 181 (Tuesday, September 18, 2012)]
[Rules and Regulations]
[Pages 57504-57523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23020]



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 at [email protected].

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 at 
http://fjallfoss.fcc.gov/ecfs/ or may be downloaded at http://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 to 
[email protected] or 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 

[[Page 57505]]

allowing 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 [lsqbb]REDACTED[rsqbb] 
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 the Pricing 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 may

[[Page 57506]]

charge. 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 the Pricing Flexibility 
Order in 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 
the Access Charge Reform Order or 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 
    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 the Pricing Flexibility Order had 
not been confirmed by marketplace developments, and that BOC special 
access rates exceeded competitive levels and hence were unjust and 
unreasonable in violation of Sec.  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 the AT&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 the Special Access 
NPRM. The Special Access NPRM initiated a broad examination of what 
regulatory framework to apply to price cap LECs' interstate special 

[[Page 57507]]

services 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. The Special Access NPRM also 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. Sec.  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 the 
Special Access NPRM raised. 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 the 
Special Access NPRM raised. 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 

    22. In the Pricing 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 the Pricing 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.''

[[Page 57508]]

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 the Pricing 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 
    31. On February 2, 2001, the U.S. Court of Appeals for the DC 
Circuit upheld the Pricing 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 1999 Pricing Flexibility Order chose 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.

[[Page 57509]]

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 the Pricing 
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.

[[Page 57510]]


[[Page 57511]]


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 

[[Page 57512]]


    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,

[[Page 57513]]

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
                                          Carrier name                          Competitive Showing
                                                                                                    Percent of
             MSA                                    At time of       WCs with                      wire centers
                                    Current           grant         collocation      Total WCs         with
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/  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,    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.

[[Page 57514]]

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: [lsqbb]REDACTED[rsqbb]. The first of these carriers 
is [lsqbb]REDACTED[rsqbb], another is the [lsqbb]REDACTED[rsqbb], and 
three are among the nation's [lsqbb]REDACTED[rsqbb]. 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 
[lsqbb]REDACTED[rsqbb] 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
                                                                                      Average       Average of
                                                                                   establishment   establishment
                                                                                  density in ZIP  density in ZIP
                                                   Number of ZIP  Percent of ZIP    codes with     codes without
                                                   codes in MSA    codes in MSA      reported        reported
      MSA and status of incumbent provider         with reported   with reported    facilities-     facilities-
                                                    facilities-     facilities-        based           based
                                                       based           based        competition     competition
                                                    competition     competition   (units: estab.  (units: estab.
                                                                                    per square      per square
                                                                                       mile)           mile)
Atlanta, GA (2000 AT&T/BellSouth Phase II                     59              40             175              41
 Pricing Flexibility)...........................
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.

[[Page 57515]]


    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 with

[[Page 57516]]

suppliers, 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 competitive entry. If our 
rules operated in a manner consistent with our predictions, it should 
follow that uniform relief would generally be granted when two or more 
price cap LECs operate in the same MSA. That has not proven to be the 
case. For example, in the Evansville, Indiana MSA, BellSouth has 4 wire 
centers and Ameritech has 13. In 2001, Ameritech qualified for Phase I 
pricing flexibility. In contrast, BellSouth met the higher competitive 
showings requirements for Phase II pricing flexibility one year later. 
Likewise, in 2002, Verizon satisfied the requirements for Phase II 
pricing flexibility for its 2 wire centers in the Bridgeport-Stamford-
Norwalk, Connecticut MSA. Two years later, SNET was only able to get 
Phase I pricing flexibility, based on revenue of 9 out of its 22 wire 
centers in the same MSA. In the total of 12 MSAs in which we granted 
pricing flexibility to more than one provider within the MSA, our data 
shows instances of inconsistent grants of pricing flexibility in nine. 
These data reinforce our conclusion that competitive conditions can 
vary significantly across an MSA.
e. Billing Practices May Not Be Indicative of Competitive Entry
    57. It is not clear, based on our existing record, that incumbent 
LEC billing practices lead to consistent pricing across an MSA. 
Commenters, in particular incumbent LECs, argue that special access 
pricing is generally not tied to a small geographic market, but rather 
pricing is uniform throughout an MSA or larger geographic region. Thus, 
because tariffs typically encompass an MSA or larger geographic region, 
incumbents assert that prices are constrained across that whole area, 
regardless of the presence of competition in any individual location. 
Such commenters also argue that it is administratively burdensome for 
the Commission to assess whether competition exists for granular 
geographic markets, and that it would be onerous for carriers to 
implement pricing flexibility for individual buildings or wire centers. 
Thus, AT&T, for example, states that the current pricing flexibility 
rules strike ``a reasonable balance between the costs and benefits of 
identifying with greater granularity those geographic areas where LECs 
face competition from rivals with sunk investments and the 
administrative manageability of pricing flexibility rules.''
    58. There also is evidence, however, that incumbent LEC billing 
practices may not be uniform across MSAs. Price cap LECs have the 
authority to set prices in zones within an MSA or the non-MSA portions 
of a study area. In the Pricing Flexibility Order, the Commission 
amended Sec.  69.123 of its rules to permit incumbent price cap LECs to 
deaverage geographically their rates for access services in the 
trunking basket, and to allow price cap incumbent LECs to define the 
scope and number of density zones. The Commission noted that 
``averaging across large geographic areas distorts the operation of 
markets in high-cost areas because it requires incumbent LECs to offer 
services in those areas at prices substantially lower than their costs 
of providing those services.'' However, by granting incumbent LECs the 
flexibility to ``choose the number of zones and the criteria for 
establishing zone boundaries, they are more likely to establish 
reasonable and efficient pricing zones.'' The record indicates that 
price cap LECs do, in at least some cases, take advantage of Sec.  
69.123's geographic deaveraging provisions. It is therefore possible 
for price cap LECs to charge different prices in, for example, rural 
and urban areas within an MSA or non-MSA portion of a study area, and 
the record indicates that carriers may engage in this practice.
    59. Moreover, in Phase I and Phase II pricing flexibility areas, 
carriers can and do offer contract tariffs to special access customers 
on an individualized basis. The record indicates that such contract 
terms are rarely, if ever, adopted by other special access purchasers. 
Thus, whether special access pricing is, in fact, disciplined across a 
broad geographic area as claimed by incumbent LECs remains an open 
f. Changes to MSAs Impact Non-MSA Rules
    60. Price cap LECs seeking pricing flexibility under our rules in a 
non-MSA area must make competitive showings throughout the entire non-
MSA portion of a study area, rather than a Rural Service Area or 
smaller geography. The Commission justified its adoption of the non-MSA 
as the appropriate geographic area because it predicted that 
``competitive entry into rural areas [would] be less concentrated than 
in urban areas.'' Embarq contends that our decision to use the non-MSA 
parts of a study area, instead of an RSA, has made it impossible for 
Embarq to obtain relief in Missouri despite the presence of 
competition. Though Embarq's situation may be indicative of a problem 
specific to our choice of adopting the non-MSA, any changes we find to 
be warranted with respect to the MSA, as discussed above, must be 
reflected by corresponding changes to non-MSA areas.
    61. Moreover, the record in this proceeding suggests that the 
Pricing Flexibility Order's prediction that competition in rural areas 
would not be concentrated was incorrect. A review of our grants of 
pricing flexibility for channel terminations to end users in non-MSA 
areas highlights problems similar to what we found in MSA areas. 
Specifically, out of five of these types of grants, three were based on 
high concentrations of demand. Verizon's grant in non-MSA Idaho was 
based on the revenues of 3 out of 26 wire centers, and its grant for 
non-MSA West Virginia was based on revenues from 8 out of 97 wire 
centers. A third grant, from ACS, was based on revenues from only half 
of the wire centers in non-MSA Juneau, Alaska. This suggests that, at 
the time the grant of pricing flexibility was made, competitive 
conditions varied greatly

[[Page 57517]]

within the non-MSA areas. Even if new competitors subsequently entered 
the non-MSA, for the reasons discussed above with respect to MSAs, they 
are likely to locate only in areas of high demand. Thus, the evidence 
in this proceeding suggests highly concentrated competitive conditions 
at the time pricing flexibility was granted. This indicates that the 
Pricing Flexibility Order's prediction that competition in non-MSA 
areas would be less concentrated than in urban areas may have been 
3. The Competitive Showings Are Not as Administratively Simple as 
    62. In addition to the issues identified above, our experience 
shows that our rules, which were intended first and foremost to be 
straightforward and simple to administer, are not. Specifically, in 
adopting the Pricing Flexibility Order, the Commission concluded that 
using MSA-based rules would be simpler and less expensive to administer 
than rules based on other geographies or regimes that might create a 
``more finely-tuned picture of competitive conditions.'' However, the 
rules have not been as administratively simple or easy to verify as the 
Commission anticipated, nor does it appear that they have provided 
bright-line guidance to industry. We therefore choose to redirect our 
efforts to conducting a more complete market analysis, as discussed in 
greater detail in Section 0 below.
    63. Previous pricing flexibility petitions demonstrate that our 
rules have failed to provide a clear-cut guide to industry. For 
example, Sec.  22.909(a) of our rules define MSAs for pricing 
flexibility, as ``* * * 306 areas * * * defined by the Office of 
Management and Budget, as modified by the FCC.'' Because OMB changes 
the list of MSAs and component counties, as discussed above, Sec.  
22.909 of the Commission's rules refers to a static list, based on data 
from the 1980 Census. Nonetheless, the fact that our rules refer to 
areas in which to make a competitive showing as ``MSAs'' has apparently 
created some confusion among petitioners, resulting in petitions 
containing data calculated over different MSA definitions. For example, 
Pacific Bell submitted a petition for pricing flexibility in the San 
Diego and Sacramento MSAs based on the list referenced in Sec.  22.909 
of our rules. In contrast, Embarq and Cincinnati Bell based their 2007 
pricing flexibility petitions on MSAs drawn in accordance with a 
``Metropolitan Areas (1993)'' map, located on the Commission's Web 
site, that provides a detailed description of how the map includes MSAs 
as defined by OMB. However, because the 1993 MSAs were more recently 
constructed and based on 1990 Census data, the component counties that 
make up each MSA are often different from those in the MSA list 
referenced in Sec.  22.909 of our rules. Thus, our supposedly bright-
line rules have failed to provide guidance to sophisticated firms such 
as Embarq and Cincinnati Bell.
    64. Moreover, our competitive showings are ambiguous and require 
time-intensive review and policy decisions by Commission staff. In 
order to fulfill the requirements of the revenue-based competitive 
showings, a petitioner must: (a) Provide a list of wire centers within 
that MSA; and (b) calculate revenues based on that number. However, our 
rules do not specify how to determine whether a wire center belongs to 
a specific MSA, nor do they provide enough specifics as to what 
revenues should be included. Therefore, as applied, petitioners are 
making these determinations using different methodologies. For example, 
Southwestern Bell determined which wire centers belonged to the 
Amarillo and St. Louis MSAs based on ``the Collocation Implementation, 
Collocation Point of Contact and Tracking Database,'' which includes 
wire center information for all MSAs. It excluded from its revenue 
calculations those revenues derived from Individual Case Basis (ICB) 
arrangements, i.e., ``the carrier practice of providing a particular 
service in response to a specific request from a customer under 
individualized rates, terms, and conditions.'' An ICB arrangement may 
involve services directly related to the provision of special access 
services, such as special conditioning of a line. In contrast, in a 
2008 petition, Windstream acknowledged that some of its wire centers 
located outside the applied-for MSA may serve locations inside the MSA 
boundary. Therefore, based on its own engineering maps, ``Windstream 
calculated the exchange area that fell within the MSA. If the area 
calculated exceeded 50 percent of the total area of the wire center, 
the wire center was assigned to the MSA.'' In contrast to Southwestern 
Bell's system of calculating revenues, Windstream included ICB revenues 
in its revenue calculations. Thus, in order to properly evaluate 
whether these petitioners have fulfilled the requirements of our rules, 
which are silent on these issues, Commission staff would have to do a 
thorough review of the company's internal records, exercise an 
extensive amount of independent judgment, and make some significant 
policy decisions as to whether each company's interpretation of our 
rules are consistent with the terms of the Pricing Flexibility Order.

C. Shortcomings of Competitive Showings Based Exclusively on 

    65. Significant questions also exist about the reliability of 
collocation as a proxy for facilities-based competition in end user 
channel terminations. Charges for special access generally are divided 
into channel termination charges and channel mileage charges. Channel 
termination charges recover the costs of facilities between the 
customer's premises and the LEC end office and the costs of facilities 
between the IXC POP and the LEC serving wire center. Channel mileage 
charges recover the costs of facilities (also known as interoffice 
facilities) between the serving wire center and the LEC end office 
serving the end user. In the Pricing Flexibility Order, the Commission 
found that pricing flexibility for channel terminations between a LEC 
end office and a customer premises required a higher threshold showing 
than pricing flexibility for other dedicated transport and special 
access services. In reaching this determination, the Commission 
acknowledged that the economics of channel terminations between the LEC 
office and the customer premises make it more costly for new entrants 
to compete in that product market.
1. Rationale for Adopting Collocation as the Sole Indicator of 
    66. The competitive showings require price cap LECs to offer 
evidence of collocation by ``competitors that use transport provided by 
a transport provider other than the incumbent LEC'' for granting 
pricing flexibility for special access and dedicated transport. The 
Commission considered that the competitive showings reasonably balanced 
two goals: ``(1) Having a clear picture of competitive conditions in 
the MSA, so that we can be certain that there is irreversible 
investment sufficient to discourage exclusionary pricing behavior; and 
(2) adopting an easily verifiable, bright-line test to avoid excessive 
administrative burdens.'' The Commission found that collocation was a 
``reliable indicator of sunk investment by competitors'' in dedicated 
transport and special access services other than channel terminations 
because it demonstrated a financial investment by the competitor in 
establishing facilities in that wire center.

[[Page 57518]]

    67. With respect to channel terminations, the Commission 
acknowledged that ``collocation by competitors does not provide direct 
evidence of sunk investment by competitors in channel terminations 
between the end office and the customer premises.'' Indeed, the 
Commission recognized that ``a competitor collocating in a LEC end 
office continues to rely on the LEC's facilities for the channel 
termination between the end office and the customer premises, at least 
initially, and thus is susceptible to exclusionary pricing behavior by 
the LEC.'' The Commission predicted, however, that ``that a new market 
entrant would provide channel terminations through collocation and 
leased LEC facilities only on a transitional basis and [would] 
eventually extend its own facilities to reach its customers.'' It thus 
concluded that despite ``the shortcomings of using collocation to 
measure competition for channel terminations, * * * it appears to be 
the best option available to us at this time.''
2. More Recent Evidence Suggests That Collocation May Produce an 
Unreliable Picture of Competitive Conditions
    68. Evidence submitted to the Commission since 1999 calls into 
question the Commission's prediction that collocators would eventually 
build their own channel terminations to end users. By the end of 2005, 
six years after the adoption of the Pricing Flexibility Order, SBC 
Communications, Inc. (SBC) had obtained pricing flexibility for channel 
terminations to end users in 67 MSAs. That same year, it acquired AT&T 
Corporation. Both the Commission and the Antitrust Division of the U.S. 
Department of Justice (``the Division'') approved the transaction, 
subject to several concessions, including divestitures. Despite SBC's 
success in obtaining pricing flexibility in many MSAs, the Division's 
antitrust investigation concluded that ``for the vast majority of 
commercial buildings in its territory, SBC is the only carrier that 
owns a last-mile connection to the building.'' That same year, the 
Commission's review of Qwest's petition for forbearance in Omaha, 
Nebraska showed that some buildout to end users had occurred, but only 
in 9 out of 24 of Qwest's wire centers in the Omaha MSA. This was three 
years after Qwest had obtained Phase II pricing flexibility in the 
Omaha MSA, based on the revenues of 11 wire centers (8 of which 
overlapped with the 9 wire centers with buildout to end users). In 
2006, the U.S. Government Accountability Office (``GAO'') analyzed 16 
metropolitan areas in which the Commission had granted pricing 
flexibility and found that facilities-based competitors served fewer 
than 6 percent of buildings with at least a DS1-level of demand. In 
2010, Qwest noted in its transfer of control application with 
CenturyLink that ``it is Qwest's practice generally to use the 
facilities of other carriers when it sells services to enterprise 
customers in locations outside of its service territory.''
    69. Commenters' pleadings also suggest that collocation has not 
always developed into facilities-based competition. As evidence to 
support its assertion that our predictions about collocation were 
inaccurate, TW Telecom relied on data supplied by Verizon to assert 
that between 1996 and 2004, non-incumbent LEC channel termination 
buildout to commercial buildings increased from 24,000 buildings to 
approximately 31,467 buildings (a change of 7,467), in contrast to the 
``millions of buildings served by incumbent LEC fiber.'' In 2005, 
WilTel estimated that competitors had deployed to 25,000 buildings, 
whereas Sprint asserted in 2007 that only 22,000 buildings had 
competing connections. Moreover, TW Telecom states that, as of a 2003 
Commission finding, competitors serve only three to five percent of 
commercial buildings nationwide. It also submitted evidence that it 
contends shows that, four years after Verizon had obtained Phase I 
pricing flexibility in the New York MSA for channel terminations to end 
users, competitors served fewer than [lsqbb]REDACTED[rsqbb] of 220,000 
buildings in New York City. Its evidence also showed that, in Chicago, 
where Ameritech had obtained pricing flexibility for channel 
terminations in 2003, competitors connected to only 429 out of 241,000 
commercial buildings.
    70. Commenters also argue that the mere installation of third party 
facilities within wire centers does not equate to competition by 
collocators because in some cases they are not being used to provide 
competitive service. For example, in its oppositions to two incumbent 
LEC petitions for pricing flexibility, AT&T argued that it never used 
the facilities it had installed in some of the wire centers listed in 
the petitions, and it was therefore erroneously identified as a 
competitive collocator. However, the competitive showing rules do not 
require incumbent LECs to show that collocation facilities are being 
used, but only that they exist in the wire center. Moreover, Sprint 
argues that collocation ``is indicative not that the competitor has 
placed its own facilities into buildings but rather that it has 
dependence upon the incumbent's facility.''
    71. We acknowledge that this evidence is limited. The Commission's 
recent attempts to obtain more robust facilities data through voluntary 
production have provided useful, but incomplete, data. Nonetheless, the 
evidence we do have suggests our predictions were inaccurate and that 
the accuracy of the use of collocations as a proxy for actual or 
potential competition warrants further investigation. We therefore 
intend to issue a data request that will require carriers to submit the 
data we need to test the accuracy of the predictions we made about 
collocation in the Pricing Flexibility Order.
3. Existence of Non-Collocation Based Competition Does Not Undercut the 
Need To Suspend Grants of New Pricing Flexibility Petitions
    72. Several commenters argue that relying exclusively on 
collocation is flawed because it undercounts entry by non-collocating 
firms who have built their own facilities. We agree, but because we 
lack reliable data on the extent or location of this competition, it 
does not change our conclusion that new pricing flexibility petitions 
should be suspended at this time.
    73. Several commenters discuss growing competition from non-
collocating competitors, such as cable. For example, Verizon claims 
that the competitive showings preclude it from obtaining pricing 
flexibility commensurate to the level of competition they claim exists 
in Los Angeles, Boston, New York, Philadelphia, and Washington, DC, 
because our rules do not account for several non-collocating firms that 
Verizon's research indicates have operations in those areas. AT&T has 
similar complaints for its operations in Chicago, Dallas, Houston, 
Detroit, San Diego and St. Louis, contending that it has lost special 
access business to cable firms in many instances. Embarq asserts that 
it too has lost business to a competitive LEC, Cox Cable, that does not 
collocate in Las Vegas, Nevada, and Fort Walton Beach and Ocala, 
Florida. Price cap LECs also criticize the rules for excluding 
competitors that collocate at ``collocation hotels,'' as opposed to 
price cap LEC wire centers. Thus, the record indicates that at times 
the rules may prevent price cap LECs from obtaining partial or full 
pricing flexibility because they do not account for competition 
sufficient to discipline rates from facilities-based competitors.
    74. We agree. As the Commission stated when it adopted its 

[[Page 57519]]

showings rules, it has ``long recognized that it should allow incumbent 
LECs progressively greater pricing flexibility as they face increasing 
competition'' and wanted to ensure that its ``regulations do not unduly 
interfere with the development and operation of these markets as 
competition develops.'' It would be inconsistent with this approach if 
we inappropriately subjected price cap LECs to unnecessary regulations, 
despite the emergence of competition that bright-line rules are unable 
to detect. We therefore agree to undertake a robust competition 
analysis that takes these factors into account, as described below.
    75. Moreover, there is currently no evidence in the record 
addressing the relationship, if any, between collocation levels and the 
presence of non-collocated competitors. Such data would assist in 
testing incumbents' claims that they have lost business to non-
collocating competitors with their own fiber. We intend to obtain 
evidence on this point in order to conduct the robust competition 
analysis described below.

IV. Grants of Pricing Flexibility Are Suspended

    76. As set forth in sections 0 and III.C above, there is compelling 
evidence that the competitive showings adopted in 1999 have not worked 
as intended, and that our pricing flexibility rules are simultaneously 
preventing grants of pricing flexibility in areas that likely are 
competitive and allowing grants of pricing flexibility in areas where 
it is not appropriate to do so. While we today initiate the process of 
developing a better way to identify areas where special access 
regulatory relief is appropriate, it would not serve the public 
interest to allow continued grants of pricing flexibility under our old 
rules. We therefore act in this section to temporarily suspend the 
operation of our competitive showing rules pending completion of our 

A. Suspension of Competitive Showing Rules for Channel Terminations

    77. Based on the evidence in the record as discussed in subsections 
0 and III.0 above, we suspend further grants of pricing flexibility on 
the basis of our existing pricing flexibility rules. Generally, the 
Commission's rules may be suspended for good cause shown. In light of 
the significant problems identified with grants of regulatory relief at 
the MSA level, continuing to grant relief under the current framework 
would run precisely the risk that the Commission sought to avoid in the 
Pricing Flexibility Order: ``Granting pricing flexibility over such a 
large geographic area would increase the likelihood of exclusionary 
behavior by incumbent LECs by giving them flexibility in areas where 
competitors have not yet made irreversible investment in facilities.'' 
Given our finding that the special access pricing flexibility triggers 
are not operating as predicted by the Commission, our action here 
suspending the application of those rules while we consider possible 
new regulatory approaches is necessary in the public interest. In 
addition, it is consistent with our ``continuing obligation to practice 
reasoned decision making'' under the APA. Indeed, this continuing 
obligation to practice reasoned decision making and revisit our rules 
is especially relevant where our predictive judgments do not 
materialize. The record indicates that the 1999 competitive showing 
rules are both over-inclusive and under-inclusive, thereby resulting in 
grants of pricing flexibility to broad geographic areas (i.e., MSAs) 
based on small pockets of concentrated demand, or denials of pricing 
flexibility where competitive alternatives are not recognized by the 
existing rules. Moreover, there is evidence that collocations--while 
perhaps ``the best option available'' to the Commission at the time--
are not a reliable indicator of the presence of actual or potential 
competition in the provision of channel terminations.
    78. The Commission's rules provide that petitions for pricing 
flexibility for special access services that are not denied within 90 
days after the close of the pleading cycle are deemed granted. Given 
the significant problems identified with our existing pricing 
flexibility rules discussed above, we find that it would be 
inappropriate to allow new grants of flexibility under those rules. 
Thus, pursuant to rule Sec.  1.3, we find good cause to suspend the 90 
day deadline in rule Sec.  1.774(f)(1) and do so on our own motion. We 
therefore amend our rules as set forth in Appendix A.

B. Suspension of Competitive Showing Rules for Non-Channel Termination 
Special Access

    79. As noted above, the staff analysis of specific data 
highlighting problems with the MSA was restricted to channel 
terminations to end users. Nonetheless, the record also indicates a 
lack of ``reasonably similar'' competitive conditions within an MSA for 
dedicated transport. As discussed above, both Verizon and SBC concede 
that special access demand--for all categories of special access 
services--is extremely concentrated. Fiber maps that they submitted 
throughout this proceeding, which include both dedicated transport and 
channel terminations, highlight that fact. In 2007, AT&T submitted 
detailed maps showing competitive deployment for Atlanta, Georgia; 
Miami, Florida; Columbus, Ohio; Austin, Texas and San Jose, California. 
In 2012, it submitted competitive deployment maps for three of those 
same MSAs (Atlanta, Miami and San Jose), as well as several other MSAs. 
Though each of those maps--whether they were produced in 2007 or 2012--
display competitive fiber in the central portion of each MSA, none of 
those maps show that those competitive fibers reach throughout the 
MSAs. In addition, as discussed above with respect to our review of 
pricing flexibility grants for channel terminations for end users, in a 
significant number of the MSAs where price cap carriers have been 
granted relief, a large proportion of wire centers have either no 
collocations, no competitive transport, or both. This calls into 
question whether our transport bright-line tests, which if met lead to 
pricing flexibility being applied to the entire MSA, appropriately 
distinguish where competition exists and where it does not. Further, 
though the Pricing Flexibility Order noted competitive differences 
among special access services, it did not make any distinctions as to 
the appropriate geographic area of relief based on the type of service 
at issue. Instead, the Commission adopted bright-line competitive 
showings, with a uniform geographic area, for all categories of special 
access service. For these reasons, we find it appropriate to 
temporarily suspend our competitive showing rules for dedicated 

C. Arguments Against Suspension of Rules

    80. Broad Assertions Regarding Competition. Commenters assert that 
the deregulatory approach of pricing flexibility, as well as the 
current competitive showing rules, has been sufficient to constrain 
exclusionary or predatory conduct by LECs to date. For example, 
Verizon, Qwest, AT&T, and CenturyLink assert that special access prices 
have fallen since the adoption of pricing flexibility, and that special 
access outputs have increased. CenturyLink states that special access 
must be considered in the broader context, as incumbent LECs have been 
facing substantial business challenges. Thus, absent evidence of a 
fundamental failure in the current pricing flexibility rules--which 
commenters believe has not been shown in the record--the

[[Page 57520]]

Commission should not substantially revise or eliminate those rules.
    81. There is insufficient evidence in the record upon which to base 
general or categorical conclusions regarding the competitiveness of the 
special access market. As an initial matter, it is not clear how the 
Commission should consider arguments that market definitions are not 
relevant because the undefined market is highly competitive. Such 
arguments would have us presume the outcome at the heart of our inquiry 
prior to conducting any analysis of market conditions. Categorical 
assertions about competitiveness are not an adequate basis upon which 
we can base grants of pricing flexibility, particularly in light of the 
problems with the current competitive showing requirements, as well as 
the potentially conflicting evidence in the record about the changes in 
special access prices in Phase I and Phase II pricing flexibility 
areas. While incumbent LECs assert that special access prices have 
fallen in pricing flexibility areas, competitors state that prices, 
particularly in areas granted Phase II relief, have increased. This 
evidence is inconclusive; thus, we do not pass judgment on these 
assertions in this Report and Order. However, given the problems 
associated with the 1999 competitive showing rules, we do believe that 
the record contains sufficient disputed evidence to warrant further 
scrutiny by the Commission. The current competitive showing rules 
provide only a limited inquiry into the state of competition in a given 
market, a fact that commenters, including incumbent LECs, concede.
    82. Moreover, we do not agree that WorldCom or the Pricing 
Flexibility Order compel us to maintain the collocation-based 
competitive showing rules or a similar standard. In WorldCom, the court 
explicitly affirmed the Commission's discretion to adopt new policy 
positions, provided that it provides a reasoned analysis to support its 
decisions. Further, the WorldCom court noted that, unless they are 
statutorily precluded from doing so, agencies have the discretion to 
make adjustments to their regulations in light of changed 
circumstances. The court also held that the Commission did not err in 
basing its policymaking on ``predictive forecasts,'' because the 
Commission's adoption of the competitive showing rules was a reasonable 
prediction of how competition for special access might develop in the 
future. Throughout this Report and Order, we identify the problems 
associated with the current pricing flexibility rules and explain why 
suspending the current competitive showings while we conduct a market 
analysis will enable us to identify a replacement for the competitive 
showing rules that will allow us to more effectively evaluate requests 
for pricing flexibility. Thus, we disagree with commenters who assert 
that precedent requires a different result.
    83. Data Collection Necessary. We do not agree with commenters that 
it is necessary to collect additional data prior to suspending our 
rules. As discussed in section 0, above, the existing record contains 
sufficient evidence to call the continued viability of the collocation-
based competitive showing rules into question. We therefore will not 
allow the inefficiencies resulting from those rules to go unaddressed 
until we are able to obtain a more extensive data set. In our view, it 
is appropriate to suspend the competitive showing rules adopted in the 
Pricing Flexibility Order while we undertake a competition analysis to 
assist us in determining how to assess the presence of actual and 
potential competition sufficient to discipline special access prices.

D. Changes in Regulatory Relief During Development of New Rules

    84. We note that parties may still take steps to alter the 
regulatory status of special access services during the pendency of 
this proceeding. As commenters have noted, the Commission has the power 
to resolve allegations of unjust or unreasonable rates, terms and 
conditions through the complaint process in the Act, rather than 
through a rulemaking proceeding. Parties also may petition for 
forbearance from any regulation or provision of the Act pursuant to 
sec. 10 thereof, or seek a waiver of our rules. The availability of 
these forms of recourse provides additional support for suspension of 
our competitive showing rules pending development of an improved method 
for providing regulatory relief.

V. Undertaking a Market Analysis for Special Access Regulatory Relief

A. Future Steps to Analyze Competition for Special Access

    85. In this section, we commence a process that will enable us to 
more effectively determine where regulatory relief is appropriate. In 
the coming months, we will undertake a robust market analysis to assist 
us in determining how best to assess the presence of actual and 
potential competition for special access that is sufficient to 
discipline prices. Our analysis will follow the collection of 
additional data and an opportunity for public comment. As described 
below, there is widespread accord in the record on the appropriateness 
of collecting additional data to inform our future actions.
    86. The market analysis we will undertake in the coming months may 
identify reliable proxies for competition for special access services, 
which we could adopt in lieu of the 1999 competitive showings. Our 
analysis may also provide evidence that changes in our regulatory 
approach are warranted in particular geographic areas. At this time, we 
do not exhaustively specify the factors that will comprise our market 
analysis: these will be subject to comment by interested parties in an 
upcoming notice. We anticipate that the analysis will be a one-time 
assessment of the competitive conditions in the special access market; 
however, we do not foreclose the possibility that further analyses may 
be needed in the future. In any event, we will issue a comprehensive 
data collection order within 60 days to facilitate this market 

B. Benefits of a More Complete Market Analysis

1. A Market Analysis is Consistent With Agency and Court Precedent
    87. We concur with commenters who point out that use of market 
analysis in the special access context is consistent with Commission 
precedent. The Commission historically has conducted an examination of 
market conditions in several instances to assess competition for 
telecommunications services. In a series of orders in the Competitive 
Carrier proceedings, the Commission established a framework to evaluate 
competition in telecommunications markets and determine whether 
deregulatory treatment of certain carriers is warranted. In those 
orders, the Commission performed a structural market analysis to 
distinguish between ``dominant carriers,'' which ``possess market power 
(i.e., the power to control price),'' and ``non-dominant carriers,'' 
which ``do not possess power over price.'' The Commission focused its 
inquiry on certain ``clearly identifiable market features,'' including 
a carrier's market share, number and size distribution of competing 
firms, the nature of competitors' barriers to entry, the availability 
of reasonably substitutable services, the level of demand elasticity, 
and whether the firm controlled bottleneck facilities. This analysis 
was designed to identify when competition is sufficient to constrain 
carriers from imposing unjust, unreasonable, or unjustly or

[[Page 57521]]

unreasonably discriminatory rates, terms, and conditions, or from 
acting in an anticompetitive manner. The Commission subsequently 
applied the same framework to reclassify AT&T as non-dominant in the 
interstate interexchange service market, finding that AT&T no longer 
possessed individual market power with respect to those services.
    88. In the 1997 LEC Classification Order, the Commission modified 
its framework for dominance/non-dominance analyses to bring the 
framework into accord with the antitrust analysis laid out in the 1992 
Merger Guidelines, a precursor to the 2010 Horizontal Merger Guidelines 
that are in use today. In that order, the Commission stated that the 
assessment of competitive conditions requires a thorough analysis which 
begins with a delineation of the relevant product and geographic 
markets, and then considers market characteristics, including market 
shares, the potential for the exercise of market power, and whether 
potential entry would be timely, likely, and sufficient to counteract 
the exercise of market power.
    89. More recently, the Commission has undertaken market analysis to 
assess the extent of competition in both merger proceedings and in the 
evaluation of forbearance petitions. For instance, in its analysis of 
the proposed AT&T/BellSouth and Verizon/MCI mergers, the Commission 
considered whether the mergers would reduce existing competition, as 
well as their likely effects on the market power of dominant firms in 
the relevant communications markets and the mergers' effects on future 
competition. Similarly, in the Qwest Phoenix Forbearance Order the 
Commission employed a structural market analysis akin to that of the 
Competitive Carrier cases to evaluate Qwest's petition for forbearance 
from certain wholesale and retail regulations in the Phoenix, Arizona, 
MSA. Additionally, a market analysis is consistent with the 
investigation performed by the DOJ and FTC to assess whether a 
horizontal merger could adversely impact competition in relevant 
    90. In the Pricing Flexibility Order, the Commission declined to 
require incumbent LECs to perform a complete market analysis as part of 
the carrier's application for pricing flexibility and instead, without 
the benefit of a fulsome market analysis, adopted proxies for 
competition that were intended to measure whether actual or potential 
competition was sufficient to ensure just and reasonable rates, terms 
and conditions for special access services. As discussed above and 
based on the record in this proceeding, we have suspended grants of 
pricing flexibility on the basis of these proxies because we find that 
the geographic market over which relief is granted, MSAs, do not 
correspond to the scope of competitive entry and serious question have 
been raised concerning whether the presence of collocation and 
competitive transport are reliable indicators of the presence of 
competitive channel termination services. The process we begin today 
may well assist in developing new proxies for special access 
competition, which could be employed going forward to evaluate 
petitions for pricing flexibility. Once we have had the opportunity to 
collect and analyze additional data, we will be better positioned to 
determine what specific showings price cap carriers must make in their 
petitions for pricing flexibility and what information they could 
submit to satisfy those showings.
2. A Market Analysis Will Provide Analytical Precision
    91. Several commenters recommend that, prior to adopting a new 
analytical framework, we collect competitive data to assess whether the 
current competitive showing rules are a reasonably accurate proxy for 
the presence of competition. Undertaking a market analysis will allow 
the Commission to more precisely determine where competition exists, or 
could potentially exist, and to develop better tests for regulatory 
relief to replace the current collocation-based approach. For example, 
as described above, some commenters observe that the collocation-based 
competitive showings do not account for sources of intermodal and/or 
intramodal competition that do not collocate in incumbent LEC 
facilities. Other commenters raise concerns that the 1999 competitive 
showing rules overlook competitors who could potentially enter the 
market in the near term or in the more distant future. In contrast to 
our current approach, a market analysis would seek to identify 
significant current and potential market participants, and consider 
their impact when assessing the level of competition in a market.
    92. Several commenters state that a single market characteristic 
(e.g., high special access rates or carrier revenues, large market 
share) is generally not sufficient on its own to signify whether a 
given market is competitive. For example, AT&T and Verizon both assert 
that the Commission should not rely on market share as the basis for 
concluding that a given market lacks competition, because market share 
is a static measure that can understate the impact of competitive 
alternatives in dynamic markets. We agree that the Commission must 
conduct a more comprehensive analysis of the state of competition prior 
to adopting replacement competitive proxies or making other changes to 
the ways that incumbent LECs may obtain regulatory relief in the 
provision of special access services. A market analysis will enable us 
to make a multi-faceted assessment of competition that considers a 
variety of factors, including both price and non-price effects. 
Additionally, this type of fact-specific analysis is in line with 
current approaches to competition policy.
3. A Market Analysis Will Foster Broadband Deployment and Competition
    93. Finally, a comprehensive market analysis will help us to take 
future steps to support broadband deployment and competition. In the 
Qwest Phoenix Forbearance Order, the Commission found that, ``by using 
the more comprehensive antitrust-based analysis that the Commission 
frequently has used in past proceedings, and that the [FTC and DOJ] 
regularly use to measure competition, we ensure that competition in 
downstream markets is not negatively affected by premature forbearance 
from regulatory obligations in upstream markets.'' Citing the National 
Broadband Plan, the Commission noted that ``regulatory policies for 
wholesale access affect the competitiveness of markets for retail 
broadband services provided to small businesses, mobile customers and 
enterprise customers.''
    94. Special access circuits are a particularly important input for 
carriers' broadband service offerings. As the National Broadband Plan 
found, the costs associated with purchasing special access circuits can 
be a significant expense that impacts a carrier's ability to provide 
affordable broadband service, particularly to smaller, rural 
    95. A market analysis will enable us to ensure that appropriate 
regulatory relief is granted in those markets where competitive 
conditions justify it. For example, we expect that our analysis will 
aid in determining whether purchasers can obtain special access 
circuits at just and reasonable prices. This inquiry could provide 
insight into challenges that carriers may face in deploying broadband 
and what actions, if any, are needed to respond to those challenges.

[[Page 57522]]

4. Factors to be Considered in Market Analysis
    96. Some commenters, in particular incumbent LECs, recommend 
specific factors or considerations they believe the Commission should 
include in a market analysis. We address several of these 
recommendations below.
a. Analysis Must Be Forward-Looking and Consider Various Sources of 
    97. As detailed below, commenters state that any market analysis we 
conduct must be forward-looking and account for significant competitors 
in a market. We agree.
    98. In our view, a comprehensive market analysis will best 
facilitate a complete inquiry into the existence of competition in a 
given market, including sources of intermodal and intramodal 
competition, potential market entrants, uncommitted entrants, carriers 
that self-supply their own special access, and non-facilities-based 
competitors. This analysis also will consider the impact of competitors 
that do not collocate in an incumbent's wire center.
    99. For instance, the 2010 Horizontal Merger Guidelines contain a 
detailed process employed to identify participants in the relevant 
market. Pursuant to the 2010 Horizontal Merger Guidelines, an 
identification of market participants includes all firms that currently 
earn revenues in the relevant market. A firm may be considered to be a 
market participant even if it does not currently earn revenues, but it 
is ``committed to entering the market in the near future,'' or if the 
firm is not a current producer in the relevant market, but ``would very 
likely provide rapid supply responses with direct competitive impact in 
the event of a [small but significant and non-transitory increase in 
price (SSNIP)], without incurring significant sunk costs.'' Thus, in 
those instances where a competitor, such as a cable or fixed wireless 
provider, can quickly enter the market and respond to customer demand, 
a market analysis would enable us to consider the likely impact of that 
entry on competition.
    100. Moreover, a market analysis allows for specific, economically 
rigorous, and factually specific inquiries regarding potential 
competition, a factor that price cap LECs such as Verizon and AT&T 
contend should be included in any framework we adopt. A market analysis 
of potential competition assesses whether a firm is perceived to be a 
potential competitor, exerting a price-constraining effect on firms 
currently participating in the market, even though it is not currently 
participating in the market. We agree with commenters that our analysis 
of competitive conditions should incorporate an assessment of potential 
competition. We also agree that barriers to market entry should be 
considered. Entry is an important consideration in a structural 
analysis, as the exercise of market power is unlikely where entry 
barriers are low and incumbents cannot profitably raise price or 
otherwise reduce competition to a level below that of a competitive 
market. In the past, the Commission has considered potential 
competition and barriers to entry as part of its market analysis.
    101. Further, we concur with commenters that the multi-faceted and 
forward-looking analysis of competition we will undertake would be 
inadequate if it focused solely on market share or building counts. By 
examining factors such as the potential for competitive effects, market 
entry, and potential competition, a market analysis is a forward-
looking alternative to the current competitive showing rules or any 
like standard. That being said, we must carefully balance the benefits 
of relying on solid, if historical data, against the risks associated 
with placing too much weight on speculative data sources. We will 
continue to consider our future data collection needs with these points 
in mind.
b. Approach That Enhances Consumer Welfare
    102. We agree with commenters who assert that the Commission must 
conduct its market analysis in light of its broader objectives for the 
telecommunications industry. For example, Verizon notes that pricing 
flexibility was among several deregulatory actions taken by the 
Commission in the 1990s with the goal of encouraging innovation, cost 
savings, and efficiencies.
    103. The major purpose of the 1996 Act was to establish ``a pro-
competitive, deregulatory national policy framework.'' Indeed, among 
its primary goals were ``opening the local exchange and exchange access 
markets to competitive entry'' and ``promoting increased competition in 
telecommunications markets that are already open to competition, 
including the long-distance services market.'' We undertake an 
analytical process to assess the level of competition in the special 
access market with these goals in mind. For example, our analysis may 
indicate that further regulatory relief is warranted in areas where 
competition exists, but is not captured by the current competitive 
proxies. As detailed above, the competitive showings adopted in the 
Pricing Flexibility Order are both over- and under-inclusive, resulting 
in inaccurate assessments of whether actual and potential competition 
is sufficient to constrain special access prices in the areas granted 
relief. Indeed, given the unreliable nature of the competitive showing 
requirements adopted in 1999, we believe a market analysis will aid us 
in granting deregulation in areas where actual and potential 
competition is sufficient to constrain prices. A nuanced market 
analysis will also allow us to better balance the potential costs of 
regulating too heavily against the potential harms of failing to 
undertake appropriate regulation where it is needed.
c. Dominance/Non-Dominance Classification
    104. Finally, incumbent LECs assert that special access pricing 
flexibility should not be treated as akin to the non-dominance analyses 
undertaken by the Commission in the Competitive Carrier proceeding. 
Further, AT&T argues that, under a non-dominance framework, upon a 
finding that an incumbent lacked market power, the Commission would 
have to reclassify the carrier as non-dominant and relieve its dominant 
carrier obligations. We agree with AT&T that, once we have performed a 
broader evaluation of competitive conditions, our analysis may show 
that a carrier classified as dominant does not possess market power as 
defined in the Competitive Carrier proceeding for a particular special 
access service in a geographic area. In that case, the Commission may 
ultimately conclude that it is appropriate to grant regulatory relief 
in the form of non-dominance treatment for the particular service and 
geographic area. We will determine at a future date what criteria the 
Commission will consider to assess whether a finding of non-dominance 
for special access service is warranted in a given area.

VI. Procedural Matters

A. Paperwork Reduction Act Analysis

    105. This document does not contain new or modified information 
collection requirements subject to the Paperwork Reduction Act of 1995 
(PRA), Public Law 104-13. In addition, therefore, it does not contain 
any new or modified information collection burden for small business 
concerns with fewer than 25 employees, pursuant to the Small Business 
Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 

[[Page 57523]]

B. Final Regulatory Flexibility Certification

    106. As required by the Regulatory Flexibility Act (RFA), an 
Initial Regulatory Flexibility Analysis (IRFA) was incorporated into 
the 2005 Special Access NPRM. The Commission sought written public 
comment on the possible significant economic impact on small entities 
regarding the proposals addressed in the 2005 Special Access NPRM, 
including comments on the IRFA.
    107. As required by sec. 603 of the RFA, the Commission has 
prepared a Final Regulatory Flexibility Certification (FRFC) of the 
expected impact on small entities of the requirements adopted in the 
Report and Order, which is set forth in Appendix B of the Report and 
Order. The Commission will send a copy of the Report and Order, 
including the FRFC, to the Chief Counsel for Advocacy of the Small 
Business Administration.

 C. Congressional Review Act

    108. The Commission will send a copy of this Report and Order to 
Congress and the Government Accountability Office pursuant to the 
Congressional Review Act.

II. Ordering Clauses

    109. Accordingly, it is ordered that pursuant to sections 1, 4(i), 
4(j), and 201-205 of the Communications Act of 1934, as amended, 47 
U.S.C. 151, 154(i), 154(j), 201, 202, 203, 204, 205, this Report and 
Order is adopted.
    110. It is further ordered that part 1 of the Commission's rules is 
amended as set forth in the final rules, and such rule amendments shall 
be effective October 18, 2012.
    111. It is further ordered that Sec.  1.774(f)(1) of the 
Commission's rules, 47 CFR 1.774(f)(1), is suspended until the 
amendments set forth in the final rules are effective.
    112. It is further ordered that, pursuant to Sec. Sec.  1.4(b)(1) 
and 1.103(a) of the Commission's rules, 47 CFR 1.4(b)(1), 1.103(a), 
this Report and Order is effective upon release.
    113. It is further ordered that the Commission will send a copy of 
this Report and Order to Congress and the Government Accountability 
Office pursuant to the Congressional Review Act, see 5 U.S.C. 
    114. It is further ordered that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order, including the Final Regulatory 
Flexibility Certification, to the Chief Counsel for Advocacy of the 
Small Business Administration.

List of Subjects in 47 CFR Part 1

    Administrative practice and procedure, Communications common 
carriers, Telecommunications.

Federal Communications Commission
Marlene H. Dortch,

Final Rule

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR Part 1 as follows:


1. The authority citation for part 1 continues to read as follows:

    Authority:  15 U.S.C. 79, et seq., 47 U.S.C. 151, 154(i), 
154(j), 155, 157, 225, 227, 303(r) and 309.

Sec.  1.774  [Amended]

2. In Sec.  1.774, remove and reserve paragraph (f)(1).

[FR Doc. 2012-23020 Filed 9-17-12; 8:45 am]