[Federal Register Volume 81, Number 107 (Friday, June 3, 2016)]
[Proposed Rules]
[Pages 36030-36075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12058]



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Vol. 81

Friday,

No. 107

June 3, 2016

Part V





Federal Communications Commission





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47 CFR Part 69





 Developing a New Regulatory Framework for Business Data Services 
(Special Access); Proposed Rule

Federal Register / Vol. 81 , No. 107 / Friday, June 3, 2016 / 
Proposed Rules

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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 69

[WC Docket Nos. 16-143, 15-247, 05-25 and RM-10593; FCC 16-54]


Developing a New Regulatory Framework for Business Data Services 
(Special Access)

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: In this document, the Federal Communications Commission seeks 
comment on replacing the existing, fragmented regulatory regime 
applicable to business data services (BDS) (i.e., special access 
services) with a new technology-neutral framework, the Competitive 
Market Test, which subjects non-competitive markets to tailored 
regulation, and competitive markets to minimal oversight.

DATES: Comments are due on or before June 28, 2016; reply comments are 
due on or before July 26, 2016. Written comments on the Paperwork 
Reduction Act proposed information collection requirements must be 
submitted by the public, Office of Management and Budget (OMB), and 
other interested parties on or before August 2, 2016.

ADDRESSES: You may submit comments, identified by WC Docket Nos. 16-
143, 15-247, 05-25 and RM-10593, by any of the following methods:
     Federal Communications Commission's Web site: http://apps.fcc.gov/ecfs/. Follow the instructions for submitting comments.
     People With Disabilities: Contact the FCC to request 
reasonable accommodations (accessible format documents, sign language 
interpreters, CART, etc.) by email: FCC504@fcc.gov or phone: 202-418-
0530 or TTY: 202-418-0432.
    For detailed instructions for submitting comments and additional 
information on the rulemaking process, see the SUPPLEMENTARY 
INFORMATION section of this document. In addition to filing comments 
with the Secretary, a copy of any comments on the Paperwork Reduction 
Act information collection requirements contained herein should be 
submitted to the Federal Communications Commission via email to 
PRA@fcc.gov and to Nicole Ongele, Federal Communications Commission, 
via email to Nicole.Ongele@fcc.gov.

FOR FURTHER INFORMATION CONTACT: Christopher Koves, Pricing Policy 
Division, Wireline Competition Bureau, 202-418-8209 or 
Christopher.Koves@fcc.gov. For additional information concerning the 
Paperwork Reduction Act information collection requirements contained 
in this document, send an email to PRA@fcc.gov or contact Nicole Ongele 
at (202) 418-2991.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's 
Further Notice of Proposed Rulemaking (FNPRM), WC Docket Nos. 16-143, 
15-247, 05-25 and RM-10593, FCC 16-54, released May 2, 2016. The 
summary is based on the public redacted version of the document, the 
full text of which is available here: https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-54A1.pdf. To request alternative 
formats for persons with disabilities (e.g. accessible format 
documents, sign language, interpreters, CARTS, etc.), send an email to 
fcc504@fcc.gov or call the Commission's Consumer and Governmental 
Affairs Bureau at (202) 418-0530 or (202) 418-0432 (TTY). Pursuant to 
Sections 1.415 and 1.419 of the Commission's rules, 47 CFR 1.415, 
1.419, interested parties may file comments and reply comments on or 
before the dates indicated on the first page of this document. Comments 
may be filed using the Commission's Electronic Comment Filing System 
(ECFS). See Electronic Filing of Documents in Rulemaking Proceedings, 
63 FR 24121 (1998), http://www.fcc.gov/Bureaus/OGC/Orders/1998/fcc98056.pdf.
     Electronic Filers: Comments may be filed electronically 
using the Internet by accessing the ECFS: http://apps.fcc.gov/ecfs/.
     Paper Filers: Parties who choose to file by paper must 
file an original and one copy of each filing. If more than one docket 
or rulemaking number appears in the caption of this proceeding, filers 
must submit two additional copies for each additional docket or 
rulemaking number.
    Filings can be sent by hand or messenger delivery, by commercial 
overnight courier, or by first-class or overnight U.S. Postal Service 
mail. All filings must be addressed to the Commission's Secretary, 
Office of the Secretary, Federal Communications Commission.
    [cir] All hand-delivered or messenger-delivered paper filings for 
the Commission's Secretary must be delivered to FCC Headquarters at 445 
12th St. SW., Room TW-A325, Washington, DC 20554. The filing hours are 
8:00 a.m. to 7:00 p.m. All hand deliveries must be held together with 
rubber bands or fasteners. Any envelopes and boxes must be disposed of 
before entering the building.
    [cir] Commercial overnight mail (other than U.S. Postal Service 
Express Mail and Priority Mail) must be sent to 9300 East Hampton 
Drive, Capitol Heights, MD 20743.
    [cir] U.S. Postal Service first-class, Express, and Priority mail 
must be addressed to 445 12th Street SW., Washington, DC 20554.
    People with Disabilities: To request materials in accessible 
formats for people with disabilities (braille, large print, electronic 
files, audio format), send an email to fcc504@fcc.gov or call the 
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-
418-0432 (tty).

I. Introduction

    1. Business data service (BDS) is critical to the delivery of 
innovative broadband services for businesses and government 
institutions and is a major contributor to the nation's economy. 
Incumbent LECs and competitive providers reported revenues of almost 
$45 billion for 2013 for the sale of dedicated services. It is, 
however, important to recognize that BDS is an important input 
(sometimes self-supplied) in the broader market for enterprise 
services, which include voice, Internet, private network, web-security, 
cloud connection, and other digital services. Available information 
suggests that the annual revenues for the broader enterprise services 
industry could exceed $75 billion annually.
    2. In this FNPRM, we provide our analysis to date of the 2015 
Collection. We then seek comment on a number of proposals to establish 
a new regulatory paradigm for BDS to more appropriately address the 
technological changes occurring today and to facilitate the continued 
evolution of the type of robust competition that will result in ever-
improving services for American businesses and consumers. To that end, 
the FNPRM seeks to develop a technology-neutral framework that no 
longer classifies BDS through the legacy prism of traditional services 
and company classifications. Rather, the Commission seeks to enter a 
new era where regulatory determinations are made based on whether a 
market is competitive and the concomitant regulatory obligations apply 
to all providers, looking to legitimate differences in products, 
places, and customers. The goals of this FNPRM are supported by the 
joint principles recently announced by INCOMPAS and Verizon urging the 
Commission to ``adopt a permanent framework for regulating all 
dedicated services in a technology neutral manner.'' That two of the 
entities who were once

[[Page 36031]]

diametrically opposed have joined together urging the Commission to 
adopt such principles is further evidence of the evolution in the BDS 
market today and the need for this new paradigm to harmonize regulation 
with the changing technology.

II. Further Notice of Proposed Rulemaking

A. Competition Analysis

1. Our Approach
    3. We analyze the data collected and the evidence submitted in this 
proceeding to reach preliminary evaluations as to the degree of 
competiveness in BDS markets. Our public interest evaluation 
necessarily encompasses the ``broad aims of the Communications Act,'' 
which include, among other things, a deeply rooted preference for 
preserving and enhancing competition in relevant markets with increased 
private sector deployment of advanced services. In conducting this 
analysis, we take a forward-looking view of technological and market 
changes.
    4. We examine the effectiveness (and likely effectiveness) of 
competitive restraints, to identify where market power exists in BDS 
markets. We focus our analysis on BDS prices, and terms and conditions, 
and consider the effectiveness of current competitive restraints and 
whether market power, where it exists, has enabled unreasonable pricing 
or other practices or an ability to unlawfully exclude competition.
    5. To distinguish product markets, we generally look to include 
products in the same market if they are reasonably interchangeable, 
with differences in price, quality, and service capability being 
relevant. In the case of geographic markets, we look to supply, rather 
than demand substitution. For both product and geographic markets, we 
do not believe it is necessarily required to engage a formal 
hypothetical monopolist test considering likely consumer substitution 
if a hypothetical monopolist imposed at least a small but significant 
and non-transitory increase in price (SSNIP), taking a more direct 
approach to demonstrate the use of market power.
2. Product Markets
    6. In our data collection we defined BDS as a dedicated end-to-end 
telecommunications service. Leading technologies of this type are DS1s 
and DS3s, typically carried over copper pairs, which account for the 
majority of the BDS revenue in 2013 according to these data. DS3 lines 
carry about 30 times the bandwidth of a DS1 line, which is a symmetric 
1.5 Mbps service. It is also possible to achieve higher bandwidth 
levels over other circuit-based technologies. An alternative to 
circuit-based technology is packet-based service, more commonly 
delivered over fiber optic cable or HFC cable using a standard called 
DOCSIS. Fiber can deliver higher bandwidth and service levels, and most 
new investment is in fiber optic and coaxial cable, and in next 
generation DOCSIS 3.1 electronics. Cable companies also provide BDS at 
competitive rates over the coaxial-fiber hybrid technology, commonly 
referred to as ``Ethernet over DOCSIS,'' that have characteristics of 
BDS carried over fiber: It can be used to provide access to the 
Internet and point-to-point communications (such as a virtual private 
network); it is generally available at symmetric bandwidths up to 10 
Mbps; and is often supplied with service reliability guarantees, even 
if not at the same level as what is typically offered over fiber. We 
agree with several commenters recognizing that since this proceeding 
began in 2005, there has been significant innovation, investment and 
deployment of IP-based technologies, and DOCSIS relied on by cable 
companies, and that increasingly business customers purchase these 
technologies instead of TDM services. However, many business customers 
continue to rely on TDM services.
    7. We described best efforts services above. Several commenters, 
including certain competitive LECs, claim that best efforts Ethernet 
over DOCSIS provided by cable companies does not provide the requisite 
dedicated access needed by certain, notably mid-sized and larger 
business customers and carriers, even if it meets other demands. Other 
commenters contend the Commission should include best efforts DOCSIS 
cable service within a broader product market definition.
    8. We believe it is likely that best effort services may not be in 
the same product market or markets as BDS. The prices of best efforts 
services are considerably lower than the prices of roughly comparable 
BDS. Compared with BDS, best effort services are less reliable, notably 
in terms of guaranteed uptime, and other service level guarantees; in 
some cases do not offer higher bandwidths; and characteristically lack 
upload/down symmetry. Although fit for many customer purposes, best 
efforts services do not meet the requirements of all BDS purchasers, 
nor is it offered by sellers as a product intended for all customers. 
Sellers generally distinguish best effort services from other BDS 
products to meet customer needs at the right price point, and organize 
sales efforts accordingly. Finally, underlying characteristics of the 
way best efforts services are supplied can make it hard for certain 
higher quality BDS to be supplied on the same network as best efforts 
services. We seek comment on this view.
    9. If two readily available services have substantially different 
prices, then they are likely dissimilar (otherwise buyers would prefer 
the cheaper service which would constrain the price of the other 
service). Best efforts services are uniformly the least cost 
alternative offered by carriers, with the lowest functionality. Prices 
for best efforts services typically start at levels consistent with 
residential broadband service, increasing as service speed, capacity 
and reliability increase. For example, ``Comcast's Business Internet 
service is available for purchase online starting at $69 per month for 
its 16/3 Mbps service.'' Verizon similarly offers a variety of best 
efforts services under $100, beginning with a ``Starter'' package with 
speeds up to: 1 Mbps download/384 Kbps upload (``Best for: Single--
person business, Light Internet use'') to the ``Fastest'' with speeds 
up to 10-15 Mbps download/1 Mbps upload (``Best for: Multiple 
employees, Online-based business eCommerce with orders''), with prices 
ranging from $39.99 to 94.99 per month. Verizon's Fios ranges from 50/
50 Mbps to 500/500 Mbps, with prices from $49.99 to 269.99 per month. 
TWC offers six best efforts products online, ranging from $14.99 for 
(``up to'') 2 Mbps download/1 Mbps upload to $64.99 for (``up to'') 50 
Mbps download/5 Mbps upload. In contrast to these best efforts 
services, TWC's average monthly BDS pricing ranges from [REDACTED].
    10. That demand exists for symmetric [REDACTED], and customers do 
not switch to available best efforts services with at least as much 
bandwidth in both directions that are priced at approximately one tenth 
of that level (compare with the FiOS 50/50 price of $49.99), implies 
some customers must value certain characteristics of BDS highly 
relative to best efforts service. This suggests such customers would be 
unlikely to be tempted to switch to a best efforts service even if its 
price were to fall by a significant amount. It also suggests a customer 
currently purchasing a best efforts service would not switch to a BDS 
with a price of several multiples of the best efforts service, even if 
the BDS price were to fall significantly.
    11. In fact, the characteristics of best efforts service and BDS 
appear to be

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very different. BDS comes with substantial reliability guarantees and 
functionality that do not accompany best efforts services, leading us 
to the view that the two services do not play important roles in 
constraining the quality-adjusted prices of each other. Consistent with 
the observed price differences between the different types of services, 
some end users do not require ``mission critical'' connectivity, and 
prefer best efforts services to BDS, prioritizing cost savings over 
reliability and specific functionality. Other end users are willing to 
pay considerably more for services that include greater (particularly 
upload) speeds, are more reliable, and come with more rigorous 
guarantees. Sprint, for example, [REDACTED]. Best efforts services do 
not satisfy these requirements.
    12. BDS uptime reliability is also generally higher than with best 
efforts services. For example, Windstream on its Web site contrasts an 
Ethernet Internet service with a 99.99% uptime guarantee with cable 
(presumably) best efforts services, while best efforts services do not 
typically come with such guarantees. AT&T's best efforts Broadband SLA 
applicable to its High Speed Internet Business Edition family of 
services (AT&T U-verse[supreg] HSI-Business Edition; AT&T High Speed 
Internet Business Edition; and FastAccess[supreg] Business DSL) comes 
with a guarantee of 99.9% uptime. The AT&T ``three nines'' service 
(99.9%) service permits approximately 8.76 hours of downtime a year, 
plus disclosed allowances for many other downtime events, which are 
material to the offering and, as discussed immediately above, would not 
be acceptable for many users. ``Comcast best efforts Business Internet 
service is sold without SLAs or contractual performance objectives.'' 
Comcast best effort offers include seven Internet packages online 
ranging from a 3 Mbps, ``Economy Plus'' service to a 2000 Mbps, 
``Xfinity Gigabit Pro'' service; each of the seven Comcast services 
include a disclaimer, ``Actual speeds vary and are not guaranteed.'' 
And in contrast Comcast BDS, like those of Windstream and AT&T, come 
with considerably greater reliability guarantees. Comcast ``business 
class data services come with a variety of performance metrics and 
assurances,'' which for Ethernet transport services include an SLA 
``committing to [REDACTED] for fiber-based service and [REDACTED] for 
HFC-based service, with penalties for failure to meet those service 
levels.'' Similarly, without a guaranteed throughput speed, ``Time 
Warner Cable offers six Internet speed options, up to 50 Mbps in most 
locations and up to 300 Mbps in select areas.'' Time Warner Cable 
guarantees for its Business Internet Access (BIA) service vary slightly 
from Comcast, ``[w]hile TWC's BIA service may be just as [REDACTED], 
leading certain customers to choose one service over the other.'' 
Moreover, as discussed above, the price differences for these services 
are large, suggesting customers highly value the product differential 
BDS has over best effort services.
    13. We seek comment on these analyses. We ask whether the 
Commission should consider alternative factors or aspects of the market 
and invite parties to submit alternative evidence in the record.
    14. Some commenters argue that packet BDS place competitive 
pressure on TDM BDS. TDM BDS offers point-to-point connectivity in 
essentially the same way that packet BDS does. Since each technology 
can be used for the same purposes, this suggests that they are in the 
same product market. This is not to say that there are no differences 
between packet and TDM services. For example, while both perform 
similar roles, Ethernet is more easily scaled.
    15. But Existing Customers Can Face High Switching Costs. Record 
evidence suggests that once a customer has installed a business data 
service, it faces high costs in switching. Consequently, switching most 
commonly occurs when a customer outgrows its service, for example, 
requiring a demand not available on their current service, or because 
they need the functionality of a different technology (most usually 
leading to a switch from TDM to packet BDS). In particular, high 
switching costs can both slow the transition from TDM to packet BDS and 
limit the potential market for packet BDS which could in turn limit 
investment.
3. Customer Markets
    16. Carriers organize how they market around distinct fairly 
similar customer groups. These customer groups also have their own 
distinct characteristics, and hence distinct service requirements. As 
Comcast explains, ``although all of Comcast's business class data 
services may be used by various types of customers, the unique needs of 
certain customers may make one service more appropriate than others.'' 
Put together these facts suggest the possibility of separate customer 
markets. In particular, if supply to a first customer group cannot be 
readily extended to supply to a second, then supply to the first 
customer group may not place material competitive constraints on supply 
to the second. We seek comment on whether such customer markets are 
possible in the supply of business data services, and if so, what these 
are. We are particularly interested in the extent that multisite 
customers may fall into such a category as we propose below.
    17. At a high level, possible customer categories are retail 
purchasers of business data services and carrier purchasers. These 
groups, in turn, could be further subdivided. Retail purchasers of 
business data services come in all shapes and sizes, and include retail 
businesses, governmental and educational institutions, and other 
enterprises that require dedicated enterprise services. Their needs 
vary depending on, among other factors, the number of employees and 
locations they have, the volume of their traffic, and the technological 
sophistication of the services they require. Many call for a 
competitive wholesale BDS access market. Large businesses are 
especially likely to require ``high quality phone and Internet 
services'' that ``depend upon special access services as the building 
blocks of their corporate networks, from workhorse DS1s to the growing 
number of Ethernet connections to the highest capacity OCns.'' Medium-
sized and small businesses also require ``advanced IP and fiber 
connections,'' which are ``mission critical.'' Retail banks, for 
example, ``rely heavily on broadband service'' to enable ``financial 
transactions and provide [customer] support in a timely fashion.'' 
Reliable broadband connections also allow brick and mortar companies to 
meet customer needs ``as efficiently and effectively as possible'' and 
to ``enhance the customer shopping and buying experience.''
    18. Most larger, sometimes called enterprise, customers require 
connections to more than one site, and some, such as retail banks, and 
large retail sales outlets, may require many sites in diverse 
locations, often in areas with limited business density. Moreover, at 
many of these locations such large customers may only have low 
bandwidth requirements, even if each connection must have a high degree 
of reliability (for example, in the case of a retailing outlet, to 
ensure rapid credit card processing) and/or be highly secure (in the 
case of a retail bank). Larger customers are typical users of dedicated 
fiber-based, symmetric services; some have service demands for a 
limited geographic area while others require service for any number of 
locations within the country. Multi-location customers are often 
provisioned by BDS providers that ``have a broad regional footprint 
without significant gaps in coverage to serve large enterprises with

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multiple sites across given geographic regions effectively.'' Such 
providers may be relatively rare. We seek comment on our implicit 
finding below that such ``spread-out'' multi-site customers may be 
sufficiently distinct from other customers to constitute a separate 
market (below we find that competitive supply to other customers may 
not place a competitive constraint on supply to these ``spread-out'' 
multi-site customers), especially to the extent that such customers 
require lower bandwidth, highly reliable, services in areas with lower 
business densities, may not face the same competitive choices as other 
customers.
    19. Carrier purchasers are different again. They are typically 
large and sophisticated buyers, with substantial capacity to leverage 
scale, for example, in seeking tenders to supply. Wireless carriers 
rely on business data services to connect their radio towers to their 
mobile switching centers. Mobile carriers purchase business data 
services often with bandwidths of around 50 Mbps and greater, but small 
cell demands, which look set to grow, may generally require lower 
bandwidths, and may require backhaul to many locations with low levels 
of business density. Sprint, a purchaser of wireless backhaul transit 
services, explains that it requires a specific BDS capable of more than 
traditional copper twisted pair and coaxial cable can support. Even 
where next-generation HFC is available, it is more suitable for mid-
range demands. Sprint, for example, describes Ethernet over HFC as a 
poor substitute for fiber-based services because [REDACTED]. Sprint 
specifically notes that its macrocell sites [REDACTED] and a service 
level guarantee not available for generally best efforts or mid-tiered 
products.
    20. Competitive LECs purchase BDS wholesale to sell retail services 
to end users. They do this where the purchasing competitive LEC does 
not currently have network and where extending their networks would not 
be profitable. While competitive LEC demand reflects end-user demand 
and so is highly diverse, competitive LECs again have the ability to 
leverage scale. We seek comment on whether carrier purchasers have 
countervailing power even when dealing with an entity that may 
otherwise have market power, and whether they need different 
protections than end users.
4. Geographic Markets
    21. In this section, we express the view that the likely BDS 
geographic market, even for lower bandwidth services, likely extends 
beyond the area of the average Census block in which there is BDS 
demand. We come to this assessment by focusing on supply-side 
substitution, and seek comment on how we might refine this definition.
    22. Relevant geographic markets are often determined by estimating 
demand side response if a hypothetical monopolist in a specified 
region, facing competition from beyond that region, tried to set prices 
above competitive levels. In this industry, given that most BDS 
customers would not shift their location to purchase special access 
from a different carrier, we focus on the supply response, that is--
under what circumstances, if any, will nearby suppliers geographically 
extend their existing facilities distances to obtain new consumers. If 
suppliers were generally willing to extend their networks to meet 
nearby demand, then they would place a degree of competitive pressure 
on the prices nearby customers would face.
    23. Geography also impacts product substitution. In certain areas, 
higher bandwidth services are not available due to the lack of 
technical capability. Available service could be limited in speed and 
capability to best efforts and similar, lower-level service levels that 
are provisioned over copper and coaxial lines. Increased service 
speeds, capacity, and guarantees are not available unless and until a 
BDS provider builds or extends new facilities (such as fiber or a 
hybrid technology) in a range close enough to the customer to readily 
extend a service that replaces best effort. Sprint points out, for 
example, that Ethernet over HFC ``is not yet available in all business 
locations served by ILEC special access--nor at most cellular tower 
sites.''
    24. We consider it unlikely that BDS supply in one part of an MSA 
would constrain the provision of BDS where it is demanded everywhere in 
the MSA. However, we also see good evidence that the presence of fiber 
competition not only could be expected to impact, but actually can 
impact, supply of lower bandwidth services over the whole Census block 
in which that fiber is located. This suggests a geographic market 
definition for lower bandwidth BDS lies somewhere above the average 
area of the Census block with BDS demand and below the MSA. We seek 
comment on these assessments and how to refine them. We seek this 
information for the purpose of developing an administratively feasible 
test for determining where we can replace regulation with market 
forces.
    25. In the Suspension Order, the Commission explained that ``demand 
varies significantly within any MSA, with highly concentrated demand in 
areas far smaller than the MSA'' and some areas with little or no 
demand. Our record reinforces that view. The Commission stated that 
competitive entry is considerably less likely to occur in areas of low 
demand, regardless of whether other areas within the MSA contain 
sufficient demand to warrant competitive entry. The Commission also 
observed 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.''
    26. The distances competitive LECs are generally willing to extend 
their facilities to reach potential customers beyond the locations they 
currently reach are quite short. These distances, which vary among 
competitive LECs and business opportunities, typically range from 
[REDACTED]. In fact, the distance Comcast will generally build within 
[REDACTED]. Similarly, TDS Metrocom estimates the average length of its 
competitive LEC's fiber laterals is [REDACTED]. Most [REDACTED]. If an 
end point of a ``transport facility is outside a [central business 
district], and perhaps the first ring of suburbs . . . the competitive 
presence is far less. . . . As a result, these non-[central business 
district] areas are largely served only by ILEC facilities.'' Buildouts 
of [REDACTED] and farther occur, but variables, including cost and 
demand factors, entailing traditional return-on-investment 
calculations, become increasingly determinative as the distance from a 
cost-effective and viable fiber junction point increases, which ``are 
often collocated at or housed near ILEC central offices.'' Incumbent 
LECs have similar buildout criteria. AT&T, for example, ``engineering 
guidelines demonstrate that AT&T engineers its network to maintain 
lateral distances at or below about [REDACTED].
    27. Responses to the data request indicate that competitive 
buildout to customers becomes increasingly less likely with a potential 
customer at a location [REDACTED] or farther away. Narrative 
descriptions of how far competitive carriers will buildout broadly 
align with observations of data submitted. For example, Cbeyond 
reported its ``maximum build distance'' is a ``distance of [REDACTED] 
from existing lit fiber of a competitive fiber provider.'' TDS METROCOM 
explained, ``If the location is beyond [REDACTED] experience has shown 
us that customers are not willing to pay the extra monthly cost that 
would be required to pay for such an expensive build.'' Cablevision

[[Page 36034]]

Lightpath reported [REDACTED] buildout parameters, requiring a 
potential customer ``be within [REDACTED] of a splice point in [its] 
core network,'' excluding certain areas of density, and ``[i]f 
[REDACTED] from splice point, no business case is required [while] 
[b]uild[ing] [REDACTED] from splice point involves ROI [analysis].'' XO 
similarly notes that ``[REDACTED] or less from its existing fiber 
infrastructure'' is most attractive, while ``buildings that are 200 
feet or less from exiting fiber assets are of particular interest.'' 
The distances and build criteria reported by Submitting Parties are 
generally in-line with that the Department of Justice in 2006. Beyond 
these general distances (and to a lesser extent within these 
distances), carriers typically rely on long-term loyalty agreement to 
guarantee a return-of-investment.
    28. These buildout distances, which rarely exceed [REDACTED] are 
orders of magnitude less than those encountered in an MSA. For example, 
the smallest MSA, Carson City, Nevada has a land area of 144.7 square 
miles. If competitive fiber is deployed in the center of Carson City, 
it will be 6.9 miles from Mound House, Nevada, or 5.8 miles from Indian 
Hills, Nevada. Moreover, the Carson City MSA is quite small. The land 
area of the average MSA, 2,494.5 square miles, is 17.2 times larger 
than the Carson City MSA. In fact, the largest MSA, Riverside-San 
Bernardino-Ontario, California, has a land area of 27,263.4 square 
miles. If competitive fiber is deployed in the center of Riverside, it 
would be 20.6 miles from Chino, California. Indeed, MSAs are large 
geographic areas that ``often contain smaller geographic areas across 
which competitive conditions are widely disparate.'' As the Commission 
has observed, ``MSAs are comprised of communities that share a locus of 
commerce, but not necessarily common economic characteristics as they 
relate to telecommunications facilities deployment . . . Due to the 
wide variability in market characteristics within an MSA, MSA-wide 
conclusions would substantially over-predict the presence of actual 
deployment, as well as the potential ability to deploy.''
    29. Census tracts are large relative to the deployment distances 
discussed immediately above. If the median Census tract in which we 
observe BDS demand were a circle, it would be approximately 1.5 miles 
across. Moreover, the geography of Census tracts vary significantly. A 
circular tract at the 75th percentile would be around 2.6 miles across. 
In contrast, if the median Census block were a circle, then it would be 
approximately 0.2 miles across. Again Census blocks can be 
significantly larger than the median. If the Census block at the 75th 
percentile were circular, then it would be around 0.4 miles across. 
This analysis suggests that a supplier's presence anywhere in most, if 
not all, Census blocks could have a material competitive effect on 
other suppliers. It also suggests that a supplier's presence anywhere 
in smaller Census tracts could have a material competitive effect on 
other suppliers. This is consistent with the analysis contained in the 
Rysman White Paper, and in the Baker Declaration, which suggests that 
the presence of a fiber competitor can have material competitive 
effects on lower bandwidth services in Census blocks in which we see 
BDS demand.
    30. We seek comment on how close competition must be to place 
material competitive pressure on supply at a given location, and 
whether this distance might vary with the nature, most notably the 
bandwidth, of the BDS in question. We also seek comment on how such 
analysis might be developed, and call for that analysis to be 
undertaken. For example, recognizing that Census tracts and Census 
blocks vary in size, we recently placed in the secure data enclave 
information on the distance from all locations with BDS demand to the 
nearest competitive providers' fiber networks. Consequently, regression 
analysis might be used to identify the range over which distant 
networks no longer have material competitive effects.
5. Concentration by Any Measure Appears High in This Industry
    31. In this section, we report several measures of geographic 
concentration, including at the national level. What these measures 
show are uniformly high levels of concentration. While we remain 
agnostic as to what the right unit or units of geography are for 
measuring concentration (noting these might also vary for different 
services and customer groups), we expressly reject the idea that many, 
if any, BDS markets are national in scope (it is unlikely that a 
supplier's presence in Miami constrains prices in Seattle). To the 
extent that markets are not national, national measures of 
concentration likely understate both market concentration measures and 
the shares of incumbent LECs. While national revenue shares make sense 
from the perspective of incumbent LECs, whose territories do not 
overlap, and which, in aggregate, cover all price cap territories, 
national shares greatly exaggerate competitive LEC presence, since 
there are many geographically diverse, and in some cases very small, 
competitive LECs, none of which competes across all the incumbent price 
cap LECs' footprints.
    32. As part of our data collection, carriers reported their 
aggregate BDS revenues. These provide an approximate indication of the 
revenue shares of different provider types supplying sophisticated 
services to end users, that is, of revenue shares in the supply of BDS 
and more complex managed services. As the pie chart below shows 
independent competitive LECs, that is, competitive LECs not affiliated 
with incumbent LECs, only capture 18% of BDS revenues. However, this 
estimate is subject to three biases, which in aggregate overstate the 
shares of independent LECs. First, a greater proportion of incumbent 
LECs' sales of BDS and managed services are BDS as compared with 
competitive LECs, a bias that likely overstates incumbent LEC revenue 
shares. Second, because a valid measure of concentration would measure 
facilities-based revenues, rather than resale revenues, and because a 
substantial proportion of incumbent LEC BDS sales are to competitive 
LECs who then resell those services, the preceding bias is likely to be 
more than offset (managed service revenues earned on the resale of 
incumbent LEC BDS will be greater than the LEC BDS sales to the 
resellers). Third, there is the bias identified immediately above from 
measuring national shares.
    33. In 2013, cable companies reported nearly two billion in BDS 
sales (or less than 5% of all sales). However, because cable BDS 
revenues have been growing at around 20 percent per year, by the end of 
2016 cable BDS revenues will be close to $3.5 billion (likely still 
less than eight percent of BDS revenues).
    34. This section considers the extent to which in 2013 there was 
competition, as indicated by various measures of the number of rivals 
(for example, by counting or excluding competition based on UNEs and/or 
HFC with DOCSIS 3.0) at the level of the unique location, Census block 
and ZIP code. We take this broad approach because, as discussed above, 
we are agnostic as to the exact geographic range of BDS markets. In 
particular, we do not yet know is how much competitive pressure 
different forms of supply place on other suppliers, or how many 
suppliers, accounting for their differences, are sufficient to make 
prices effectively competitive (matters we have sought comment on 
above). Moreover, the Rysman White Paper suggests that competitive 
effects may occur at the level of the building, even when there are 
additional competitive effects from

[[Page 36035]]

more distant competition. Under all these measures, market 
concentration is large. For example, when counting fiber, and DOCSIS 
3.0 over HFC and UNE supply as forms of competition, we find more than 
ten percent of unique locations with BDS demand are supplied by one 
provider, and that slightly over half of such locations are only 
supplied by two providers (so \2/3\rds of such locations have only a 
choice of one or two suppliers).
    35. Table 3 considers how many unique locations have one through 
six suppliers in the location, under two measures of competition. In 
both cases, the incumbent LEC is considered ubiquitous, and ILEC-
affiliated supply is counted as competitive, but in the first case (the 
left side of the table), only competitors with fiber in the building 
are counted, while in the second, competition over UNEs is also 
counted. Under both cases, more than half of all unique locations only 
have one supplier, and less than five percent have three or more.
    36. In 2013, cable companies reported being able to serve something 
just over 150,000 unique locations (or less than 15 percent of unique 
locations with BDS demand), almost entirely on their own facilities 
(cable companies make limited use of UNEs). Looking forward, if cable 
adds 20 percent more lines every year (in line with historic BDS 
revenue growth), then at the end of 2016 cable would be able to serve 
over 260,000 unique locations. However, in 2013, cable provision of BDS 
was much more limited than it is today. In particular, BDS was not 
typically supplied over HFC. Looking forward, it may already be or soon 
will be the case that cable companies are able to supply BDS everywhere 
they have deployed DOCSIS 3.0. We seek comment on this. Counting cable 
supply as being capable of reaching every unique location with BDS 
demand in every Census block that cable reports as being able to serve 
greatly increases the extent of competition at the level of unique 
location. Table 4 shows the resulting number of providers that can 
supply one through six buildings. More than half of unique locations 
are only supplied by one or two providers, and more than ten percent 
have only one supplier.
    37. Firm concentration falls as the square areas of the geographic 
region under examination increases. Table 5 provides the number of 
Census blocks with BDS demand that have one through six fiber suppliers 
(so is similar to the left half of Table 3 in that it excludes UNE 
competition). It shows that around 16 percent of Census blocks with BDS 
demand are only served by an incumbent LEC (compared with more than 75 
percent in Table 3), while more half of such Census blocks have a 
choice of two suppliers (compared with more than 20 percent in Table 
3). It remains true that nearly 70 percent of Census blocks with BDS 
demand have two or fewer competitors capable of serving a unique 
location in the block.
    38. Table 5 also gives an indication of the strength of different 
classes of providers. For example, incumbent-affiliated competitive 
LECs have very few facilities indeed. This is true even if competition 
over UNEs is added in (not shown in the table) and is indicative of the 
extent to which incumbent-affiliated competitive LECs rely on other 
incumbent LECs' BDS.
6. Entry and Entry Barriers
    39. Similar to the antitrust enforcement agencies, we consider 
entry by competitors to be an important part of our analysis of 
competition. The viability of potential competition is significantly 
affected by barriers to entry, which are ``cost[s] of production that 
must be borne by competitors entering a market that is not borne by an 
incumbent already operating in the market,'' as well as conditions that 
impact entry. Both costs and conditions exist in the BDS market with 
enough significance in any measure of a geographic market to deter 
rapid competitive entry or expansion, including ``high capital 
expenditures, large sunk costs, long lead times, scale economies, and 
cost disadvantages.'' High barriers to entry at local levels may 
particularly affect competitive entry or expansion to service customers 
with national and multi-region demand that requires ``an extensive 
network footprint to be able offer services widely.'' The competitive 
provider's footprint most often includes a combination of locally-based 
facilities owned by the competitor and network access purchased from 
the regional incumbent or other competitors, which may be available at 
a regulated UNE- (by the incumbent LEC) or unregulated wholesale-basis 
(by a LEC or, in some instances, a cable company or other competitive 
LEC). Although there is evidence of potential competitors becoming 
increasingly relevant, commenters assert substantial barriers limit the 
timelines, likelihood, and sufficiency of entry to counteract 
anticompetitive effects in BDS markets.
    40. The passage of the 1996 Act increased the Commission's focus on 
how barriers to entry impact competitive buildout. Like incumbent LECs, 
competitive LECs build facilities to meet consumer demand. Deploying 
facilities requires incurring costs that vary, ``among other things, on 
the length of the laterals and fiber rings built, the nature of the 
electronics added, whether the lines are buried, and local regulations 
(e.g., a city may require replacement of cobblestones on scenic 
streets).'' In addition to deploying facilities, a provider frequently 
needs to obtain building access and/or rights of way to reach the 
building.
    41. The barriers to entry do not materially differ whether the 
technology being deployed is TDM- or Ethernet-based. As Ad Hoc notes, 
``[t]he underlying transport facilities for Ethernet services are the 
same as the underlying transport facilities for TDM services,'' which 
is consistent with AT&T's observation that ``Ethernet is simply a 
service that can be provided over many different types of transport 
facilities, including copper, fiber, coaxial, and wireless 
facilities.'' BT adds that it is reasonable to conclude that that the 
main Ethernet access cost elements--duct, fiber, and electronics--do 
not vary much across service speeds up to 1 Gbps.'' Legacy TDM services 
require the same transport facilities and, in most geographic areas, 
the incumbent already provides TDM service and therefore has an 
advantage over a new entrant. That historical incumbent advantage 
allows the incumbent LEC to lower its costs through its ``initial 
control of all customers'' and ``us[ing] the same rights of way, 
trenches, conduit, wires, poles, building access, riser, truck rolls, 
employees, outside plant, central office equipment, administrative 
expenses, and other legacy inputs that they use when the provision TDM-
based special access services.''
    42. One recent study asserts that current barriers are sufficient 
to deter new construction in most business locations. Certain issues 
cannot be easily overcome, such as ``when the building owner refuses to 
grant the CLEC access or charges a high access fee, or when it is 
difficult or costly to obtain rights of way to a specific building 
(e.g., pole access or costs of burying lines).'' Also, competitive 
carriers can connect their networks to ``customer locations that are 
near to their fiber transport facilities, where the customer at the 
location is suitable for the competitive carrier's service offerings, 
and where the revenues associated with the location are sufficient to 
make loop deployment profitable.'' Areas of low BDS demand, which would 
include most suburban and rural areas, present additional issues for 
those considering an extension of facilities, principally a lack

[[Page 36036]]

of a timely potential for a positive return on investment. Charter, for 
example, notes how in its [REDACTED]. Cablevision Lightpath also faced 
issues outside of its traditional, denser, region because [REDACTED]. 
Many simply avoid higher-cost areas, such as, [REDACTED].
    43. In addition to deploying their own facilities, competitive LECs 
extend their network reach by purchasing incumbent LEC facilities at a 
regulated price on an unbundled basis or at non-regulated wholesale 
prices. Obtaining UNEs often is the most economical way to reach a new 
customer for a competitive LEC, and it is important to account for the 
effects of UNE competition. However, UNE competition has its limits. 
UNEs are not always available ``because of insufficient or 
insufficiently-conditioned facilities, regulatory or contractual 
constraints.'' And even with significant investment in facilities in an 
area, competitors ``must depend heavily access to on the incumbent 
LECs' facilities and services to serve its customers.'' When purchasing 
from the incumbent LEC, proximity to a collocation point near the 
customer lowers cost, meaning costs increase the farther the 
competitor's facilities are located from the potential customer. UNE 
reliance, therefore, is successful ``only in some locations, only for 
some customers, and only to some extent.''
    44. Competitive LECs also lease dedicated, non-regulated, wholesale 
services to connect to commercial buildings over non-UNE facilities 
from incumbent LECs or other competitive LECs. Even competitive LECs 
with well-developed regional fiber rings rely on an incumbent or 
competitive LEC wholesale inputs for last-mile connections. Leasing 
last-mile dedicated services from the ubiquitous incumbent LEC 
oftentimes is the only option due to a lack of competitive build-out. 
Level 3, for example, explains that it ``usually has no choice but to 
lease dedicated services from the incumbent LEC in order to reach 
locations that Level 3 cannot reach with its own network.''
    45. While wholesale access can be a cost effective means for a 
competitive LEC to expand its reach, such a wholesale purchaser cannot 
place competitive pressure on supply of the underlying facility that it 
purchases, but rather can only compete by being more efficient at 
retailing. Thus, we do not consider competition over resold lines as a 
material competitive restraint on any facility-based supplier with 
market power. Moreover, we are told that in some cases an incumbent 
LEC's wholesale prices can be near or above retail levels (sometimes 
referred to as a ``price squeeze''). Similarly, we are told that rates 
below retail, available through many incumbent LEC purchase agreements, 
also can create barriers to entry when they include ``penalty clauses 
and loyalty discount provisions in their wholesale contracts'' that are 
not related to a competitive efficiency and simply have the effect of 
raising the rival's cost. XO, for example, generally declines to build 
facilities when doing so will increase its risk of falling short of a 
minimum purchase requirement under an incumbent LEC commitment plan. 
Level 3 similarly reports added costs due to incumbent LEC loyalty 
agreements, which forecloses an opportunity to purchase from other 
lower-priced wholesale inputs. In the end, competition is constrained. 
A motivated and efficient competitive LEC, such as Level 3--the largest 
competitive LEC and the third largest provider of fiber optic internet 
access (based on coverage area) in the United States--only ``deploy[s] 
new loops to approximately 3,000 to 4,000 commercial buildings in the 
U.S. each year.''
    46. Cable providers encounter similar barriers to entry, even 
within their incumbent franchise areas, although their in-region 
networks present economies of scale, similar to incumbent LECs, and 
present lower barriers for in-region expansion, compared to other 
competitive LECs. Nevertheless, for traditional competitive LECs and 
cable companies alike, ``loop deployment costs are distance-
sensitive,'' limiting competitive reach, even if cable companies would 
likely have ``lower loop deployment costs in areas where they have 
deployed extensive transport networks.'' As CenturyLink notes, even 
cable companies must incur significant investment costs and rely on the 
networks of others to expand their footprints.''
    47. Efforts to enter and expand in markets are being made with 
success, however, which has required investment and new networking 
initiatives to address barriers to entry. Comcast, for example, has 
recently established a new business unit to target Fortune 1000 
businesses. But to reach Fortune 1000 companies, and satisfy their 
varying and broad geographic requirements, Comcast could not rely on 
its own facilities alone. To compete, ``[i]t struck wholesale 
agreements with other cable companies including Charter, Time Warner 
Cable, Cox, Cablevision, and Mediacom, and it acquired Contingent 
Network Services--a managed services firm with ``aggregation or 
wholesale relationships with many other CLECs, ILECs, [and] small cable 
providers.'' Some companies are more risk-adverse or sensitive to 
barriers than others, however. Charter, for example, notes that a 
``partner model creates high transaction costs, as multiple networks 
and personnel must be coordinated, and these costs impact the price at 
which these services can be offered.''
    48. Incumbent LECs face lower overall barriers within region and 
barriers similar to independent competitive LECs out-of-region. Within 
region, the Commission has recognized that incumbents can ``increase 
capacity on many special access routes at a relatively low incremental 
cost (relative to the total cost of trenching and placing poles, 
manholes, conduit, fiber, and copper, and securing rights and access) 
by adding or upgrading terminating electronics.'' Carriers with 
incumbent LEC and competitive LEC affiliated entities confirm the lower 
incumbent LEC barriers to entry. For example, TDS, which operates both 
incumbent LEC and competitive LEC subsidiaries, has explained that ``it 
is generally far less expensive and more efficient for TDS ILEC to 
deploy new fiber to business customer locations than is the case for 
TDS CLEC.'' Windstream, which also operates both incumbent LEC and 
competitive LEC businesses, has found that ``ILECs continue to enjoy a 
dramatic advantage over CLECs in the average cost per building of new 
last-mile fiber deployment--an advantage that is largely attributable 
to the incumbents' much larger market shares, which is 6+ a direct 
result of the ILEC first mover advantage rooted in the monopoly era.'' 
As TDS explains, this is because (1) ``business customer locations are, 
on average, located much closer to TDS ILEC's existing fiber plant than 
TDS CLEC's''; (2) ``TDS ILEC possesses many advantages due [to] its 
operation of a preexisting network along potential fiber routes''; and 
(3) ``TDS CLEC must incur much higher equipment and fiber splicing 
costs than TDS ILEC when deploying new fiber.''
    49. High barriers to entry and carrier agreements that have the 
effect of preventing switching over an extended time create ``low 
elasticities of demand for the incumbent and low elasticities of supply 
for competitors.'' Such low elasticities respectively mean few 
customers switch away from a supplier due to an increase in price, and 
few suppliers are able to switch away from resale to reliance on new 
network deployment. If the service had lower barriers of entry, 
customers would be more able to switch carriers when faced with higher 
prices or unfavorable or

[[Page 36037]]

inefficient supply agreement terms and conditions. Level 3, for 
example, reports that it must purchase ``a large percentage of its 
overall dedicated services requirements'' under what it terms ``lock-
in'' agreements, which mean it cannot switch to purchasing from a 
lower-priced competitive providers when a lower rate is available. The 
resulting higher downstream prices, therefore, offset any claimed 
efficiencies brought by the so-called lock-in requirements.
    50. It would be a mistake to assume, however, that all barriers to 
entry are insurmountable, or that they exist to the same degree 
everywhere. The record and our data collection support the view that 
competition is growing, and that potential competition, appropriately 
defined, is important. When investments are made to self-provision 
facilities to customers, competitors typically first look to a region, 
such as a metropolitan region, and then focus on deploying facilities, 
such as fiber construction, to reach specific buildings. ``[U]rban 
centers where costs are low (e.g., zero or low mileage) and demand is 
significant'' are attractive to competitive LECs. For many competitive 
LECs, ``the reach of an embedded network can extend beyond the location 
of its current connections to serve additional customers in the 
surrounding region.'' XO, for example, ``entered initially by building 
metro rings in dense areas of major cities, since these could aggregate 
traffic from more users and hence were more economical.'' Many 
competitor carriers prefer to provide services over their own network 
facilities because it allows greater efficiency and permits flexibility 
to control the type and quality of the competitor's service offerings. 
After deploying a ``core fiber network . . . extending laterals 
requires significantly smaller capital expenditure per unit of 
bandwidth'' resulting in a lower-cost expansion. Relying solely on 
independent lateral facilities without a core fiber presence, in 
contrast (by carrying traffic from a single location), limits scale of 
economies and requires significant customer spend to justify investing 
in facilities. Other advantages with a region-first approach include 
familiarity with local marketplace, which can be useful for a local 
sales force.
    51. The great entry success story has been that of cable. Less than 
a decade ago cable largely provided no businesses services of any kind 
that were materially different from the services marketed to 
residential customers. Yet, for more than half a decade cable business 
revenues have experienced compound annual growth rate of 20 percent, 
starting with the smallest business customers and working their way up 
to the largest. More recently, cable began offering BDS services over 
HFC, as well as fiber, and has forced even the largest incumbent LECs 
to focus on maintaining market share. In addition, Israel et al., 
estimate, based on our data collection, that over the course of 2013, 
competitive LECs' ``bandwidth grew at six times the growth of the rate 
of the ILECs''.
7. Evidence of Market Power in the Delivery of DS1 and DS3 Services and 
Lack Thereof for Higher Bandwidth Services
    52. Our own analysis, the Rysman White Paper, and the Baker 
Declaration, provide direct evidence of market power in the supply of 
various services. We seek comment on validity of these analyses, on how 
they might be extended, or tested. At the same time, we recognize that 
no analysis is ever perfect, and look for comments on what the broad 
evidence available to us ultimately says about competition and market 
power, even if alternative theories cannot be entirely ruled out. Key 
pieces of evidence before us are regression analyses that show price 
effects due to the presence of competition, which imply that in the 
absence of competition prices are higher than they otherwise would be; 
the fact the price capped incumbent LECs have no headroom under our 
price caps, and have been in that situation for at least several years; 
that competition in areas with pricing flexibility lowers prices more 
than in price cap areas; and that incumbent-affiliated competitive LECs 
do not appear to be focused on facility-based or UNE competition (with 
some interesting exceptions). We also note that the Rysman White Paper 
concludes that there may not be market power in the supply BDS at 
bandwidths in excess of approximately 50 Mbps and seek comment on this 
analysis.
    53. A central finding in the Rysman White Paper is that, in 
regressions controlling for a range of other factors, competitive 
supply in a unique location is correlated in both statistically and 
economically significant ways with lower ILEC prices for DS1s and DS3s 
at that location. Similarly, the Rysman White Paper finds that 
competitive supply in a unique location anywhere in a Census block, and 
competitive supply anywhere in the Census tract, is correlated in both 
statistically and economically significant ways with lower prices 
within the Census block. Analysis in the Baker Declaration comes to 
similar conclusions, though others have criticized the Baker 
Declaration. We seek comment on these analyses, on how such analyses 
might be extended, further verified or disproved, and indeed for 
additional analysis from interested parties.
    54. As a result of the CALLS Order, the price cap indices for BDS 
services have been frozen (outside of exogenous cost adjustments) since 
2004. Over the period since then, there has been no evidence that the 
price caps have been a source of any kind of financial stress to the 
incumbent LECs. Yet, at the same time, the price capped incumbent LECs 
have essentially raised prices up to the maximum allowed by the price 
caps. In our view, this does not suggest that over the last decade or 
more our caps were too harsh, and rates as constrained by the caps were 
too low, and this was the reason the price capped incumbent LECs kept 
their prices at the top of the cap. Consequently, it is our view that 
the fact that the price capped incumbent LECs have kept their prices at 
the top of the cap is additional evidence of market power.
    55. Price cap incumbent LECs file their respective annual access 
charge tariff filings to become effective on or around July 1st of each 
year. In that filing, price cap incumbent LECs file Tariff Review Plans 
(TRPs) to demonstrate that the carrier's Actual Price Index (API) does 
not exceed its Price Cap Index (PCI). To the extent that a carrier's 
API is less than its PCI, the difference, often referred to as ``head 
room,'' is a measure of the extent to which such a carrier is able to 
increase its rates under the price cap rules. By calculating the 
average ratio of the API to the PCI, based on the APIs and PCIs in each 
carrier's TRPs, we can determine how close each carrier is to the 
maximum prices it is permitted to charge overall. The ratios, based on 
the TRPs, demonstrate that the six largest price cap incumbent LECs 
have been charging close to maximum prices for the last four tariff 
years. This also implies that if the price capped carrier had any 
headroom in previous years, then in or prior to 2012 took advantage of 
that headroom and raised its prices effectively eliminating that 
headroom.
    56. As demonstrated from the table above, the APIs of the six 
largest price cap incumbent LECs are more than 99 percent of their 
PCIs. Therefore, the largest carriers have almost zero headroom under 
the price caps; even a small rate increase would likely cause the 
carriers' APIs to exceed their PCIs.
    57. The Rysman White Paper finds evidence that prices in areas 
granted pricing flexibility respond more to competition than prices in 
pure price

[[Page 36038]]

capped areas. We seek comment on the validity of this finding, and 
whether it might be evidence that granting incumbent LECs the ability 
to offer contract tariffs allows them to respond more effectively to 
competitive pressures in pricing flexibility areas, and if so, does 
this support allowing contract tariffs throughout areas we might 
designate in a future order as non-competitive. We also seek comment on 
the Rysman White Paper finding that in price cap only areas competitive 
effects are smaller than in pricing flexibility I and II areas. Is that 
a valid finding, and if so does it indicate less competition in pricing 
flexibility areas, or something else?
    58. The Approach to Competition of Competitive LECs Affiliated with 
Incumbent LECs. Competitive LECs affiliated with incumbent LECs have 
engaged in limited facilities-based investment relative to certain 
other competitive LECs and in some cases have avoided the use of UNEs. 
In particular, the [REDACTED].
    59. The Rysman White Paper finds little statistical relationship 
between the presence of local fiber-based competition and lower 
incumbent LEC prices for BDS above 45 Mbps. At least three 
possibilities could account for this observation: (1) Competition 
broadly exists for these services, (2) to the extent any competition 
existed, it was too little competition to produce material competitive 
effects, or (3) there are too little data and/or too many uncontrolled 
for variables for a statistical relationship to emerge. However, given 
limited complaints in the record about higher bandwidth services, and 
evidence that competitive LEC market share of fibered buildings is much 
higher than its general share, we recognize that supply of higher 
bandwidth services may often be more competitive than supply of lower 
bandwidth services. We, however, seek comment on this assessment. Is it 
correct generally? If so, could it be incorrect in particular cases 
that are sufficiently important that the Commission should consider 
action specific to those cases? How should any conclusion reached in 
the future about the nature of higher bandwidth services be applied, 
given the data on geographic areas, different categories of customers, 
and other factors?

B. New Technology Neutral Regulatory Framework for Business Data 
Services

    60. The BDS market has changed substantially since this proceeding 
was initiated, both in terms of technology and providers. While the 
price cap LECs maintain substantial market power in some areas for some 
services, it is clear the market will continue to evolve and that 
market power and market positions are likely to shift over the next ten 
to fifteen years and beyond. The Commission's prior adoption of bright 
line rules based on what turned out to be a poor measure of the 
presence of competition led to some of the problems we start to solve 
today.
    61. Some parties to the proceeding have raised objections to being 
fully included in the new framework. We note that business data 
services are telecommunications services, regardless of the provider 
supplying the service. BDS providers are therefore common carriers. And 
as such, with the unique exception of Verizon's forbearance, the 
providers are subject to Title II in the provision of their services, 
including packet-based BDS services such as Ethernet. Sections 201 and 
202 of the Act require that the rates, terms, and conditions under 
which common carriers provide telecommunications services, such as the 
broadband data services we address herein, must be just, reasonable, 
and not unjustly or unreasonably discriminatory. These requirements are 
enforced through section 208 of the Act, which permits any person to 
file a complaint against any common carrier for acts or omissions in 
violation of the Act or a Commission rule or order.
    62. The presence, and use, of market power can inhibit the 
evolution of a competitive market, both through prices and terms and 
conditions. For example, we examine certain terms and conditions in the 
Tariff Investigation Order and prescribe changes to address terms we 
found to be unreasonable and, in some cases, anticompetitive. This 
Order and its findings in this and other areas will provide substantial 
precedent to guide the Commission in its consideration of any section 
208 complaints challenging the reasonableness of conduct in the 
provision of business data services. Likewise, the Commission seeks 
comment in this FNPRM on significant issues such as the basis for 
determining the presence of material competitive effects that would 
support the removal of direct rate regulation in some areas for some 
services. Such analysis will provide further guidance for resolving the 
threshold question whether the services are offered in a non-
competitive area, in any complaint asserting unreasonable conduct under 
sections 201 and 202.
    63. While a case-by-case adjudication under section 208 is one 
option to provide guidance for what is reasonable conduct in light of 
the market analysis conducted in this proceeding, we find clear rules 
of the road will be valuable to all broadband data service providers as 
the market evolves. Accordingly, in this FNPRM, we propose a new 
regulatory framework for broadband data service that distinguishes 
between broadband data service providers based on market circumstances, 
rather than technology or the happenstance of prior Commission action 
and inaction.
    64. The proposed technology-neutral framework will apply depending 
on the classification of a specific market as either competitive or 
non-competitive. This framework will depend on the adoption of a new 
Competitive Market Test to then determine whether market power is 
present and we additionally seek comment on such test below. As another 
significant piece of the technology neutral framework, we additionally 
propose actions to change the regulatory structure for the historically 
dominant price cap LECs. These proposed rules will establish a path 
towards technology-neutral regulation for broadband data services, 
while protecting against harm from lack of competition where it 
continues to exist.

C. Statutory Authority for New Regulatory Framework

    65. Sections 201 and 202 of the Communications Act are foundational 
requirements for all telecommunications services, designed to ensure 
that such services are offered to the public on just and reasonable 
rates, terms and conditions, and that services are not offered on an 
unreasonably discriminatory basis.
    66. These sections have served as the statutory basis for a wide 
range of rules and other actions over the years. In addition to 
providing the substantive authority for various rules and requirements, 
section 201(b) states that the Commission ``may prescribe such rules 
and regulations as may be necessary in the public interest to carry out 
the provisions of this Act.''
    67. We propose that sections 201 and 202 of the Act serve as an 
adequate basis of statutory authority for actions that the Commission 
would take to create and implement the Technology-Neutral Framework 
that we propose to apply to BDS going forward. We have forborne from 
tariffing provisions for many BDS providers over the years. In this 
FNPRM, the Commission proposes to transition away from tariffing 
requirements for the last portion of BDS (incumbent LEC TDM), and to 
establish benchmarked prices for non-TDM services. We note that the 
Verizon/INCOMPAS Joint Letter urges that the Commission should make 
clear ``that all

[[Page 36039]]

providers offering dedicated services are subject to Title II of the 
Communications Act, including Sections 201 and 202 of the 
Communications Act.'' The Commission seeks comment on whether its 
authority to ensure just and reasonable prices, terms and conditions 
under sections 201 and 202, and its explicit rulemaking authority in 
section 201(b), is adequate to require price cap filings for TDM 
services and benchmarked prices for non-TDM services.
    68. Commenters have noted that the Commission's existing price cap 
regime was adopted with reference to section 204. If the Commission 
were to forbear from tariffing provisions for incumbent LEC TDM 
services, as it has with respect to the incumbent LECs' non-TDM 
services and all BDS telecommunications services of competitive 
providers, could it continue to require price cap filings for incumbent 
LEC TDM services in non-competitive markets based solely on the 
statutory authority in section 201(b)? Likewise, could the Commission 
use benchmarked prices to ensure that non-TDM services in non-
competitive markets are offered on just and reasonable prices, as 
required by section 201? If not, why not, and what additional authority 
or action would be needed?
    69. The Commission's proposed Technology-Neutral Framework also 
would place certain limits on terms and conditions of BDS to ensure 
that they are offered on just, reasonable, and not unreasonably 
discriminatory terms, especially in non-competitive markets. We seek 
comment on whether sections 201 and 202 provide the Commission with the 
statutory authority to take such actions. If not, why not, and what 
additional authority or action would be needed?
    70. A fundamental aspect of the new Technology-Neutral Framework 
for BDS would be the adoption of new triggers to determine whether 
markets are competitive or non-competitive. We seek comment on whether 
sections 201 and 202 are themselves sufficient to support the adoption 
of such triggers, which could be used to determine whether (and if so, 
where) regulations are required to ensure that rates, terms and 
conditions of BDS services are just and reasonable. We note that such 
triggers have been tied in the past to the Commission's authority under 
sections 201-205, and we seek comment on whether the Commission should 
rely on additional sources of authority.
    71. Some entities have suggested that the Commission address 
certain issues such as wholesale pricing under section 251, where 
Congress has imposed specific resale requirements. However, section 251 
has an explicit savings clause, which states: ``Nothing in this section 
shall be construed to limit or otherwise affect the Commission's 
authority under section 201.'' Does the savings clause indicate that 
the Commission has ample statutory authority to address resale issues 
for BDS under section 201 authority, notwithstanding that the statute 
imposes particular resale requirements on certain types of providers in 
sections 251(b) (local exchange carriers) and 251(c)(4) (incumbent 
local exchange carriers)? If not, why not, and what additional 
authority or action would be needed?
    72. Are there any other statutory provisions that the Commission 
should consider invoking to support a Technology-Neutral Framework for 
BDS? For example, section 706 of the 1996 Act provides that the 
Commission ``shall encourage the deployment on a reasonable and timely 
basis of advanced telecommunications capability to all Americans 
(including, in particular, elementary and secondary schools and 
classrooms) by utilizing, in a manner consistent with the public 
interest, convenience, and necessity, price cap regulation, regulatory 
forbearance, measures that promote competition in the local 
telecommunications market, or other regulating methods that remove 
barriers to infrastructure investment.'' Does that section have any 
particular applicability to the actions proposed in this FNPRM, such as 
promoting competition for BDS and removing obstacles to technology 
transitions?
    73. Finally, we seek comment on whether any transitional or 
incremental policy actions are appropriate as the Commission considers 
and moves to comprehensively reform the BDS regulatory framework. Are 
there incremental changes the Commission could take as it evaluates 
broader reforms and a Competitive Market Test that furthers our goals? 
Should we adopt any transition to a new Competitive Market Test and, if 
so, how should we structure the transition?

D. Competitive Market Test

    74. We propose to replace the 1999 pricing flexibility regime with 
a new regulatory framework for BDS. The new framework, as proposed, 
builds on the analysis of the 2015 Collection to establish a 
comprehensive Competitive Market Test to determine whether a relevant 
market is competitive or non-competitive. Where competition is 
sufficient in a relevant market, based on objective criteria to measure 
competitive effects, the Commission is proposing to rely upon market 
forces to constrain rates, terms, and conditions. That is, we propose 
to subject markets determined competitive to minimal regulation to 
protect consumers as proposed in Part V.E. The Commission would subject 
relevant markets, determined non-competitive, to specific rules as 
proposed in Part V.F on the ground that customers in those markets are 
being harmed. A separate question concerns the scope of regulation in a 
non-competitive market, and whether it should apply to all or some 
providers and, if some, which ones and on what basis (such as market 
power)--and we seek comment on these questions below. The ultimate goal 
going forward is to apply regulatory obligations on a technology and 
provider neutral basis where it is necessary to protect and promote 
competition.
    75. On the criteria for the Competitive Market Test, we invite 
comment. Initially, we are proposing a test, which focuses on multiple 
factors, including bandwidth, different customer classes, business 
density, and the number of providers in areas consisting of census 
blocks where each block in the relevant market meets the specified 
criteria. As described above, the data and our analysis suggests that 
competition is lacking in BDS at or below 50 Mbps in many 
circumstances, and that competition is present in BDS above 50 Mbps in 
many circumstances. Such evidence will guide how the Commission uses 
product market characteristics in applying the Competitive Market Test 
to a relevant market. We seek comment on the appropriate factors to 
include in the test and, in particular, the appropriate weight to 
attribute to the various factors in application of the test. With any 
test criteria and for application of the test as a whole, we seek 
comment on how to create a test that is simple to administer and, to 
this end, ask about the commercial practicalities and administrative 
feasibility of any particular approach. We also seek comment on how any 
approach would further our goals of promoting competition and 
investment.
    76. We propose to apply the Competitive Market Test across all 
geographic areas served by price cap carriers. The Commission would use 
publicly available information, the 2015 Collection, and other 
information in the record to apply the test to create a list of 
geographic areas that are deemed competitive and non-competitive by 
relevant product market. To provide certainty but also ensure accuracy 
of the data, we seek comment on whether the

[[Page 36040]]

Commission should reapply the test every three years for example, with 
updated data to reflect changes in business density or the number of 
providers in a geographic area. Once the initial competitive/non-
competitive determination is made, we seek comment on a process to 
address instances where a provider or purchaser disagrees with the 
determination finding and suggestions for the appropriate standards and 
procedures to govern that process.
    77. The pricing flexibility framework adopted in 1999 based 
regulatory relief on the presence of third-party collocations in the 
incumbent LEC's wire centers, which were considered proxies for 
competition in the marketplace. In 2012 the Commission concluded after 
a substantial review that, despite the many administrative benefits to 
reliance on the triggers, collocations are a poor proxy for predicting 
the entry of facilities-based competition and suspended, on an interim 
basis, further automatic grants of pricing flexibility. The Commission 
found the 1999 regime retained unnecessary regulation in areas that 
were very likely to be very competitive and deregulated over large 
areas where competition was unlikely to occur.
    78. Our review of the 2015 Collection supports the Commission's 
earlier findings that the existing triggers do not reflect the existing 
competitive nature of the market. Specifically, in 97.9 percent of the 
wire center territories where a cable competitive LEC has reported 
locations--where the connection to the location is not a UNE obtained 
from an incumbent LEC, a cable company has not collocated in the wire 
center. Of these wire centers, 62 percent remain subject to price cap 
regulation without pricing flexibility for channel terminations. If we 
include census blocks where a cable company reported having DOCSIS 3.0 
coverage for 2013 for the National Broadband Map, the percentage of 
wire center territories without any collocations from the cable company 
increases to 98.4 percent. Of these wire centers, 66 percent remain 
subject to price cap regulation without pricing flexibility for channel 
terminations. This strongly shows the collocation triggers are 
substantially underestimating the entry of facilities-based competition 
from cable companies for last-mile facilities and hindering 
deregulation.
    79. When we look at all competitive providers and remove locations 
with UNEs, in 32.3 percent of the wire center territories where the 
Commission has granted the incumbent LEC pricing flexibility for 
channel terminations, competitive providers have reported no locations 
where they own or lease, pursuant to an indefeasible right of use 
(IRU), a connection to a location. If we expand the inquiry to include 
census blocks where a cable company reported having DOCSIS 3.0 coverage 
for 2013 for the National Broadband Map, this percentage decreases to 
24.7 percent. This shows that collocations at a substantial percentage 
of wire centers do not accurately predict the entry of facilities-based 
competition for last-mile connections.
    80. We now believe it is appropriate to modernize our triggers to 
ensure we capture all competitive entrants. Therefore, we propose to 
abandon the collocation-based competition showings for channel 
terminations and other dedicated transport services for determining 
regulatory relief for incumbent LECs. Instead, we propose to apply a 
new Competitive Market Test. Our intent, discussed in more detail 
below, is to create a framework that is provider and technology 
neutral. Our goal is also to create a framework that is simple and 
minimizes regulation only to the extent necessary to ensure rates are 
just and reasonable.
1. Business Data Service Definition
    81. A definition for BDS is critical to any new regulatory 
framework. We suggest below a definition similar to the definition used 
for dedicated services in the 2015 Collection. Specifically, we would 
define BDS as a telecommunications service that: Transports data 
between two or more designated points at a rate of at least 1.5 Mbps in 
both directions (upstream/downstream) with prescribed performance 
requirements that typically include bandwidth, reliability, latency, 
jitter, and/or packet loss. BDS does not include ``best effort'' 
services, e.g., mass market BIAS such as DSL and cable modem broadband 
access.
    82. We seek comment on this definition and ask whether the 
definition should include minimum performance guarantees, such as 99.99 
percent reliability. Also we seek comment on whether we should reduce 
the minimum symmetrical speed to 1 Mbps to account for dedicated 
service offerings below 1.5 Mbps.
2. Multi-Factor Competitive Market Test--Relevant Market(s) and Test 
Criteria
    83. We are guided by traditional economic principles in identifying 
relevant market(s) and the competition criteria for a Competitive 
Market Test. We also consider, and seek comment on, the administrative 
feasibility and commercial practicalities of any particular approach 
both for providers as well as the Commission. A proposal under 
consideration, as discussed in more detail below, is to define the 
relevant market for applying a test along customer classes and varying 
bandwidths in geographic areas consisting of census blocks, including 
groupings of census blocks. The proposed criteria for the test would 
focus on business density and the number of providers in the relevant 
market area.
    84. The Commission has traditionally applied the pricing 
flexibility competitive showings to two different BDS segments, channel 
terminations and other dedicated transport services. There is little 
discussion in the Pricing Flexibility Order as to why the Commission 
chose these two particular service categories. Historically, incumbent 
LECs tariffed these services separately, and the charges reflected 
different traffic sensitivities. The Commission explained in the 
Pricing Flexibility Order that a lower competitive showing was required 
for other dedicated transport services because these services, which 
move traffic from one point of concentration to another, require ``less 
investment per unit of traffic,'' than channel terminations. The 
Commission found that competitors were more likely to enter the market 
to provide other dedicated transport services than channel 
terminations. Looking at how non-cable competitive LECs have deployed 
their networks, we find this approach holds true today for those types 
of providers (and as discussed above, appears as much driven by 
bandwidth demand as it does by the channel termination/transport 
distinction).
    85. Developing a new framework, however, gives us the opportunity 
to re-evaluate the triggers and product markets used in the application 
of a competitive test to ensure that they reflect technology 
transitions and the current market. Today, competitors, and even 
incumbent LECs with their forborne services, do not typically offer 
consumers BDS by charging a customer separately for transport, last-
mile access, and channel mileage. They instead offer connectivity at 
certain bandwidth levels and performance guarantees and packaged 
communications solutions that include a transmission component to meet 
the demands of different types of customers. Our framework should 
reflect how the market operates today.
    86. Moreover, the needs of the customer dictate the service 
offerings. As discussed in our competition

[[Page 36041]]

analysis and as providers have told us, different types of customers 
have different needs. A small business with less than 20 employees at 
one location is unlikely to need the multi-office networking 
connectivity, or even the same level of bandwidth capacity, as would a 
large enterprise customer. The needs of a mobile operator to backhaul 
aggregated traffic from cell sites are different than the needs of a 
retail chain wanting to securely process credit transactions. The needs 
of competitive LECs, as wholesale customers, for last mile access as an 
input for their own service offerings differ from the needs of retail 
end users. And as the needs change by customer class so do the service 
substitutes, the economics of providing service, and the likelihood of 
facilities-based entry by competitors.
    87. We therefore seek comment on whether to apply our Competitive 
Market Test based on different BDS customer classes at varying 
bandwidths and ask for comment on whether, and if so how, the 
Commission should separate the product market by customer type and 
bandwidth. For example, should the customer classes consist of the 
following categories: Small business with less than 20 employees, mid-
sized businesses with 20-500 employees, national/enterprise businesses 
with 500+ employees that typically require service at multiple 
locations? And should we adopt a separate product market to address the 
cell site backhaul needs of mobile providers and another one for sales 
to wholesale customers? We seek comment on the benefits of segmenting 
product markets by customer class and whether the data supports such an 
approach. In lieu of customer classes by size of retail customers, 
should we instead have fewer customer classes, such as just wholesale, 
mobile backhaul, and retail? Or are the benefits of using customer 
classes outweighed by the burdens due to the complexity and 
practicality of implementing such a framework?
    88. To the extent the Commission adopts such an approach, we seek 
comment on whether we should also subdivide the relevant product 
markets by bandwidth to capture the varying demand and competition 
levels within each customer class. For example, we could divide the 
wholesale segment into BDS <=50 Mbps and >50 Mbps. In developing the 
appropriate bandwidth overlay, we can look to evidence in the record 
and our own analysis of the 2015 Collection as to the level of 
competition at different bandwidth levels. To what extent, should 
evidence indicating that the supply of BDS above 50 Mbps tends to be 
more competitive than the supply of BDS at lower bandwidths factor into 
this overlay? We seek comment on whether 100 Mbps or some other 
bandwidth level is better supported by the evidence in particular 
market segments? Should we recognize different tiers of products (or 
distinct product markets) based on differences in speed? Should the 
bandwidth overlay levels vary depending on a particular customer class? 
Should the relevant bandwidth level(s) be static or evolve over time? 
For example, should product market re-evaluation be made part of the 
review conducted in light of future data collections?
    89. We seek comment on these issues and encourage commenters to 
suggest other alternatives for consideration. Commenters should address 
whether a customer class/bandwidth approach would appropriately capture 
the nature of competition in these markets, whether the approach is 
administratively feasible, the appropriate bandwidth and/or product-
feature categories, and whether we should include additional customer 
classes or make other modifications to the classes identified. For 
example, is it correct to base a product market identification on speed 
or do we need to factor in as well additional performance features and, 
if so, which ones should be used and how should multiple product 
features be used to identify different product markets? We also seek 
comment on how various approaches would further our goal of promoting 
competition and investment for BDS services.
    90. In 1999, the Commission chose to grant pricing flexibility on 
an MSA and non-MSA basis with the intent of defining ``geographic areas 
narrowly enough so that the competitive conditions within each area are 
reasonably similar, yet broadly enough to be administratively 
workable.'' The Commission in the Suspension Order concluded ``MSAs 
have generally failed to reflect the scope of competitive entry.'' In 
reaching this conclusion, the Commission found ``that business demand 
can vary significantly across an MSA'' and that competitive entry tends 
to occur in smaller areas with the highest density of business 
establishments. The GAO reached a similar conclusion in 2006.
    91. Our analysis of the 2015 Collection further confirms these 
findings. According to our analysis, the price regressions of incumbent 
LEC rates for DS1 and DS3 lines show consistent negative effects for 
the presence of competition in the building, and the census block, much 
of which is both economically and statistically significant. In 
addition, the regressions show some effects for the presence of 
competitive fiber in the census block, even if that fiber is not 
connected to any buildings in the block.
    92. Given our analysis, we seek comment on using census blocks as 
the geographic area for applying the Competitive Market Test. We also 
ask whether using a more granular area, e.g., the building or cell site 
location as the relevant geographic market, or whether a larger 
geographic area is appropriate. For example, if the geographic area 
were the building location, the provider's regulatory obligations could 
change building-by-building, which could make it difficult not only for 
regulators but also for providers trying to offer services to customers 
at multiple locations. Could a building approach reduce the challenges 
to determining the necessary proximity to fiber, thereby simplifying 
administration? A census block or even census tract approach would 
create a similar patchwork of geographic areas with different 
regulatory treatment. Census blocks in metropolitan areas are also 
often very small in size. For example, according to AT&T, ``[t]he 
average size of census blocks in MSAs with demand for special access 
services is only about one-seventh of a square mile.'' However, we 
anticipate that areas adjacent to a census block will often have 
similar business density and facilities-based competitor 
characteristics resulting in a similar determination as to the level of 
competition.
    93. Our goal is to learn from past experiences and to not repeat 
the errors of the 1999 pricing flexibility regime by granting relief 
too broadly to cover areas where competition is not present or unlikely 
to occur.
    94. We seek comment on these proposals. Commenters should address 
the administrative feasibility of the proposals and how each option 
would impact the goal of promoting competition and investment in the 
BDS market. We also invite commenters to suggest alternative geographic 
units and ask commenters to explain how any alternative is supported by 
the data and furthers our goals.
    95. Our intent, as with any of the proposals under consideration, 
is to focus regulation on areas where actual or potential competition 
is insufficient to ensure rates, terms and conditions are at just and 
reasonable levels. We believe that bright-line criteria are best suited 
to meet these goals. Based on our review, we have identified two 
possible criteria for determining whether or not a market is 
competitive, i.e., business density and the number of providers in the 
relevant

[[Page 36042]]

geographic area. We seek comment on these criteria below and whether 
alternative or additional criteria should be incorporated into the 
test.
    96. Our analysis shows there is a significant correlation between 
business density and the presence, or likelihood, of competition. We 
therefore seek comment on the appropriate business density metric for 
the Competitive Market Test. Should we use the number of businesses 
establishments in a defined geographic area, the number employees, the 
level of payroll, or some other variable that is readily available and 
shown to be a good proxy for business demand? For example, should we 
look to any census block with more than some number of businesses 
establishments per square mile? Also to what extent should a different 
density standard apply when evaluating mobile backhaul? The deployment 
of cell sites may not necessarily correspond to business density and 
may more likely relate to population density or public travel areas. 
Should the Commission instead focus on the density of existing cell 
sites in a census block area when evaluating a mobile backhaul market? 
If so, what is the appropriate cell site density metric?
    97. Our analysis further shows that the competitive effect on 
pricing increases as the number of competitors in the area increases. 
How should we incorporate this into a bright-line trigger? The 
Commission in the Qwest Phoenix Order found a market with only two 
competitors, a duopoly, not sufficiently competitive. Should we require 
more than two facilities-based competitors in any area for a 
competitive trigger? Are there instances where having just one or two 
competitors is sufficient given the bandwidth level and business 
density in a given area? There is also the question of whether the type 
of competitor in the market makes a difference? Should we weight 
competition from a cable company differently than a non-cable 
competitive LEC or vice versa? If so, should this different weighting 
vary with bandwidth levels? There is also the question of how we 
identify the presence of a competitor in the area. Is it enough for a 
competitor to have one served location in the area? Is it enough for a 
cable company to just have DOCSIS 3.0 coverage over their HFC network 
in the area or should we weight an HFC network differently based on the 
presence of Metro-E capable nodes in the area? Should we also base the 
presence of a competitor on the presence of their fiber in the area or 
is it the presence of a competitor's fiber node in the area? For each 
customer class and bandwidth level, should we only count competitors in 
the area that are currently offering such services to that customer 
class within the stated bandwidth level?
    98. We seek comment on the administratively feasibility of using 
the above test criteria, and encourage commenters to suggest 
alternative test metrics.
    99. Our goal in creating the Competitive Market Test is to adopt a 
formula using available data, e.g., publicly available business density 
information and information provided in the 2015 Collection, and 
information from the National Broadband Map on the presence of 
facilities-based providers in a given geographic area, to determine 
whether or not a relevant market in areas served by price cap carriers 
is competitive.
    100. The Competitive Market Test matrix would generate lists of 
census blocks or whatever geographic area the Commission adopts for 
each relevant market determined competitive and non-competitive. The 
corresponding regulatory obligations would then apply to markets within 
the relevant geographic area going forward, e.g., census block areas. 
We seek comment on how to ensure that this information is disclosed in 
a transparent, easily accessible format. For example, should the 
Commission create a central repository for information on its Web site 
that could contain an interactive map, which reviewers could filter by 
product class like the National Broadband Map? Or alternatively or in 
addition to a map, should the Commission simply create a publicly 
available database, which simply contains lists of relevant geographic 
areas by product market as competitive and non-competitive? Commenters 
should address which approach would be the easiest to administer and 
simplest for providers.
    101. To provide certainty but also ensure that data are accurate 
and updated, we seek comment on re-applying the Competitive Market Test 
across all areas served by price cap carriers every three years to 
account for example, for changes in business density and the presence 
of facilities-based providers in geographic areas. This periodic 
reassessment could coincide with our separate proposal discussed in 
Part V.J to collect data from providers on their supply capabilities 
every three years starting in 2018. The re-application of the 
Competitive Market Test matrix using updated data would likely result 
in changes to the market delineation established by its prior 
application. For example, the Commission could subsequently determine a 
relevant market area, previously considered non-competitive, as 
competitive based on the updated data. And the opposite might also be 
true.
    102. A periodic reassessment reduces burdens on providers as well 
as the Commission and balances the need to ensure accurate data. We 
generally seek comment on the administrative feasibility of this 
approach, both as a whole and as to its individual parts. We also 
welcome suggestions for alternative approaches. We additionally seek 
comment on whether we should provide some implementation period to 
allow providers to conform operations following the application of the 
Competitive Market Test before any new regulatory obligations resulting 
from the determination of a relevant market as competitive or non-
competitive are effective? If so, how long of a period should we 
provide? Commenters should also address the commercial practicalities 
of changing the regulatory treatment of a relevant market area every 
few years? For example, how could this impact contractual obligations 
with customers and to what extent could commercial providers adjust or 
account for a potentially changing regulatory environment every few 
years? Should the Commission re-apply the Competitive Market Test less 
frequently, like every five years?
3. Post-Determination Process
    103. We ask to what extent and how the Commission should give 
providers and purchasers an opportunity to challenge the determinations 
rendered. We seek comment on how best to structure such a process to 
minimize administrative burdens on providers, purchasers, and the 
Commission.
    104. We seek comment on the timing and frequency of such post-
determination challenges. Should the Commission open a window to permit 
challenges within a specified period of time after the Competitive 
Market Test determinations are rendered, e.g., 30 or 60 days? If 
commenters believe that challenges should be permitted on a rolling 
basis, how would that impact market certainty and the transactions 
between providers and purchasers of BDS services?
    105. We also seek comment on how to build upon lessons learned from 
the Connect America Fund challenge process. Based on the Connect 
America Fund experience, we believe a specific, bright-line test is 
appropriate to ensure that the Commission has data necessary to 
evaluate the merits of any challenges. We propose that parties seeking 
to

[[Page 36043]]

challenge an area determined non-competitive to be designated as 
competitive should have the burden of proof to provide data 
demonstrating that the given area satisfies the Competitive Market 
Test. Should the same hold true of a challenge that a competitive 
market is non-competitive? What standards or showing should the 
challenger have to make to overcome a Competitive Market Test 
determination? For example, should challengers be required to submit 
new maps of fiber? In addition to providing challengers with access to 
data collection results subject to confidentiality restrictions, should 
the Commission give challengers a limited right of discovery to obtain 
information from providers to help make their requisite showing? If so, 
should the petitioner be required to meet a threshold evidentiary 
burden to initiate discovery and what should that be?
    106. Should there be a different process if a provider challenges 
that an area determined competitive is non-competitive? What standard 
should apply? Is pricing data relevant or just the number of providers? 
Should the burden shift upon a prima facie showing? If so, what should 
constitute a prima facie case?
    107. To the extent the Commission adopts product markets, how 
should such product markets factor into a challenge process? For 
example, what evidence would be necessary to show that a certain class 
of business customers face competition but smaller businesses do not?
    108. In evaluating any challenges, should we limit filings to an 
affirmative case and a response? Should all challengers be required to 
submit certifications from officers attesting to the accuracy? We seek 
comment on how the Commission could build upon lessons from the Connect 
America Fund challenge processes to improve the implementation and 
reduce burdens for providers and the Commission.
    109. We also seek comment on the how the Commission should 
implement the results of a post-determination challenge. If a challenge 
were successful, we propose that any determination for the relevant 
market changed from competitive to non-competitive as a result of the 
challenge (thereby changing the regulatory treatment of the relevant 
market area) would apply prospectively. If a successful challenge 
resulted in the change of a determination in 2017 to competitive, 
hypothetically, how should the Commission treat this relevant market 
area when it comes time to reapply the Competitive Market Test in a 
later year, like 2018? Should the Commission just reapply the test at 
that time, which could then trigger another round of challenges for 
that relevant market depending on the outcome of the determination?
    110. Any post-determination process that allows for challenges or 
even a request for waiver raises serious administrative feasibility and 
burden concerns for the agency. The Commission must weigh the equitable 
benefits of allowing such a process to prevent undue harm to providers 
and customers in the relevant markets against these concerns. We seek 
comment on the above questions and invite commenters to suggest 
alternatives balancing benefit and burden.
4. Regulation for Provider(s) in Areas Determined Non-Competitive
    111. Once the Competitive Market Test is applied, we ask which 
provider(s) should be subject to the specific rules that apply to 
markets determined non-competitive. Should such rules only apply to the 
largest BDS provider in the non-competitive market as measured by 
network coverage, locations served, revenues or some other metric or 
metric combinations? If so, how would we define the appropriate measure 
of ``largest'' (e.g., share of customers, share of revenue)? If we 
borrow upon antitrust principles and Commission precedent that focused 
on dominance, should we focus on the provider with the largest market 
share and therefore market power? Should we focus on the provider with 
the largest market share? If so, what is the appropriate measure of 
market share?
    112. Alternatively, should we apply specific rules to any firm in 
the non-competitive market that has a near ubiquitous network in the 
local territory and rights of way? This could result in specific rules 
applying to more than one firm in the non-competitive area. Another 
approach is to apply this framework to all BDS providers in the non-
competitive area. However, such an approach could apply additional 
regulation to new entrants with little or no market share. Given our 
desire to promote new competitive entry, should new entrants or 
providers with market share below a certain threshold not be subject to 
all or some of the proposed rules applicable to non-competitive 
markets? If so, what is the appropriate market share where providers 
should be exempt from such framework and why? Is there a better way to 
encourage new entrants?
    113. We seek comment on these questions. Commenters should consider 
the regulation that would apply, as proposed in Part V.F where the 
Competitive Market Test resulted in a finding of a non-competitive 
service area. For example, if it were merely that our proposed 
benchmarks would apply to disputes about whether a price is just and 
reasonable, this may not impact providers that currently price below 
the benchmark. Other proposals, such as limitations on terms and 
conditions, may be more onerous.
    114. Commenters should specifically address the potential impacts 
on infrastructure investment, innovation, administrative feasibility, 
and commercial practicalities of any particular approach. We also ask 
commenters to explain how each approach minimizes regulation to where 
necessary to ensure that rates, terms and conditions are just and 
reasonable in the absence of competitive pressures to do so. Commenters 
should also address the Commission's ability to implement any 
particular approach given the previous grants of forbearance authority 
to incumbent LECs for packet-based and optical carrier transmission 
services.

E. Rules Applying to All Markets

    115. We first propose limited requirements that would apply to the 
provision of BDS in all markets, both competitive and non-competitive. 
All BDS providers are common carriers and, are subject to sections 201 
and 202 of the Act. The Commission has long relied on these provisions 
to ensure just, reasonable and non-discriminatory conduct by 
competitive telecommunications service providers and we do so here. We 
have, however, identified an area for which a general prohibition could 
be valuable in our effort to facilitate the evolution of competitive 
markets. The proposed rule would limit the use of NDAs to block 
providers from sharing, subject to appropriate protective orders, the 
terms of business data services commercial agreements with the 
Commission and other government entities with oversight 
responsibilities. Such agreements have restricted competitive LECs from 
providing information that we believe would have been useful in the 
course of this proceeding and we find that they could inhibit the 
Commission's oversight of the business data services market going 
forward. We additionally seek comment on certain terms and conditions 
we found unlawful in the Tariff Investigation Order and whether such 
provisions should be prohibited in connection with the provision of BDS 
either generally or more narrowly in non-competitive markets. These 
proposed requirements would be technology neutral in nature and would

[[Page 36044]]

form a part of our proposed overarching framework for the regulation of 
BDS generally.
1. Non-Disclosure Agreements
    116. We seek comment on prohibiting the use of NDAs or their 
functional equivalents in business data service commercial agreements 
that restrict providers' and purchasers' ability to disclose 
information to the Commission or other government entities with 
oversight responsibilities. Competitive LECs have asserted that such 
requirements preclude them from sharing information with the Commission 
that would inform the Commission's oversight of the business data 
services market. We recognize that such agreements contain commercially 
sensitive information and underscore our continuing commitment to 
ensure the protection of confidential information submitted to the 
Commission through our protective orders.
    117. We acknowledge the important role NDAs play in ensuring the 
protection of confidential information in commercial agreements. 
Parties to a commercial agreement have the right to seek protection of 
their confidential information and would be unlikely to enter into such 
commercial agreements without reasonable assurance that their sensitive 
business information would not be compromised. The Commission is fully 
cognizant of this need and ensures confidential data submitted by 
parties is accorded all necessary protections, principally through the 
use of protective orders. Protective orders have almost universally 
fulfilled their purpose. In the rare cases that confidential 
information has been misused by a party, the Commission has undertaken 
appropriate steps to ensure the protective orders are enforced.
    118. While we respect the importance of protecting parties' 
confidential information, the Commission must also ensure its access to 
the information necessary to discharge its core statutory duties. NDAs 
that obstruct this access may unreasonably interfere with the core 
oversight functions of the Commission and undermine the public interest 
in a full and complete record on which the Commission can base its 
decisions. We therefore propose several alternative prohibitions and 
restrictions on NDAs for business data service commercial agreements. 
First, we seek comment on adopting a prohibition on NDAs for commercial 
agreements that bar the provision to the Commission of any information 
regarding a commercial agreement. While such NDAs may be uncommon, 
should any such NDAs be permitted? We seek comment on the effect 
allowing such NDAs would have on the Commission's fact finding efforts 
and on its ability to base its decisions on all relevant information. 
We also seek comment on whether there are any circumstances which would 
justify precluding parties' ability to share any information in such a 
blanket fashion.
    119. Second, we seek comment on whether the Commission should 
prohibit NDAs that effectively require the Commission's legal 
compulsion before parties are able to produce information from a 
business data service commercial agreement. Do NDAs that require 
parties to disclose confidential information only when required to do 
so by the Commission unduly restrict the Commission's access to 
information necessary to discharge its statutory functions? To what 
extent does this kind of constraint in practice restrict the 
Commission's ability to access information to the small number of cases 
where it is both aware of the existence of a commercial agreement and 
can devote the time and resources necessary for issuing an express 
direction for the production of information from the agreement? To what 
extent do such NDAs place the Commission in a quandary where it can 
only access information it specifically seeks, the existence and 
substance of which the parties are bound not to disclose?
    120. Finally, we seek comment on whether we should prohibit NDAs 
that limit parties to disclosing information subject to an NDA only in 
response to a request by the Commission (in a notice of proposed 
rulemaking, a public notice or otherwise). Such a prohibition would 
allow parties to disclose information to the Commission on a voluntary 
basis at their own initiative and apart from any express request by the 
Commission. We note that the Commission has previously imposed rules 
effectively requiring a prior request from the Commission before 
parties could disclose information subject to an NDA. Section 
51.301(c)(1) of the Commission's rules states that ``a nondisclosure 
agreement that precludes [a] party from providing information requested 
by the Commission'' is a violation of the section 251 duty to negotiate 
in good faith. Should the Commission adopt similar restrictions on NDAs 
in business data services commercial agreements? Would such an approach 
to NDAs impact parties' advocacy before the Commission? Would it still 
constrain the Commission's access to important information from 
commercial agreements? As with NDAs that require legal compulsion prior 
to disclosure, how would the Commission know to request disclosure of 
information in commercial agreements that it may have no way of knowing 
existed?
    121. Eliminating the requirement of a prior request for information 
would effectively enable parties to disclose information from a 
commercial agreement on a voluntary basis. We seek comment on whether 
this is an appropriate approach for the Commission to take. TDS 
Metrocom notes that NDAs impact parties' ability to fully participate 
in the rulemaking process. It states that the ``practice of subjecting 
the rates, terms, and conditions of commercial Ethernet agreements to 
confidentiality restrictions impedes TDS CLEC's ability to advocate in 
support of new rules and detect unreasonable and discriminatory 
rates.'' Would allowing parties to disclose voluntarily information 
from a commercial agreement enable fuller and freer advocacy by those 
parties? Would it also assist the Commission in identifying issues that 
it otherwise would be unaware of? We also seek comment on how the 
Commission would ensure the confidentiality of such information once 
disclosed to the Commission. To the extent the information was related 
to an existing proceeding, the Commission would presumably either have 
already adopted a suitable protective order or would be able to do so 
in response to such a submission. What steps should the Commission take 
to ensure the protection of such information if the information was not 
related to an existing proceeding? Are there any other steps the 
Commission should take to ensure the protection of confidential 
information voluntarily submitted by a party?
    122. Additionally, we seek comment on whether there are other types 
of NDAs or confidentiality provisions that may inhibit the Commission's 
discharge of its core oversight and fact finding functions. If so, we 
seek comment on whether the Commission should also prohibit these or 
take some other action to modify them. We seek comment on how any rules 
the Commission adopts related to NDAs or other confidentiality 
provisions should affect existing contracts? Finally, how would the 
Commission implement a prohibition on NDAs that restrict its access to 
information contained in commercial agreements?

[[Page 36045]]

2. Scope of Application of Terms and Conditions Requirements Adopted in 
the Tariff Investigation Order
    123. In this section of the FNPRM, we seek comment on the scope of 
application of the three requirements we adopt in the accompanying 
Tariff Investigation Order to other tariff pricing plans not subject to 
the tariff investigation and to commercial agreements for IP based 
business data services such as Ethernet. We also seek comment on 
whether such requirements should be applied in non-competitive markets 
or more generally in all markets.
    124. In the Designation Order, the Bureau designated for 
investigation ``all-or-nothing'' provisions in certain incumbent LEC 
tariff pricing plans that required customers that participate in one of 
the plans to make all of their TDM purchases out of that single plan. 
In the Tariff Investigation Order, we determined that all-or-nothing 
provisions are unreasonable and anti-competitive because they restrict 
a customer's purchase options from both incumbent LECs and other 
providers.
    125. We seek comment on whether we should extend the Tariff 
Investigation Order's prohibition on all-or-nothing provisions in the 
plans under investigation to a general prohibition on all-or-nothing 
provisions in all business data services, including both tariffed 
offerings and commercial agreements, and whether such a prohibition 
should be imposed in noncompetitive markets or in all markets. We seek 
comment on whether other pricing plans or other providers use all-or-
nothing provisions or provisions that have materially similar effects 
for purchasers of TDM or packet business data services. How common are 
such provisions in TDM tariffs or Ethernet commercial agreements? If 
all-or-nothing provisions are used in other tariffs or in commercial 
agreements, what is the business justification for using them? What 
impact do all-or-nothing restrictions have on the transition to IP 
business data services? How, if at all, are such requirements different 
for Ethernet than TDM business data services? Do Ethernet commercial 
agreements raise any special considerations that would merit unique 
consideration? Do these provisions help providers lower costs or create 
efficiencies? If so, we seek quantification of these costs and whether 
there is any rational relationship between these costs and efficiencies 
generated by all-or-nothing provisions? Additionally, we seek comment 
on whether we should impose such a prohibition on noncompetitive 
markets or all markets.
    126. We also seek comment on potential issues regarding the 
implementation of a prohibition on all-or-nothing requirements. To the 
extent there are other tariffed incumbent LEC pricing plans or contract 
tariffs that contain all-or-nothing provisions, how should the 
Commission implement this proposed prohibition? Should such a 
prohibition be effective immediately upon publication in the Federal 
Register? Should it consider a transition period to allow parties to 
implement this rule? If so, what would be an appropriate transition 
period for phasing out these provisions? Should the Commission 
institute a fresh look opportunity to enable customers of existing 
pricing plans with all-or-nothing restrictions to remedy the effects of 
these restrictions prior to the expiration of their current, often long 
term, pricing plans.
    127. Multiple purchases under a single plan. We also seek comment 
on whether we should find unreasonable restrictions on customers' 
ability to participate in an incumbent tariff pricing plan more than 
one time concurrently. In other words, should customers be restricted 
from splitting their purchases under one pricing plan into two or more 
separate agreements and managing those separately? Some incumbent LEC 
tariff pricing plans address this issue and expressly restrict 
customers to participating in a single version of a pricing plan at any 
one point in time. For example, the RCP in the CenturyLink Tariff 
F.C.C. No. 11 states: ``A customer can have only one RCP in effect at a 
time.'' We seek comment on whether other pricing plans impose a similar 
requirement in this or other ways.
    128. We seek comment on whether these restrictions on customers are 
reasonable. Should incumbent LECs effectively force customers to 
aggregate all their purchases into a single purchase under a pricing 
plan? Would eliminating such restrictions and allowing customers to 
split their overall purchases under a pricing plan into separate 
purchases under that plan provide them with greater flexibility in 
managing their purchases? Would it allow competitive LECs to better 
manage increasing shortfall penalty liability in a declining TDM market 
that is transitioning to packet business data services? We also seek 
comment on the business rationale for such a requirement. What 
additional management or tracking burdens would this impose on 
incumbent LECs and how significant would they be? Can such costs or 
burdens be quantified? How would any such administrative burdens 
compare with the benefits of added flexibility for customers in the 
business data services market?
    129. We also seek comment on whether such restrictions are used in 
Ethernet commercial agreements. If so, commenters should cite examples 
and discuss the impact they have on customers' flexibility in managing 
their Ethernet purchases. Would allowing customers to treat their 
purchases under one Ethernet commercial agreement as separate purchases 
impose any burdens on providers of business data services? Would the 
benefits of increased flexibility outweigh any such burdens? Should the 
Commission prohibit such restrictions solely in noncompetitive markets 
or should it prohibit them in all markets?
    130. Shortfall penalties are fees that are imposed for violations 
of percentage-based commitments, which competitive LECs assert require 
them to maintain a large proportion of their total spend with an 
incumbent LEC provider to obtain discounts and circuit portability 
typically necessary for wholesale providers. In the Tariff 
Investigation Order, we found shortfall penalties that provided 
compensation beyond a price cap LEC's expectation damages were 
unreasonable and directed certain price cap LECs to remove such 
provisions from their tariffs under investigation and directed them to 
make tariff revisions consistent with the terms of the order. We seek 
comment in this FNPRM on whether we should prohibit the assessment of 
shortfall penalties that provide compensation beyond expectation 
damages. Should we prohibit such penalties both in tariff pricing plans 
and in commercial agreements and should any such prohibition be imposed 
only on noncompetitive markets or also on competitive markets?
    131. We now seek further comment on the reasonableness of shortfall 
penalties that are contained either in tariff pricing plans that were 
not the subject of the Bureau's tariff investigation or are contained 
in commercial agreements for the sale of IP-based business data 
services. We seek comment on whether shortfall penalties should reflect 
the economic costs of breaching an agreement or whether they should be 
set at some other level. Would unreasonable and excessive penalties 
impair providers' ability to transition to IP based business data 
services? Could such penalties negatively affect wholesale competition 
and end-user customers in the form of higher prices,

[[Page 36046]]

reduced innovation, and reduced investment in broadband services?
    132. We seek comment on whether the standard for assessing the 
reasonableness of shortfall penalties that we adopted in the Tariff 
Investigation Order should be applied more broadly to all providers of 
TDM and packet-based BDS through either tariff pricing plans or 
commercial agreements and either in noncompetitive markets or in all 
markets. We propose that any action we take in this regard should be 
applied on a technology neutral manner. Would such a standard allow 
providers to recover from their customers in the event of a breach 
sufficient, insufficient or excessive damages? We seek comment on the 
wide variety of methodologies for calculating shortfall penalties both 
in tariff provisions and commercial agreements. Commenters advocating 
for other measures of reasonableness for shortfall penalties should 
explain their concerns with the proposed standard and identify an 
alternative standard and provide examples.
    133. We seek comment on what approach would best ensure that both 
parties to a contract, whether through a tariff or a commercial 
agreement, receive the benefit of their bargain. Would a higher ceiling 
on reasonable penalties distort market incentives and lead to a 
windfall for providers? Would a lower ceiling be sufficient to 
compensate providers? We note that some incumbent LEC plans assess 
shortfall penalties that are a fraction of full expectation damages for 
DS1 and DS3 services. Would it be reasonable to require incumbent LECs 
to apply these lower penalty calculation methods to all plans? If 
providers currently have shortfall penalties that are a fraction of 
expectation damages in some of their plans or agreements, should they 
be allowed to adopt higher penalties without first substantiating a 
reasonable basis for an increase? What showing should such providers 
have to make? For example, if carriers claim shortfall penalties are 
necessary to recover their risks and costs, should they be required to 
make a cost showing or some other financial demonstration to justify 
the level of the shortfall penalty?
    134. We also seek comment on the impact of shortfall provisions in 
tariff pricing plans on customers' Ethernet purchase and construction 
decisions. The record shows that, if these penalties are not set 
equitably and reasonably, they can provide incumbent LECs with economic 
leverage that may cause competitive LEC customers to forgo purchasing 
IP-based business data services and other services from potential 
competitors or self-provisioning these services over their own 
networks. For example, competitive LECs have provided evidence that the 
decline in TDM sales has exposed wholesale buyers to ever-increasing 
shortfall penalties, which in concert with high purchase commitments 
and the need for circuit portability, have ``left them no choice but to 
commit to purchasing large volumes of Ethernet from incumbent LECs in 
return for relief from the penalties.'' Would ensuring the 
reasonableness of shortfall penalties provide relief for competitive 
LECs that claim to experience pressure to make most if not all Ethernet 
purchases from price cap LECs where a shortfall liability is present?
    135. Finally, we seek more specific comment on the framework that 
should be applied to ensure the reasonableness of shortfall penalties 
in commercial agreements for the provision of IP-based business data 
services both in noncompetitive and competitive markets. Competitive 
LECs have provided evidence of the use of shortfall fees in Ethernet 
commercial agreements. We seek comment on the use of shortfall fees in 
commercial agreements generally. How common is the use of shortfall 
fees in commercial agreements, overlay agreements, and other agreements 
for the provision of Ethernet service? How are such fees calculated and 
by what methodology are they set? How do they impact the dynamics of 
the market for Ethernet services? What are the economic costs that 
providers and purchasers face in the event of a breach? What is the 
best way to structure shortfall penalties in Ethernet commercial 
agreements so that they reasonably compensate providers while not 
excessively penalizing purchasers?
    136. Early termination fees, as distinguished from shortfall or 
other fees, are charges assessed on a purchaser under business data 
services tariff pricing plans if a purchaser exits the plan prior to 
the expiration of the purchaser's term commitment. In the Tariff 
Investigation Order, we found early termination fees to be unreasonable 
when they allow the incumbent LEC seller to recover damages that exceed 
the lesser of either: (1) The revenues the incumbent LEC would have 
received if the purchaser had retained the circuit or circuits through 
the end of the term commitment; or (2) the revenues the incumbent LEC 
would have received if the purchaser had paid the lesser discount 
corresponding to the shorter term the purchaser actually used the 
circuit or circuits. We also found that certain tariffs at issue 
contained early termination provisions in excess of this measure of 
damage, concluded such provisions are unjust and unreasonable practices 
under section 201(b), and directed the incumbent LECs to revise their 
tariffs accordingly. We now seek comment on whether and how the 
Commission should consider imposing constraints on early termination 
fees beyond the plans subject to the tariff investigation and what the 
scope of such constraints should be.
    137. We first seek comment on imposing limits on early termination 
fees in other price cap LEC tariff pricing plans and contract tariffs 
for the provision of TDM based services. Competitive LECs assert that 
incumbent LECs failed to provide cost justification or other support 
for the early termination fees they charge. For example, in the tariff 
investigation, the Joint CLECs argue that incumbent LECs did not 
attempt to ``quantify [their] fixed and incremental costs or the extent 
to which both have already been recovered over many years of charging 
customers for DS1 and DS3 services.'' Sprint also asserts that 
incumbent LECs are ``unable to explain why it is reasonable to impose 
penalty amounts that bear no relationship to the costs of [ ] early 
termination, and that frequently exceed even the amount the customer 
would pay if it met its commitment level.'' On the other hand, 
incumbent LECs assert that early termination provisions are necessary 
to enforce term commitments and that they are calculated reasonably. 
For example, AT&T argues that early termination provisions in its 
tariffs are ``lower than what the customer would have paid if they had 
held the circuit to term.'' CenturyLink contends that ``[e]arly 
termination fees help ensure that at least a portion of the expected 
revenue stream on which CenturyLink's investment was premised will 
continue over the life of the customer's commitment, and to provide 
some compensation to CenturyLink if it does not.''
    138. We seek comment on the use of early termination fees more 
generally and on their potential impact on the development of 
competition and the technology transitions. Are early termination fees 
that penalize customers beyond the full cost of the term plan they 
agreed to reasonable? We seek comment on whether we should extend and 
apply the framework we adopted in the Tariff Investigation Order to 
other providers of TDM and Ethernet-based business data services either 
solely in noncompetitive markets or in all markets. That framework 
entailed capping early termination fees at the

[[Page 36047]]

lesser of either: (1) The revenues the incumbent LEC would have 
received if the purchaser had retained the circuit or circuits through 
the end of the term commitment; or (2) the revenues the incumbent LEC 
would have received if the purchaser had paid the lesser discount 
corresponding to the shorter term the purchaser actually used the 
circuit or circuits.
    139. In commenting on this proposal, commenters should address the 
following questions. Do these two measures adequately compensate 
providers without excessively penalizing customers? Are there other 
ways to calculate a reasonable early termination penalty? Would a cost-
based calculation be appropriate? Are there any circumstances where a 
penalty that compensates providers beyond their opportunity cost is 
reasonable? If so, please describe such circumstances and what evidence 
a provider could use to establish that such a penalty is reasonable? 
What showing should the Commission require if a provider seeks to raise 
its existing early termination fees? Commenters are invited to discuss 
factors that the Commission might take into consideration in 
calculating reasonable early termination penalties, such as cost 
studies, revenue expectations, avoided maintenance and administrative 
costs, and any alternative means of valuing parties' expectations.
    140. A number of existing tariff pricing plans set early 
termination fees lower than this proposed standard. Some assess fees 
that represent only a fraction of the incumbent LEC's revenue 
expectations under the plan. These penalty amounts were filed as part 
of the incumbent LECs' tariffs and therefore presumably provide 
reasonable compensation to the incumbent LEC in the case of a 
customer's breach of its term commitment. We therefore seek comment on 
whether we should impose an upper bound on what we would consider a 
reasonable early termination fee that is lower than the incumbent LEC's 
revenue expectations under its plan. To the extent commenters suggest 
lower limits for early termination fees, they should provide business 
and cost justification for their recommendations.
    141. Further, we seek comment on whether, in the case of the 
retirement of a copper network, to require providers to eliminate any 
early termination fee liability where the termination is caused by the 
provider electing to discontinue the plan or service that is the 
subject of the term commitment. In such cases, where it is the 
provider's decision to cancel the service, is eliminating early 
termination fees appropriate so as not to penalize the customer? Are 
there any circumstances under which providers could reasonably assess 
early termination fees in this situation?
    142. We also seek comment on any unique issues that would arise in 
applying this prohibition on early termination fees in commercial 
agreements for Ethernet-based business data services, either solely in 
noncompetitive markets or in all markets. Do overlay or other 
commercial agreements for the provision of Ethernet-based service 
assess early termination penalties? At what level are these penalties 
set? How are early termination penalties calculated in these commercial 
agreements? What are the economic costs that providers and purchasers 
face in the event of a breach? What is the best way to structure early 
termination fees in Ethernet commercial agreements to ensure that such 
fees reasonably compensate providers while not excessively penalizing 
purchasers?

F. Rules Applying to Non-Competitive Markets

    143. We next propose requirements that would apply to the provision 
of business data services only in those markets that are characterized 
as non-competitive. These rules are intended to provide clear guidance 
as to what conduct is just and reasonable in a non-competitive market 
and thereby facilitate the resolution of disputes through commercial 
negotiations and we seek comment generally on what actions should be 
taken to ensure that conduct is just and reasonable in a non-
competitive market. Providers with market power are able to exercise 
such market power to the detriment of their customers. Recognizing that 
the market is evolving and competition may develop in many markets not 
currently subject to material competitive effects, these rules are 
intended to constrain potentially anti-competitive conduct while also 
providing the flexibility to allow all providers to respond to 
competition. Like the limited rules that would be applicable in all 
markets, these proposed requirements would be technology neutral in 
nature and would form a part of our proposed overarching framework for 
the regulation of BDS generally.
1. Price Cap Regulation
    144. We believe that we should continue to apply price caps to 
business data services now subject to price cap regulation to the 
extent an application of our proposed Competitive Market Test 
determines that such price regulation is necessary or such services are 
not otherwise made subject to an alternative pricing mechanism. The 
principal price cap services are TDM business data services (i.e., DS1 
and DS3 services). Elsewhere in this order, we propose a number of 
actions that will impact how and to which services price caps will 
continue to apply. As described above, we propose to adopt a 
Competitive Market Test as a basis for determining which broadband data 
services are competitive or non-competitive. And, as described below, 
we propose to remove competitive TDM services from price cap 
regulation. We further propose to subject non-competitive TDM services 
to price cap regulation and allow for providers to enter into 
individually negotiated agreements for such services. Finally, we 
propose and seek comment on maintaining price caps for non-competitive 
TDM services consistent with these proposals on a non-tariffed basis. 
While we seek comment on our view and each of these proposals 
individually, we ask commenters to keep all these proposed actions in 
mind and address advantages or concerns with their collective impact as 
appropriate in their comments.
    145. We also seek comment on the scope of the application of rate 
regulation in non-competitive markets to packet-based BDS (and, as 
well, to TDM BDS). At some point in the future, there may be non-
competitive BDS markets in which TDM is no longer available. In such a 
case, how would we regulate the non-competitive business data services? 
How do we ensure the regulation we adopt here is technology-neutral and 
sufficient to permit it to be applied to such a non-competitive BDS 
market?
    146. As discussed above, the record makes clear that the market for 
lower-bandwidth TDM business data services such as those currently 
subject to price caps is non-competitive in significant measure. Firms 
with market power do not have incentives to price services at just and 
reasonable levels consistent with section 201 of the Act. We believe 
that the price cap system, as modified by any measures we adopt in this 
proceeding, will limit the extent to which price cap LECs can exercise 
their market power over non-competitive TDM BDS rates. When properly 
applied, price cap regulation replicates the beneficial incentives of 
competition in the provision of business data services while balancing 
ratepayer and stockholder interests. The price cap indices provide 
benchmarks of price cap LEC cost changes that encourage them to become 
more productive and innovative by permitting them to retain

[[Page 36048]]

reasonably higher earnings. Those indices are designed to limit the 
prices price cap LECs charge for service to just and reasonable levels. 
By establishing limits on prices carriers can charge for business data 
services, and placing downward pressure on those limits or ``caps,'' 
price caps creates a regulatory environment that incentivizes carriers 
to become more productive and forces them to pass a portion of their 
cost savings to ratepayers.
    147. We are not aware of any other presently available alternative 
to price cap regulation that more effectively balances the interests of 
ratepayers and carriers. For instance, extending Phase II pricing 
flexibility relief to services presently under price caps would be 
inconsistent with our findings that these services are provided in non-
competitive areas. Applying rate of return regulation, in contrast, 
would entail overcoming daunting administrative challenges and would 
dampen firms' incentives to become more productive. And consistent with 
our proposal below to apply a technology-neutral anchor or benchmark 
pricing system to all business data services, we also propose to use 
TDM BDS rates as the benchmark for establishing reasonable packet-based 
BDS rates. Accordingly, we believe we should continue applying price 
cap regulation to BDS, including TDM DS1 or DS3 services, to the extent 
an application of our proposed Competitive Market Test determines such 
services are non-competitive. We invite comment on the above analysis 
and on these views.
    148. We invite comment on extending price cap regulation to 
business data services presently subject to Phase II pricing 
flexibility to the extent an application of our proposed Competitive 
Market Test determines such services are non-competitive consistent 
with our proposal below. We believe that we should not take that step--
or indeed apply any sort of ex ante pricing regulation--where our 
analysis shows that the market is competitive. We invite comment on 
this approach.
    149. A productivity-based X factor and a corresponding inflation 
measure had been a fundamental feature of the Commission's price cap 
system from the system's inception in 1987 until the adoption of the 
CALLS plan. This balance reflected two propositions that we believe are 
essential to any effort to ensure reasonable rates in non-competitive 
markets: (a) That the service provider have an opportunity to recover 
its costs of service; and (b) that the ratepayer benefit from any 
decrease in those costs in much the same way as a customer in a 
competitive market benefits from cost decreases. We believe we should 
restore this balance between ratepayer and price cap carrier interests 
by incorporating a productivity-based X factor into our price caps 
system for business data services on a forward-going basis. We invite 
comment on this view. We also ask whether we should make any 
adjustments to current price caps to reflect any past productivity 
gains that were not reflected in our past regulatory regimes. Below, we 
propose corresponding action to regulate the rates of IP-based BDS in 
non-competitive markets.
    150. The goal of price cap regulation is to have rates and output 
levels roughly mirror rates and output levels in a competitive market, 
at least on average over an extended period of time. If inflation 
outpaces productivity growth, price cap rates may become unreasonably 
low. Conversely, if productivity growth outpaces inflation, companies 
with market power will be able to charge unreasonably high rates. Our 
current system, in which the X-factor equals its inflation measure, 
implicitly assumes that changes in business data services productivity 
perfectly offset inflation in the general economy. We think such a 
perfect offset likely did not occur in the business data services 
industry during the period since the expiration of the CALLS plan. 
Given the rapid growth in business data services output, and the ever-
increasing economies of scale with respect to providing business data 
services, per unit costs likely have decreased significantly since that 
time. We seek comment on whether this analysis is correct and, if so, 
whether this productivity trend will continue.
    151. Over the period since the expiration of the CALLS plan, as 
technology has evolved and for other business reasons, price cap LECs, 
like other LECs, have been consolidating TDM switches, placing soft-
switches, increasing fiber deployments, and decreasing maintenance 
costs. We believe that, as a consequence, business data services 
productivity growth has significantly outpaced inflation and therefore 
that the price cap LECs are likely charging unreasonably high rates. In 
a regulatory environment where prices fail to reflect productivity 
gains and, consequently, carriers set prices too high, end users will 
purchase less of the services produced, and the quantity of output will 
be lower than if prices were set at a competitive level. The 
productivity of which the plant is capable will not be realized.
    152. We note that some price cap LECs assert that their costs have 
risen and the fact that the X factor has been set equal to the GDP-PI 
has forced them to charge below-cost prices. We are skeptical of this 
claim: These price cap LECs have not provided any evidence to support 
their claim that business data services productivity increases have 
departed from historical patterns and now lag behind productivity 
increases in the economy as a whole. Additionally, we note that no 
price cap LEC has filed any request that we examine the frozen 
productivity factor in light of their claimed increased costs. But even 
if we were to accept the price cap LECs' claim, that would only prove 
that we need to restore the fundamental balance between carriers and 
ratepayers inherent in the Commission's price cap system.
    153. Competitive LECs, in contrast, maintain that price cap LECs 
have been reaping the benefits of cost-saving productivity gains and 
have not passed these cost savings to customers. If the competitive 
LECs are correct--as our analysis strongly suggests, prices are higher 
than an appropriate X-factor would have produced. We therefore believe 
we should incorporate a productivity-based X factor into our price caps 
system for business data services. We invite comment on the above 
analysis and this approach.
    154. We agree with Sprint that we should explore all available 
methodologies for determining a productivity-based X-factor for 
business data services. Accordingly, we seek comment on several 
methodologies and ask the parties to suggest additional alternatives 
that they believe will lead to reasonable rates for those business data 
services regulated under price caps.
    155. We believe that we should balance potential precision with 
administrative feasibility in deciding how to set a productivity-based 
X-factor. Measuring past productivity and predicting its future 
trajectory are inexact sciences; we are not required ``to enter precise 
predictive judgments on all questions as to which neither [our] staff 
nor interested commenters [are] able to supply certainty.'' On the 
contrary, we believe that we may properly rely on available data to 
estimate productivity growth in the provision of business data services 
and use that estimate to calculate a reasonable productivity-based X 
factor. We invite comment on this analysis and on how we should balance 
potential precision with administrative feasibility in setting a 
productivity-based X-factor.
    156. We invite comment below on three methodologies for calculating 
a productivity-based X-factor and corresponding price cap indices

[[Page 36049]]

adjustments. We think these methodologies capture cost-reduction 
incentives while mimicking competitive-market outcomes by using 
projections of productivity gains, rather than actual values, based on 
historical trends. They calculate possible productivity-based X-factors 
by taking the difference between an economy-wide rate of inflation and 
the growth rate of industry input prices and the projected growth rate 
of a firm's productivity level.
    157. Our calculations rely on three data sources: (a) The U.S. 
Bureau of Labor Statistics' (BLS's) Capital, Labor, Energy, Materials, 
and Services (KLEMS) data; (b) data from the peer review process in 
connection with the deployment of the Commission's Connect America Cost 
Model (CACM); and (c) those data in combination with cost data that TDS 
submitted in this proceeding. We seek comment on whether data from 
these sources provide a reasonable basis for calculating a 
productivity-based X factor. Do they properly balance potential 
precision with administrative feasibility? Are there alternative 
sources of data that would more precisely calculate productivity 
increases in the provision of business data services? If so, would the 
additional precision associated with obtaining those data and using 
them to calculate a productivity-based X-factor outweigh the associated 
burdens?
    158. The KLEMS data used in our calculations are publicly 
available, annual industry-level data on industry-level measures of 
input prices and total factor productivity (TFP) for the 
telecommunications and broadcasting industries. We seek comment on any 
adjustments to the KLEMS data that we should make to improve its 
utility as a measure of business data services productivity. We seek 
comment on the relevant years for which we should use KLEMS data.
    159. In response to a peer review of the CACM, the CACM was used to 
generate cost share data for ten cost categories. Are there other cost 
categories that we should include or should we exclude some of these 
cost categories from our calculations? Does combining CACM peer review 
data with company-specific data, such as the TDS data used in 
calculating the proposed X factor and corresponding adjustments to 
price cap indices, provide a more precise estimate of business data 
services productivity growth? Are there other sources of available 
company-specific cost data that would increase that precision?
    160. We invite comment on whether we should require price cap LECs 
to submit their expense matrix data from 2005 to 2015? If so, should we 
require that these data be reported using the categories previously 
required under the Commission's rules and, if not, what categories 
should we specify? Would the benefits from these data outweigh the 
burdens?
    161. We ask whether we should require the price cap LECs to submit 
cost studies, as Sprint suggests, to help us determine business data 
services productivity growth. If so, what methodology should we specify 
for those costs studies? Would the benefits from relying on company-
specific data from these cost studies, as opposed to economy-wide or 
industry-wide KLEMS and CAPM data, outweigh the burdens?
    162. We invite comment on whether and, if so, how we may use the 
pricing data collected in this proceeding to supplement our other 
calculations. Would regressions comparing prices for DS1 and DS3 
services in competitive and non-competitive areas provide proxies for 
the minimum amount that prices should have fallen in non-competitive 
areas and, if so, how we should use those proxies in setting an X-
factor and price cap indices adjustments? We seek comment on the pros 
and cons of using regressions to supplement other X-factor 
calculations. We ask the parties to submit their own regressions.
    163. We seek comment on whether we should incorporate a consumer 
productivity dividend into our price cap system. If so, how should we 
calculate that dividend? Should we incorporate a dividend component 
into any X-factor that we set? Should we include such a dividend in a 
price cap indices adjustment if we decide to take that approach?
    164. GDP-PI (i.e., the gross domestic product price index) is a 
measure of inflation incorporated into the Commission's price cap index 
formula as one of three basic components in addition to the X-factor 
and exogenous cost adjustments.
    165. The Commission currently uses the BEA chain-weighted GDP-PI to 
measure inflation. We find that this measure accurately reflects cost 
changes that carriers face without being susceptible to carrier 
influence or manipulation. We propose that we should continue to use 
GDP-PI as the inflation measure in the price cap index formula 
consistent with BEA's measure for purposes of setting the X Factor. We 
seek comment on this proposal.
    166. In the 2005 Special Access NPRM, the Commission invited 
comment on a series of additional issues relating to price caps. These 
issues included: (a) Whether the price cap index formula for business 
data services should include a growth or ``g'' factor to account for 
any demand growth effects that are not reflected in an X factor; (b) 
whether the Commission should require price cap LECs to share a portion 
of their business data services earnings with ratepayers through 
adjustments to the price cap indices; (c) whether the Commission should 
retain a low-end adjustment mechanism for price cap LECs that have not 
implemented pricing flexibility; and (d) whether the Commission should 
subdivide its special access price cap basket into additional or 
different categories and subcategories.
    167. We ask the parties to update the record on each of these 
issues. We also ask whether there are any additional issues we should 
resolve to help ensure that our price cap system produces reasonable 
rates for business data services in non-competitive markets.
    168. A growth or ``g'' factor would allow ratepayers to benefit 
from at least of portion of any business data services demand growth 
effects that are not reflected in a productivity-based X-factor. We 
invite comment on whether we should adopt a ``g'' factor and, if so, 
how we should calculate it. We also ask how we should how we should 
measure demand growth and how we can ensure that any ``g'' factor does 
not double count growth already reflected in a productivity-based X-
factor. We ask, in particular, whether demand growth benefits not 
reflected in an X factor should be shared between business data 
services providers and their customers. Should any ``g'' factor we 
adopt be applied only on a going-forward basis, or should we also 
adjust the price caps indices to account for prior demand growth?
    169. Earnings sharing allows ratepayers to benefit from business 
data services profitability and was a feature of the Commission price 
cap regime until 1997. In abolishing sharing, the Commission found that 
it blunted price cap LECs' efficiency incentives and that eliminating 
it would remove vestiges of rate of return regulation from the price 
cap system. We find these reasons persuasive and therefore believe that 
we should not reinstate sharing. We invite comment on this approach.
    170. The low-end adjustment permits price cap LECs that earn a rate 
of return 100 basis points or more below the prescribed rate of return 
for rate-of-return carriers to increase their price cap indices in the 
next year to a level that would allow them to earn 100 basis points 
below that rate of return. This mechanism is available to all price cap

[[Page 36050]]

LECS that have not implemented pricing flexibility. In the 2005 Special 
Access NPRM, the Commission tentatively concluded that, if it were to 
continue to apply price caps to business data services, it should 
retain a low-end adjustment mechanism for price cap LECs that have not 
implemented pricing flexibility.
    171. In this FNPRM, we propose below to replace the current pricing 
flexibility framework with a new technology-neutral framework. Under 
the proposed framework, price cap LECs' TDM BDS in non-competitive 
markets will be subject to price caps and can be offered through 
individually negotiated agreements, a regime that parallels in most 
practical respects the Phase I pricing rules. And price cap LECs' TDM 
BDS in competitive markets will be removed from price cap regulation 
and offered pursuant to commercial agreements. We invite comment on how 
our action on this proposed paradigm should affect our consideration of 
whether we should retain a low-end adjustment as part of our price cap 
system. In particular, should we allow business data services providers 
that provide their TDM services under these varying regimes to seek 
low-end adjustments? If so, how can we assure that the providers' 
claimed earnings on services provided under price caps accurately 
reflect their costs of providing those services?
    172. In March 2016, the Commission reduced the prescribed rate of 
return for rate-of-return carriers from 11.25 percent to 9.75 percent, 
subject to a transition. Effective July 1, 2016, this transition will 
reduce the 11.25 percent rate of return by 25 basis points per year 
until it reaches the represcribed 9.75 percent on July 1, 2021. We ask 
that the parties address whether we should use this reduced rate of 
return to measure eligibility for a low-end adjustment in the event we 
retain that mechanism. If so, how, if at all, should we adjust the 
percentage that determines eligibility for a low-end adjustment and the 
level to which price cap indices are retargeted as this transition 
proceeds? Specifically, should we use the 9.75 percent prescribed rate 
of return in considering low-end adjustments when it is effective or 
should the applicable rate of return track the rate of return 
transition?
    173. A price cap basket is a broad grouping of services, such as 
TDM services. Prices for services in a given basket are capped by its 
price cap index. Placing services together in the same basket limits 
the LEC's pricing flexibility and incentives to shift costs. Within the 
special access service basket, services currently are grouped into 
service categories and subcategories. Similar services are grouped 
together into service categories within a single basket to act as a 
substantial bar on the LEC's ability to engage in anticompetitive 
behavior.
    174. In the 2005 Special Access NPRM, the Commission sought comment 
on the categories and subcategories the Commission should establish in 
a special access basket if we continued to apply price cap regulation 
to business data services. In response, commenters proposed a number of 
changes to the categories and subcategories for the special access 
basket. We ask interested parties to update their comments with respect 
to the special access basket categories and subcategories in light of 
technological and operational changes that have occurred in the 
business data services marketplace since 2005.
    175. We seek comment on whether the special access basket should be 
subdivided into more than one basket, and whether the baskets should be 
further subdivided into categories and subcategories. We ask whether 
should use a single basket or multiple baskets and the advantages and 
disadvantages of each approach. What categories and subcategories 
should we establish in a BDS basket if we adopt a price cap method to 
regulate BDS prices? Should we retain without modification for BDS the 
existing special access category and subcategories? If not, parties 
should identify the specific categories and subcategories of BDS that 
they contend we should adopt.
    176. We ask parties to discuss the advantages and disadvantages of 
having a BDS basket with relatively few categories or subcategories 
compared to one with many. We also seek comment on what criteria and 
data we should examine to determine which services to place in which 
categories or subcategories. We ask parties proposing categories or 
subcategories, to explain in detail the bases for their proposed 
categories or subcategories, and to support their proposals with data 
and studies.
    177. Should we establish separate categories or subcategories based 
on BDS line densities? For example, channel termination services 
extending between a LEC end office and a customer premise in areas 
where there are more than 10,000 special access lines per square mile 
could be placed in a particular subcategory.
    178. For the same reasons that the Commission eliminated the lower 
pricing bands, we believe that there should be no lower band for 
service categories or subcategories to restrict the price cap LECs' 
downward pricing flexibility. We seek comment on this approach. We 
likewise seek comment on the upper band value to limit the price cap 
LECs' upward pricing flexibility for the categories or subcategories. 
Should we retain five percent as the value? Should we use different 
values for different categories or subcategories? What criteria and 
data should we use to determine these values?
    179. We invite comment on whether business data services 
productivity gains have outpaced inflation during the period since June 
30, 2005, the date the CALLS plan expired. We ask that the parties 
support their position on this issue with detailed data and economic 
analysis. We seek comment on whether in the event we conclude that 
business data services productivity gains outpaced inflation during 
that period, we should adjust the baseline price cap levels to capture 
those gains for ratepayers. As noted above, we propose that a new 
forward-looking productivity factor should be applied to TDM services 
in non-competitive markets (with corresponding rate regulation for IP-
based BDS in non-competitive markets).
    180. As indicated above, our X-factor and price cap indices 
adjustment calculations rely on BLS's KLEMS data; the Commission's CACM 
peer review data; and CACM peer review data in combination with TDS 
cost data. We think our X-factor calculations capture cost-reduction 
incentives while mimicking competitive-market outcomes by using 
projections of productivity gains, rather than actual values, based on 
historical trends. We use a proxy for the growth rate of input prices, 
a measure of economy-wide rate of inflation based on a national price 
index (i.e., GDP-PI) adjusted to account for systematic difference 
between the growth rates of national prices and telecommunications 
industry-specific input prices. To adjust the price cap index to 
account for the historic productivity X-factor, this estimation of X is 
subtracted from the annual change in the GDP-PI to determine the annual 
change in the price cap index.
    181. We calculate the X-factor by subtracting from the change in 
GDP-PI, the change in industry prices and add the change in industry 
total factor productivity (TFP). The change in industry TFP is the 
difference between the change in TFP for price cap LECs and the change 
in TFP for the overall U.S. economy. We calculate an input price 
differential reflecting the historical difference in the average annual 
rate of change in price cap LEC input prices as

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compared with the historical average annual rate of change in the 
economy as a whole. These two factors are then added together for each 
year and subtracted from the measure of the change in the rate of 
inflation (i.e. the change in GDP-PI).
    182. Applying this basic calculation, we apply various data sources 
and models for estimating the inputs in the X-factor equation. From 
these calculations, we develop a forward-looking X-factor adjustment to 
the price cap index applied annually.
    183. Method One--KLEMS Model. Our first set of calculations rely on 
KLEMS from BEA and the U.S. Department of Labor's Bureau of Labor 
Statistics (BLS). The BLS maintains yearly KLEMS statistics on 
Broadcasting and Telecommunications. These industry-level measures of 
input prices and total factor productivity (TFP) are publically 
available. This is the most granular level of industry detail for which 
KLEMS data is available on a regular and consistent basis. Input price 
indexes are available for each of the five components of KLEMS--capital 
(K), labor (L), energy (E), non-energy materials (M), and services 
purchased from other businesses (S).
    184. Commission staff computed three X-factor estimates using KLEMS 
data: (1) The first estimate uses growth rates that are averaged over 
all years for which we have data, 1997 through 2013; (2) the second 
considers only the years for which data would have been available in 
2005, 1997 through 2003; and (3) the third considers data from 2005 
(the year in which the CALLS plan ended) through 2013. The year 1997 
provides a helpful starting point as the last year in which the 
Commission prescribed a productivity-based X-factor and 2013 represents 
the year for which the business data services data was collected. The 
results are as follows:
    185. Method Two--Connect America Cost Model. Our second set of 
calculations uses data from the CACM peer review process. In the 2011 
USF/ICC Transformation Order, the Commission adopted CACM to provide a 
forward-looking estimate by census block of the costs of providing a 
voice and broadband-capable network for use in determining Connect 
America Fund support for broadband necessary to serve price cap areas. 
The Commission's response to a peer review of the CACM set forth data, 
including shares and estimates of changing prices, for ten cost 
categories. Relying on cost models and industry financial accounts, the 
Commission staff determined the key cost components of business data 
services supply, estimated their shares, and estimated changes in the 
input prices of each key component. These calculations relied on the 
following input categories and estimates of the cost shares of each of 
these categories: Labor, fiber, poles, conduit, drop, optical net 
terminal, fiber pedestals, splitters, electronics, and land/buildings.
    186. The CACM methodology provides base information about the key 
costs of supplying business data services. The CACM was developed to 
estimate the costs of a mass market residential broadband fiber-to-the-
premise network that also is used to provide telephone service, and was 
built to also provide business data services. Consequently, it is 
essentially a model of the costs of an incumbent LEC supply, but with a 
focus on residential rather than business data services. Despite this, 
there are no reasons to think that either (1) the underlying cost 
categories of the CACM or (2) the rates of change in input prices of 
these cost categories would be significantly different for business 
data services than for residential data services. The CACM peer review 
response provides at least a very rough indication of shares even 
though its modeling is not limited to business data services.
    187. For each category, Commission staff calculated low and high 
estimates for changes in input prices. Two measures, one high and one 
low, were used for changes in total factor productivity. The low 
estimate for net impact on costs applies the low estimate for input 
prices and the high estimate for productivity. The high estimate for 
net impact on costs applies the high estimate for input price and the 
low estimate for productivity. Weighted averages were computed for both 
low and high estimate, where the weights were the cost category shares. 
Commission staff calculated the net impact on costs which equals the 
change in industry input prices plus the change in industry TFP. The 
results are as follows:
    188. Method Three--TDS and Connect America Cost Model. Our third 
set of calculations is a modification of method two, relying on CACM 
calculation supplemented with data provided by TDS Telecom (TDS). The 
TDS data consist of booked financial data on TDS's incumbent LEC 
operations. Commission staff used these data as an alternative set of 
input categories. However, the TDS categories, other than those for 
labor and real estate, were not at the same level of detail as in the 
same CACM calculations. This required that the TDS categories for 
switching and transmission be mapped to the remaining eight CACM 
categories. The results are as follows:
    189. We invite comment on whether these methodologies provide a 
reasonable basis for assessing industry productivity for use in X-
factor and price cap indices adjustment and whether we should use them 
for such purpose. How precise are they? Are there alternative 
methodologies that would provide comparable or greater precision at 
comparable, or lower, cost? If so, we ask the parties to describe those 
methodologies in detail and to explain how we should apply them.
    190. Are the data used in our calculations reliable? Are other, 
more detailed data available that would more accurately portray 
productivity trends? Do data that provide broad measures of large 
economic sectors, like the KLEMS data, provide the most reliable data 
for measuring BDS productivity trends in relation to production trends 
in the overall economy? Or are telecommunications-specific data, like 
the CAPM data, or company-specific data, like the TDS data, preferable? 
We ask the commenters to address the relative merits of each of these 
categories of data and to suggest additional sources of reliable data 
within each category.
    191. The calculations present three different time periods that we 
could use to determine a productivity-based X-factor and, if we decide 
to take that course, price cap indices adjustments. We ask whether 
these time periods accurately capture BDS productivity trends for such 
purposes and, if not, which other time periods would provide increased 
accuracy and why.
    192. Finally, we ask the parties to recommend, based on our 
analysis or their proposed alternative, whether we should make 
adjustments to the X factor and price cap indices. We also seek comment 
on capping existing price cap indices and ask whether this should be 
done in all areas or just certain areas with pricing flexibility. We 
ask commenters to explain the basis for their recommendation and 
explain how such approaches would impact competition and the technology 
transitions.
    193. We seek comment below in this FNPRM on applying the substance 
of the current Phase I pricing flexibility requirements to TDM BDS 
offered in non-competitive areas. To implement such proposal, we also 
seek comment above on extending price cap regulation to TDM BDS offered 
in non-competitive areas that presently are subject to Phase II pricing 
flexibility. We now seek comment on how we would move such

[[Page 36052]]

services back into price caps. Because the services we now consider 
currently are subject to Phase II pricing flexibility, their rates have 
been moved out of price cap constrained tariffs and are, in some cases, 
higher than they would have been had they been consistently constrained 
by the price caps. What, if any, changes to the currently applicable 
rates should be made as part of a transition back into price caps and 
why? If so, how should such changes be implemented? Does this 
transition raise any special considerations? We seek comment on these 
questions.
    194. We propose that if the Commission adopts a new X-factor or 
otherwise requires adjustments to the price cap indices, price cap 
carriers would implement the associated rate decreases by submitting 
TRPs (i.e., Tariff Review Plans) and special access tariff revisions 
for all rate elements associated with special access. Such TRPs would 
set forth the calculations underlying the API, and demonstrate that the 
revised API for the special access basket does not exceed the revised 
price cap index. We seek comment on this proposal.
    195. How shall we adjust the price cap indices if the Commission 
adopts a new X-factor or otherwise requires adjustments to the price 
cap indices? Should the rate decreases that result from these actions 
apply to all rate elements associated with special access services, or 
should carriers be permitted to choose the manner in which the 
decreases are made as long as the revised API for the special access 
basket does not exceed the revised price cap index? What process should 
the Commission employ for purposes of implementing a new X-factor or 
any required adjustments to the price cap indices? In this regard, we 
invite comment on implementation issues such as the timing for 
complying with the required rate reductions, what should be included in 
related TRP submissions and tariff filings, and carrier certification 
requirements.
2. Anchor or Benchmarking Pricing
    196. In non-competitive markets, absent guidance as to the range of 
rates that would be considered reasonable, a provider could exercise 
market power through the charging of supracompetitive rates. As 
discussed above, TDM BDS rates currently are constrained to some extent 
by price caps. In this section, we propose and seek comment on a 
methodology to ensure that, in non-competitive markets, rates for 
Ethernet business data services not subject to price cap regulation are 
just and reasonable. We emphasize that the proposed mechanism described 
below would be used in those markets where the Commission determines, 
based on an application of the Competitive Market Test, the market is 
non-competitive such that it is likely competition is not constraining 
rates to just and reasonable levels. That said, the proposed 
methodology is not prescriptive, and is intended to facilitate 
providers and customers negotiating reasonable commercial agreements.
    197. We first took action to protect against concerns regarding 
Ethernet pricing during the transition to IP in the Emerging Wireline 
Order by adopting an interim rule to ensure that incumbent LEC BDS 
providers that are discontinuing legacy TDM services offer Ethernet 
services, used as wholesale inputs by competitive carriers, at 
reasonably comparable rates, terms, and conditions. This interim rule 
applies to two categories of services: (1) BDS services at DS1 speed 
and above; and (2) commercial wholesale platform services such as 
AT&T's Local Service Complete and Verizon's Wholesale Advantage. The 
interim reasonably comparable wholesale access requirement is a 
condition to a grant of an incumbent LEC's discontinuance application 
imposed under our authority pursuant to section 214(c) of the Act, and 
helps ``bridg[e] the gap'' between the current competitive situation 
and the completion of the BDS rulemaking. The condition that the rule 
imposes expires when ``all of the following have occurred: (1) The 
Commission identifies a set of rules and/or policies that will ensure 
rates, terms, and conditions for special access services are just and 
reasonable; (2) the Commission provides notice such rules are effective 
in the Federal Register; and (3) such rules and/or policies become 
effective.'' The rules and policies that we propose establishing from 
this FNPRM are intended to meet the first prong of the Emerging 
Wireline Order's standards governing expiration of the condition. Once 
we adopt permanent rules subsequent to this FNPRM, we will provide the 
Federal Register notice called for in the second prong, which will 
announce the effective date called for in the third prong. We 
anticipate that the condition the interim rule imposes will expire as 
of the effective date of our permanent pricing rules for BDS, absent 
action staying or overturning our rules and policies. We further 
discuss our various methods for considering a permanent pricing 
methodology below.
    198. In this FNPRM, we propose an anchor pricing or benchmarking 
approach to replace, as it applies to BDS, the interim rule currently 
in effect. We consider three options below. The first option is to rely 
on regulated TDM service prices to anchor the prices of similar packet 
services. This option would be effective only where TDM prices could be 
expected to reasonably constrain the rates for higher speed packet-
based services. In that case, we could decline to otherwise regulate 
packet-based BDS rates. If, however, we were unable to determine that 
regulated TDM prices would provide a reasonable constraint on packet-
based BDS, a second option would be to establish one regulated price 
for packet-based BDS, for example, establish a regulated rate for a 10 
Mbps Ethernet service, which could serve as an anchor for nearby-
bandwidth packet-based BDS, and could arguably constrain those rates. 
Our third option is to initially use reasonably comparable prices for 
regulated TDM services as a benchmark to help the Commission determine 
whether rates for various packet-based BDS are just and reasonable, but 
over time using, as a benchmark, the packet-based BDS prices 
established under this approach. Price cap TDM rates do not have a 
single rate for a particular TDM service but a series of rates that, 
when combined, create a rate. How should we account for differences in 
rate structures between price-capped TDM rates and packet-based BDS?
    199. We seek comment on which option we should use and how such a 
pricing regime should operate. We believe we should adopt the third 
option--using regulated TDM prices, but over time using the packet-
based BDS prices established under this approach as a benchmarking tool 
in determining whether packet-based BDS rates are just and reasonable, 
similar to the interim rule adopted in the Emerging Wireline Order. We 
believe this option would be most effective in constraining rates and 
most consistent with the Commission's goals of promoting facilities-
based competition and facilitating technology transitions. We question 
whether, under the first option, TDM services could effectively 
constrain the prices for higher speed packet-based services in the 
current environment of increasing demand for high-bandwidth services. 
In addition, such reliance may create incentives at odds with our goal 
of facilitating the technology transitions. We also question the 
desirability of the second option, establishing rates for one tier of 
packet-based BDS, for two reasons. First, because it is doubtful that 
such an approach could reasonably constrain a relatively wide range of 
bandwidths (for example, it is unlikely that a 25 Mbps

[[Page 36053]]

anchor price would effectively constrain prices for 2 Mbps and 50 Mbps 
services). Second, for reasons similar to our hesitation to bring such 
services under price cap regulation, any price regulation where the 
Commission would be establishing rates for carriers to charge (even for 
just one service) would still add reporting and monitoring burdens on 
carriers, which could inhibit innovation. In contrast, we believe the 
third option would be the least burdensome and most effective in 
encouraging competition through commercial negotiation. We seek comment 
on these various options and our views.
    200. Certain parties have suggested we could use a cost model to 
establish benchmarks for packet-based BDS Ethernet services. For 
instance, as noted above, the CACM was used to provide a forward-
looking estimate by census block of the costs of providing a voice and 
broadband-capable network for use in determining Connect America Fund 
support for broadband necessary to serve price cap areas. We seek 
comment on whether we could either establish a new cost model or modify 
an existing cost model to provide a basis for establishing Ethernet 
rate benchmarks within price cap incumbent LEC service areas to the 
extent that price regulation might otherwise apply? What would be the 
benefits of a model-based approach in contrast to the anchor or 
benchmarking approaches described above? Is there a particular model 
that we should consider? What would be the benefits of establishing a 
new model instead of modifying an existing model?
    201. Although packet-based BDS have largely been provided outside 
of price cap regulation, we expect adoption of an anchor or 
benchmarking pricing mechanism would provide many of the advantages of 
price caps and other forms of pricing regulation without some of the 
disadvantages. Through the adoption of price cap regulation, the 
Commission attempted to encourage incumbent LECs to innovate and 
increase efficiencies in providing service. However, bringing more 
services under our price caps would entail reporting and monitoring 
costs which we can avoid under our proposed anchor or benchmarking 
approach (since such an approach, in part by its expression, and in 
part through setting of precedents in adjudications, will encourage 
parties to negotiate reasonable terms and conditions). We seek comment 
on this approach. Would our proposed approach work effectively to 
constrain prices and increase innovation? Would one of the alternative 
forms be more effective than our proposed approach?
    202. We note that the Verizon/INCOMPAS Joint Letter suggests that 
the Commission should rely on ex ante rate regulation in relevant 
markets with insufficient competition. We seek comment on the 
principles in the Verizon/INCOMPAS Joint Letter. How would we implement 
ex ante pricing regulation that would further the goals of constraining 
prices and ensuring just and reasonable rates and be imposed on a 
technology neutral basis? How would such regulation be implemented on 
an operational basis?
    203. As described above, we propose to use as a benchmark for 
reasonable packet-based BDS rates the price of the most comparable 
legacy TDM technology and base the reasonableness of the price on that 
service level, even if the services are provided using a new or 
different technology. Over time, as TDM benchmarks are discontinued, 
packet-based BDS rates established as being fair and reasonable under 
this approach would serve as a continuing benchmark. We seek comment on 
this proposal. How would this methodology be implemented? Should this 
price be a ceiling for the rates of various packet-based services or 
should it merely be used as a tool to determine whether rates are 
reasonable? Would this method be a workable solution to ensure that 
packet-based BDS rates are just and reasonable? If not, what 
alternative solutions should the Commission consider?
    204. We believe we should impose anchor or benchmarking pricing 
only in non-competitive markets. Is that the correct determination? Why 
or why not? Would there be reasons to impose anchor or benchmarking 
pricing in competitive markets? We believe that in effectively 
competitive markets, anchor or benchmarking pricing would not be 
necessary because competition would be sufficient to constrain prices 
to just and reasonable levels. We also believe that anchor or 
benchmarking pricing would not be appropriate where we find sufficient 
material competitive effects under the Competitive Market Test, even 
where that means competition is not necessarily driving prices to 
effectively competitive levels. This is because we must account for 
limitations on our ability to establish what a competitive price is, 
the harms of unintended consequences from regulatory action (for 
example, to the extent regulatory action encourages waste through rent-
seeking), as well as its administrative costs. Is that a reasonable 
approach? If not, what impact would anchor or benchmarking pricing have 
on areas that already have material competitive effects?
    205. We seek comment on the scope of the application of rate 
regulation in non-competitive markets to packet-based BDS (and, as 
well, to TDM BDS). In non-competitive areas, should all providers be 
subject to rate regulation or should only some providers be so 
impacted? If the latter, how should we determine which providers? So, 
for example, should rate regulation apply only to the largest providers 
(and how would such an outcome be implemented as market shares change 
over time)? Conversely, should we consider adopting a rule that 
providers with less than a certain percentage of market share would not 
be subject to rate regulation on the ground that smaller providers 
likely represent new entrants? Or should we use another factor than 
market share were we to adopt this approach, such as the ubiquity of 
infrastructure capable of delivering BDS service in a relevant 
geographic market, or the effective ability of a provider to reach some 
percentage of potential BDS customers? We seek general comment on the 
scope of rate regulation in non-competitive markets.
    206. We propose above to evaluate the reasonableness of rates for 
packet-based BDS by benchmarking them against the incumbent LEC's TDM 
price for the most comparable level of service available, and over 
time, as TDM services are discontinued, benchmarking them against 
packet-based BDS rates established as being just and reasonable under 
this approach. For example, the anchor price for a particular market 
for a 5 Mbps Ethernet service would be the cost of the closest TDM 
equivalent offered by the incumbent LEC, which, for example, might be a 
DS1. This would not imply that the price of the Ethernet service should 
be the same as that of the nearest equivalent service, but only that 
the Commission would judge whether the 5 Mbps service price was just 
and reasonable in the light of the DS1 price. In this example, the 
Commission could determine that the 5 Mbps service price should not 
exceed the price of the DS1 multiplied by 3.3 (= 5 / 1.5), given the 
prices of higher bandwidth services usually fall more than 
proportionately with bandwidth, and that Ethernet services are 
considered to have a lower cost in supply than legacy TDM services. 
Would this anchor price approach be workable? If not--what method 
should the Commission utilize? If it is workable, would the proposed 
upper bound, that the ratio of the price of a packet-based BDS with a 
bandwidth

[[Page 36054]]

in excess of a regulated TDM service to the price of the TDM service 
should not exceed the ratio the packet-based BDS bandwidth to the TDM 
service bandwidth, be reasonable? What about for packet-based BDS for 
which the nearest comparable TDM service has a higher bandwidth?
    207. We seek comment on this proposal. Does it adequately cover 
situations in which an obvious comparable TDM service does not exist in 
a given market? We welcome comment on any alternative or additional 
ways for providers to address the situation where it is difficult to 
find a comparable TDM service offering on which to base the anchor 
price.
    208. In addition to the bandwidth of the service offering, should 
the rates differ based on the technology, service tier, geographic 
location, quality of service, or any other factors? How should these 
differences be accounted for in determining the ultimate rate ceilings 
that providers are permitted to charge at or below for their packet-
based BDS? How would any discounts commonly provided for TDM services 
influence the benchmark rates? Are there any other issues that should 
be accounted for that may affect the ultimate rates (either higher or 
lower) than the benchmark set by our anchor price? If so, what are 
they, and why should BDS providers be entitled to adjust their rates 
accordingly? How do we ensure that carriers are not permitted to 
increase prices above the benchmark by imposing unreasonable charges on 
related services, such as special construction?
    209. Our anchor or benchmark prices must adjust to changes in 
economic conditions and advancements in technology and productivity 
that impact the costs of providing services. Specifically, how would 
anchor prices be established once incumbent LECs have fully 
transitioned from TDM to packet-based services? To address this 
challenge, at least over the medium term, we propose to make permanent, 
after the interim rule expires, the current network transition 
requirement adopted in the Emerging Wireline Order which requires an 
ILEC discontinuing TDM service to offer a comparable packet service at 
comparable prices. We seek comment on that approach, and also on how 
best to establish an anchor or benchmark price for the potential 
situation where, due to increased bandwidth demands, sales of low 
bandwidth Ethernet services decline and have been replaced by broad 
demand for higher bandwidth BDS. Is this situation too speculative to 
consider regulatory approaches at this point? In particular, would our 
proposal to use as a benchmark any packet-based BDS with prices that 
were established under this approach work? Is this approach 
sufficiently technology-neutral, and if not, is there a more 
appropriate technology-neutral alternative? Would this approach over 
time be likely to become unmoored as TDM services are discontinued and 
as the minimum bandwidth of service offerings rise? What other factors 
would cause the Commission to reset anchor or benchmark pricing? Should 
anchor or benchmark pricing be revisited on a regular, recurring basis? 
In any case, is it likely there will be any need for regulation of such 
higher bandwidth services or are there reasons to believe that, as this 
transition takes place, such services will take on the characteristics 
of low bandwidth services, including a lack of competitive supply for 
such services?
    210. In the Enterprise Broadband Forbearance Orders, the Commission 
granted forbearance from the application of dominant carrier 
regulation, including tariffing, to certain of the petitioning 
incumbent LECs' broadband telecommunications services. The forbearance 
grants did not include all price cap incumbent LECs and only included 
certain IP services being offered at the time of the grants, resulting 
in some inconsistency regarding the tariffing of IP-services. Upon 
implementation of an anchor or benchmarking pricing methodology, we 
believe we should continue the forbearance from tariffing for all 
packet-based services currently subject to forbearance. In addition, we 
believe we should expand the forbearance to include all price cap 
incumbent LECs and all packet-based services. We believe that 
forbearance from tariffing will allow for greater use of commercial 
negotiations, which will facilitate innovative integrated service 
offerings designed to meet changing market conditions and will increase 
customers' ability to obtain service arrangements that are specifically 
tailored to their individualized needs. We seek comment on these views. 
Would this approach be consistent with the three-part test in section 
10(a) of the Act? What impact would a more comprehensive forbearance 
from tariffing have on the development of packet-based BDS? Would 
greater flexibility lead to more competitive pricing and offerings? How 
should the increased use of forbearance from tariffing requirements be 
implemented? Should the detariffing be mandatory or should carriers be 
permitted to file permissive tariffs? Should there be any 
grandfathering for services that are currently offered pursuant to 
tariff?
    211. The success of the proposed anchor or benchmarking pricing 
framework will rest in part on parties having access to generally 
available rates that comply with the anchor or benchmarking pricing 
requirements. Our primary goal under anchor or benchmarking pricing 
would be to create a framework of technology-neutral regulation that 
will facilitate the emergence of competition. We want to minimize 
burdens on market participants and not increase barriers to market 
entry. Tariffing has the potential to impose burdensome obligations and 
may prevent more competitive offerings from being introduced by 
limiting flexibility and the ability to individually tailor product 
offerings. The disclosure tariffs require, however, is a positive 
aspect in non-competitive areas because it can help combat unjust and 
unreasonable rates, terms, and conditions. Requiring BDS providers to 
disclose their rates, terms, and conditions publically would provide a 
clear check as to whether they are compliant with our anchor pricing 
requirements. Do these potential transparency benefits outweigh 
potential benefits to competition that would arise from forbearance 
from tariffing requirements? Are there other potential benefits to 
tariffs that we should consider? We now turn to a proposed public 
disclosure requirement that would offset any negative impact of 
forbearance from tariffing requirements.
    212. We believe we should require providers affected by our 
proposed anchor or benchmarking pricing regime to publicly disclose 
their generally available rates, terms, and conditions. The rates in 
these public disclosures should be consistent with the anchor or 
benchmarking pricing rules we adopt and should be available to 
customers on the carrier's Web site. We seek comment on these 
proposals. How should disclosure of rates be implemented? Is posting on 
a carrier's Web site sufficient?
    213. Currently, the Emerging Wireline Order's reasonably comparable 
standard helps ensure that providers are offering just and reasonable 
rates when they seek to discontinue certain legacy TDM services. 
Accordingly, we have temporary policies in place that should help ease 
any unjust and unreasonable rates in the Ethernet BDS market where 
legacy TDM services are discontinued. With this in mind, what is a 
reasonable timeline for implementing the new anchor or benchmarking 
pricing methodology? Should the timeline be

[[Page 36055]]

linked to the determinations under the Competitive Market Test? What 
types of changes and preparations would providers need to undertake to 
switch to the anchor or benchmark prices that would justify time for a 
transition? If a transition is needed, how long should it last to 
ensure that providers are ready and customers are provided relief in as 
timely a manner as possible?
    214. Some BDS providers and purchasers enter into contracts with 
terms that last for several years, especially in the context of 
receiving term discounts. We do not intend to intervene where 
sufficient material competitive effects keep rates at just and 
reasonable levels. However, should the Commission need to take 
additional action after adoption of our proposed anchor or benchmarking 
pricing regime, it is well-established that ``[u]nder the Sierra-Mobile 
doctrine, the Commission has the power to prescribe a change in 
contract rates when it finds them to be unlawful, and to modify other 
provisions of private contracts when necessary to serve the public 
interest.'' Such a need may arise, for example, when contract terms 
last long after adoption of our regime, which would prevent the rates 
from falling to just and reasonable level under our anchored prices. We 
note that an agency may modify or abrogate a valid contract ``only if 
it harms the public interest.'' Under what circumstances should we 
exercise our authority under the Sierra-Mobile doctrine to abrogate 
such contracts that remain inconsistent with the benchmarked rates 
under our anchor pricing system? In the context of the prices for BDS, 
under what, if any, circumstances would rates above the anchor or 
benchmark price justify contract abrogation?
    215. We do not envision that our anchor or benchmarking pricing 
methodology will impose any additional reporting requirements on 
carriers that offer the Ethernet services falling under these new 
anchor or benchmark rates. We have, however, proposed to require public 
disclosure of generally available terms and conditions. We invite 
commenters to explain whether any reporting requirements should be 
imposed to ensure that providers comply with our rules and that those 
rules serve the purposes for which they were designed. If reporting 
requirements should be implemented, what form should they take? Should 
we require certification that providers are in compliance? Are there 
any other requirements we should consider, and what are the costs and 
benefits of adopting additional requirements?
    216. We expect the Commission's enforcement process and declaratory 
ruling process will be critical components of our proposed anchor or 
benchmarking pricing methodology that will help ensure our new rules 
prevent providers from offering packet-based BDS at rates, terms, and 
conditions that are unjust and unreasonable. For example, interested 
parties may file complaints alleging that particular BDS providers' 
rates, terms, and conditions are unjust, unreasonable, or unjustly or 
unreasonably discriminatory. Based on these complaints, we would then 
evaluate the rates providers' charge to determine whether they are just 
and reasonable. This determination would be made based on the facts 
before us in each individual circumstance. In response to complaints, 
providers of Ethernet BDS could make arguments about why the services 
at issue cost more to provide than the TDM services to which we would 
look to benchmark prices. BDS providers, in addition, may seek 
declaratory rulings that the rates they charge for services subject to 
our anchor pricing system are just and reasonable. Such declaratory 
rulings will provide BDS providers certainty that they are in 
compliance with our new anchor or benchmarking pricing regime. We seek 
comment on whether the complaint and declaratory ruling processes would 
be reasonable processes to utilize in enforcing the proposed pricing 
methodology. Should we adopt a timeframe for resolving these complaints 
or declaratory rulings? Where the Commission concludes that the rates 
for BDS services were unjust and unreasonable, should providers be 
found liable for refunds? Are there better approaches to meeting these 
goals?
3. Wholesale Pricing
    217. Certain competitive LECs argue that business data services 
providers are charging them wholesale rates higher than the retail 
rates those same providers charge end user customers, and that such 
wholesale rates are unreasonable. These competitive LECs argue that 
when business data services providers price their wholesale services 
higher than their retail services, this can result ``in a price 
squeeze, preventing [competitors] from competing with the RBOCs for the 
sale of Ethernet service to end users.'' As evidence of this price 
squeeze, Windstream cites the fact that the ``ILECs' wholesale 
Guidebook rates bear little relationship to real retail prices. 
[REDACTED] which is below its wholesale Guidebook rate for an Ethernet 
at the same capacity level and term ($1,225) as well as its DS3 three-
year rate ($1,232.50).'' TDS also argues that the ``RBOCs were offering 
Ethernet service to wholesale customers such as TDS CLEC at a price 
higher than they sold the same service at retail, even though they 
avoided some significant costs when selling at wholesale.'' Windstream 
adds that, [REDACTED].
    218. These allegations raise concerns that are not novel. The 
Commission previously has recognized that incumbent LECs can 
``strategically manipulate the price of their direct competitors' 
wholesale inputs to prevent competition in the downstream retail 
market.'' While our proposed framework would move away from regulating 
providers based on their historical categorizations, we find it likely 
that providers in non-competitive markets have similar abilities and 
incentives to engage in such price manipulation. We believe that 
existing rules may apply to these concerns regarding wholesale pricing, 
and that addressing such concerns in our proposed framework may provide 
helpful guidance. We also note that the Verizon/INCOMPAS Joint Letter 
states that ``[t]here should be a relationship between wholesale and 
retail pricing'' for business data services.
    219. We seek proposals for and comment on adopting rules, under 
sections 201 and 202(a), ensuring just and reasonable wholesale rates 
that would be applicable to provider(s) in non-competitive markets. Are 
there other sources of authority that we should consider? How do we 
best ensure that we employ sources of authority that operate in a 
technology-neutral manner?
    220. We ask commenters to explain how frequently business data 
services providers charge wholesale customers rates that exceed the 
corresponding retail rate. Does the practice vary depending on 
bandwidth levels or other product features? Are there other examples of 
this practice, and if so where is such pricing taking place? Windstream 
argues that such practices violate ``Section 251(b)(1) as an 
`unreasonable or discriminatory condition[] or limitation[]' that 
results in a failure to provide carrier customers and end users 
services `subject to the same conditions,' and violates prohibitions of 
sections 201 and 202 against unjust and unreasonable as well as 
unreasonably discriminatory practices and charges.'' We invite 
commenters to explain whether charging higher rates for wholesale 
business data services than for comparable retail services would 
violate the Act and our rules. We also seek comment on the view that, 
because of

[[Page 36056]]

avoided costs or other factors, reasonable wholesale rates should be 
lower than retail. Do the services wholesale customers tend to purchase 
use different portions of the incumbent LECs' networks than the 
services retail customers purchase? Are there differences in the 
incumbent LECs' expenses for sales, marketing, customer service, 
technical support, and uncollectibles between wholesale and retail 
customers? If there are differences justifying a discount, how would we 
determine the just and reasonable discount that would apply to 
wholesale rates?
    221. We seek comment on what if any steps should be taken to ensure 
that customers have a basis for determining whether wholesale rates are 
just and reasonable under existing or proposed rules. For example, what 
steps are incumbent LECs currently taking to disclose the lowest retail 
price to potential customers under existing rules? Are such processes 
effective, or should we take additional measures to ensure that 
potential customers are aware of the lowest retail price? For example, 
should we require some form of public disclosure, such as on a 
carrier's Web site? Would such a disclosure put purchasers in a better 
position to know whether the rates they are charged are just and 
reasonable? Are there other requirements we should adopt regarding 
wholesale rates?
    222. Finally, we seek comment on the relationship between any 
requirement concerning wholesale rates and the rate regulation we have 
proposed for TDM and packet-based services in non-competitive markets. 
Should both approaches be used? One or the other? Or are there certain 
markets (by service, geography, customers or some combination of 
factors) for which the relationship between wholesale and retail rates 
is most salient?
4. Terms and Conditions
    223. As part of the technology neutral framework for regulating 
business data services, we propose prohibiting tariff and other 
contractual arrangements that condition the sale of business data 
services in a non-competitive market on the sale of such services in a 
competitive market. Such rules would be applied on a technology neutral 
basis. We seek comment on both the harms such agreements may impose and 
on implementation of any prohibition in light of the ongoing purchase 
agreements for such services that may contain tying arrangements. How 
do we balance current business expectations of customers and providers 
against the long term harms such arrangements may impose on the 
evolution of the competitive market for business data services? We 
address specifically three types of tying arrangements that have been 
identified in the record: IP migration provisions, typically found in 
incumbent LEC tariff pricing plans, provisions that leverage incumbent 
LEC tariff pricing plan penalty liability to induce sales of Ethernet 
and other services, and geographic tying. To what extent, if at all, 
would a prohibition on tying obviate the need to identify multi-
location customers, or any other class of customers, for purposes of 
the application of the Competitive Markets Test or alternative 
regulatory approach? Are there any other actions that the Commission 
should consider to address issues arising from customers who are 
purchasing a service that spans competitive and non-competitive 
markets?
    224. IP migration provisions are common among incumbent LEC pricing 
plans. These provisions allow customers to count Ethernet purchases 
toward fulfillment of their TDM commitments. We seek comment on whether 
we should prohibit such provisions as unreasonable tying arrangements. 
To what extent do such provisions encourage and facilitate incumbent 
LECs' leveraging of their dominance in the provision of TDM business 
data services to increase sales of their Ethernet services? How do the 
price cap incumbent LECs' market positions differ between the TDM and 
Ethernet business data services markets that are usually covered by the 
tariff containing such provisions? We seek comment on whether and, if 
so, to what extent incumbent LEC IP migration provisions advantage 
incumbent LECs competing for Ethernet sales. If IP migration provisions 
were eliminated from incumbent LEC tariff pricing plans, what would be 
the impact on customers of those plans? To what extent have customers 
relied on IP migration provisions to meet their commitments under TDM 
pricing plans? What volume of Ethernet purchases would be affected? If 
customers were unable to count such purchases toward fulfillment of 
their TDM commitments, what potential penalties would they incur? How 
would a prohibition, if adopted, best be implemented? Should customers 
be allowed a ``fresh look'' period to re-evaluate their tariff 
commitments or other transition period to allow customers to adapt 
their purchasing arrangements? Would this unreasonably deprive price 
cap incumbent LECs of the benefit of their bargain? How could such a 
prohibition best be applied in a technology-neutral manner? What 
implementation questions are raised by our proposal to eliminate 
tariffing? What additional factors should the Commission consider?
    225. As explained above, competitive LECs have more recently 
alleged incumbent LECs use tariff pricing plan penalty liability as 
leverage to induce competitive LECs to agree to large Ethernet 
purchases from the incumbent LECs. They claim that these practices 
represent unreasonable tying arrangements and could extend incumbent 
LECs' dominance of TDM business data services to IP services. We seek 
comment on prohibiting the use of provisions that offset penalty 
liability from tariff pricing plans in Ethernet commercial agreements. 
We note that such provisions appear in multiple commercial agreements 
submitted by the four large incumbent LECs in response to the Bureau's 
tariff investigation. How pervasive are these practices? What is their 
impact on competition for Ethernet services? What would be the impact 
of eliminating such provisions on buyers, sellers and the market 
generally? To what extent do such agreements contain change of law 
provisions in anticipation of changes such as this? We also seek 
comment on the use of other provisions in commercial agreements that 
tie the sale of Ethernet services to the sale of services by providers 
in non-competitive markets. Finally, if the Commission were to bar the 
use of such provisions in Ethernet commercial agreements, how should 
the Commission implement such a requirement? Should the Commission, as 
some competitive LECs have advocated, require commercial agreements 
that link purchases to tariffed penalties or other tariff provisions be 
filed with the Commission as a contract tariff? What should the 
parameters be of such a requirement? Would any other type of linkage 
require such agreement to be filed as a tariff? How could such a 
prohibition best be applied in a technology-neutral manner?
    226. First, we recognize that in the competition analysis above we 
find that the competitive triggers adopted in the Pricing Flexibility 
Order were poor measures of competition. In this FNPRM, however, we 
propose a new framework that includes a Competitive Market Test to 
determine areas that are competitive and non-competitive. The 
assertions and arguments concerning tying across markets subject to 
different levels of market concentration remain relevant in the new 
regulatory framework. We seek additional comment on whether and to what 
extent

[[Page 36057]]

we should be concerned geographic tying could take place under the 
proposed technology-neutral framework and, if so, what remedial action 
we should take.
    227. While prohibiting such tying arrangements would minimize 
potential harm, it would also eliminate the ability of providers and 
purchasers to link TDM purchases and Ethernet purchases in any way, 
including the use of IP migration provisions in TDM tariffed services 
and the use of credits to offset penalty liability conditioned on the 
purchase of Ethernet service from the provider. It is clear from the 
record that linking DSn purchases and Ethernet purchases involves 
material short term benefits for purchasers as they attempt to manage 
the effects of the decline in TDM services and the transition to IP 
services. Some competitive LECs advocate in favor of such arrangements 
and incumbent LECs generally defend their reasonableness. Considering 
the benefits of these arrangements may be particularly relevant given 
the current decline in TDM sales and the consequent penalty liabilities 
that decline involves.
    228. The Commission has established as one of its priorities 
facilitating technology transitions. While we share the concerns of 
commenters that incumbent LECs may have the incentive and ability to 
leverage their market position in TDM services to increase their 
Ethernet sales, we also recognize that addressing the harms of tying 
TDM BDS to Ethernet services may require a more nuanced approach to 
reflect the implications of such a prohibition on the technology 
transition. AT&T states that such restrictions would ``artificially 
discourage the replacement of TDM services with Ethernet services.'' We 
seek comment on approaches that would encourage the transition to 
Ethernet while limiting an incumbent LEC's ability to leverage its 
market position in the provision of TDM BDS to gain a similar position 
in the provision of Ethernet offerings. Are there other ways to provide 
both parties with the benefits from these arrangements while limiting 
the harms to competition in the market for business data services? We 
also seek comment on ways to allow the benefits of such arrangements 
during a defined period of time to facilitate the industry's transition 
to IP services.
    229. Finally, we seek comment on how we should implement any 
prohibition on tying arrangements the Commission may adopt. What effect 
would adopting such a prohibition have on existing tariff and 
contractual arrangements in tariffs and commercial agreements? Should 
the Commission consider either grandfathering existing agreements or 
providing a transition period to allow parties to adapt their 
agreements to reflect such a prohibition? Should there be a ``fresh'' 
look period to allow customers to reallocate their purchases in light 
of the modifications or prohibitions we propose to tying arrangements?
    230. Percentage commitments are requirements included in some 
incumbent LEC tariff pricing plans that require customers to commit to 
buy, over the term of the plan, a high percentage of the amount of 
services they elect to purchase when initiating or renewing purchases 
through a tariff pricing plan. Given the framework we adopted in the 
Tariff Investigation Order that addresses the special access 
marketplace by focusing on penalties, we declined to take action on 
percentage commitments in that Order. We seek comment on whether this 
approach is sufficient to ensure that percentage commitments will not 
harm competition, impede investment and deployment of facilities-based 
competitive networks, or hinder the transition to IP-based business 
data services.
    231. We also seek to broaden our inquiry into minimum percentage 
commitments in this FNPRM and seek comment on the impact percentage 
commitments have on the provision of TDM based business data services. 
With regard to the TDM based market, how prevalent is the use of such 
commitments in tariff pricing plans and contract tariffs beyond those 
investigated in the Bureau's tariff investigation? What impact do such 
commitments have systemically on the market for TDM based business data 
services? How do they vary? Competitive LECs claim that such 
commitments tend to ``lock up'' or foreclose significant portions of 
the market for TDM based business data services, impairing competition 
and inhibiting technology transition. Is that still the case? Incumbent 
LECs assert in the tariff investigation that the decline in TDM based 
business data services market effectively rendered the competitive 
LECs' lock up arguments moot. We seek comment on whether that is in 
fact the case or whether percentage commitments operate differently in 
a declining market. What is their effect in a declining TDM market? 
What remedies would be appropriate to ensure that percentage 
commitments are reasonable and allow incumbent LECs the flexibility to 
manage their businesses while also minimizing the potential harms 
associated with ``locking in'' competitive LEC customers? Should the 
Commission consider prohibiting the use of percentage commitments, 
limiting the level at which the commitment is set, or taking some other 
remedial step to ensure they do not negatively impact the market?
    232. We also seek comment on the use of percentage commitments in 
commercial agreements for the sale of packet based business data 
services such as Ethernet. Competitive LECs cite the incumbent LECs' 
use of such requirements in Ethernet commercial agreements and claim 
incumbent LECs are attempting to lock up or control their Ethernet 
purchases. Competitive LECs cite in particular the fact that their 
Ethernet commercial agreements with incumbent LECs typically involve 
large scale purchases and involve the sale of other telecommunications 
services such as mobile wireless and long distance service. How 
commonly are percentage commitments used in Ethernet commercial 
agreements and at what percentage levels are they set? How do they 
impact the market for Ethernet business data services? Should the fact 
that commercial agreements can involve such large scale purchases 
impact our analysis? If the Commission found percentage commitments 
were impacting the Ethernet market, what remedies should the Commission 
consider adopting? To the extent commenters suggest the adoption of 
remedies, they should also address how such remedies should be 
implemented.
    233. Term commitments require customers that participate in a term 
pricing plan to commit to continue to make those purchases for a set 
term of months or years. Term commitments in tariff pricing plans vary 
considerably from one year to as long as ten years. We declined to 
address term commitments in the Tariff Investigation Order, instead 
addressing competitive LECs' concerns by prohibiting penalties that 
exceed the incumbent LECs' expectation damages. We seek comment on 
whether action on term commitments is necessary to ensure that they 
will not harm competition, impede investment and deployment of 
facilities-based competitive networks, or hinder the transition to IP-
based business data services. We also seek to broaden our inquiry into 
term commitments in this FNPRM and seek comment on the impact term 
commitments have on the provision of TDM based business data services 
generally. How prevalent is the use of such commitments in tariff 
pricing plans and contract tariffs beyond those investigated in the 
Bureau's tariff investigation? What impact do such

[[Page 36058]]

commitments have systemically on the market for TDM based business data 
services? In the tariff investigation, the incumbent LECs submitted 
data that showed that the average term lengths for agreements under the 
plans at issue was considerably longer than the term lengths typically 
reported by competitive LECs. It also showed that a very high 
percentage of all sales in the plans at issue--over 97 percent--occur 
in plans longer than three years. Are longer term agreements in any way 
evidence of a seller's market power? Do incumbent LEC term plans that 
are longer than most competitive LEC plans tend to inhibit the 
technology transition or otherwise impact competition in the TDM based 
market? What remedies would be appropriate to ensure that term 
commitments are reasonable and allow incumbent LECs the flexibility to 
manage their businesses while also minimizing the potential harms 
associated with the alleged ``locking in'' competitive providers?
    234. We also seek comment on the use of term commitments in 
commercial agreements for the sale of IP based business data services 
such as Ethernet. How do term commitments in Ethernet commercial 
agreements compare with those in TDM tariff pricing plans and contract 
tariffs? To what extent do term commitments impact the Ethernet market? 
How does the length of term commitments offered by competitive 
providers in Ethernet commercial agreements compare with the length of 
term commitments offered by incumbent LECs? What remedies, if any, 
should the Commission consider adopting either to limit or condition 
term commitments in Ethernet commercial agreements? To the extent 
commenters suggest the adoption of remedies, they should also address 
how such remedies should be implemented. To the extent that the 
Commission should consider restrictions on term commitments, should 
such restrictions apply solely to non-competitive markets or more 
broadly to all markets?
    235. Under upper percentage thresholds, if a buyer's purchases 
increase more than a set percentage above their initial volume 
commitment during the term of the plan, the buyer is required either to 
commit to an increased purchase volume or to pay an overage penalty. We 
did not address upper percentage thresholds in the Tariff Investigation 
Order, but instead seek comment on whether we should adopt a broad 
prohibition on such requirements in non-competitive areas.
    236. We seek comment on whether the use of upper percentage 
thresholds in tariffs and contract tariffs generally is an unreasonable 
practice. As discussed above, in both the Tariff Investigation Order 
and earlier in this FNPRM, the price cap LECs' all-or-nothing 
requirements often served to restrict customer options and inhibit the 
ability of competitive LEC customers to plan for their network 
evolution. Such unreasonable restrictions also may have contributed to 
the asserted lock in effect of upper percentage thresholds. We seek 
comment on whether the price cap LECs' arguments about their potential 
risk exposure when customers add large amounts of circuits to their 
plans with portability are more persuasive if the customer has the 
choice to place its demand in a term plan without portability when 
adding new circuits to its agreements with the price cap LEC. We seek 
comment on whether upper percentage thresholds are unreasonable and 
should be prohibited for providers of TDM business data services in 
non-competitive markets. Under what circumstances might upper 
percentage provisions be found reasonable? In the record, incumbents 
LECs argued they incurred risks and costs when an increase in purchases 
reached a certain point; however, they failed to provide any financial 
information on what these costs are or how they are related to actual 
upper percentages or overage penalties that are used. We seek comment 
on what showing a carrier should be required to make if it supports 
such a provision. Will removing the all-or-nothing requirements from 
the providers' tariffs provide the flexibility customers need to make 
different choices if they do not want to increase their spend under an 
upper percentage threshold? If we were to adopt a prohibition on upper 
percentage thresholds, what is an appropriate transition period for 
phasing out these provisions?
    237. We seek comment on the extent to which commercial agreements 
for the provision of Ethernet-based service assess upper percentage 
thresholds. We also seek comment on whether these provisions are found 
elsewhere in the telecommunications industry or offered by other 
carriers other than in incumbent LEC tariffs. Are upper percentage 
thresholds in Ethernet commercial agreements unreasonable and, if so, 
should the Commission prohibit them in this context as well? Should 
such a prohibition apply solely to non-competitive markets or more 
broadly to all markets?
    238. Overage penalties effectively function as the enforcement 
mechanism for the upper volume thresholds addressed in the previous 
section of this FNPRM. We did not address overage penalties in the 
Tariff Investigation Order, but instead seek further comment here. We 
seek comment on the use of overage penalties to enforce upper 
percentage thresholds in TDM based tariffs and contract tariffs. If the 
Commission does not eliminate upper percentage thresholds, we seek 
comment on the circumstances under which the Commission should find 
overage penalties to be unreasonable. For example, in the Tariff 
Investigation Order, we determined that shortfall penalties that 
exceeded the seller's revenue expectations were unreasonable. We seek 
comment on whether this is an appropriate approach to assessing overage 
penalties as well. How would such a measure work in the case of an 
overage? How should the Commission determine a seller's revenue 
expectations in an overage situation? Are there alternative approaches 
to determining the outer bound of reasonableness for overage penalties? 
Commenters advocating for the use of a different measure of reasonable 
overage penalties should explain their reasons for not applying the 
standard used to assess shortfall penalties and identify an alternative 
standard using examples. What is the best way to structure overage 
penalties to ensure that the fees reasonably compensate providers while 
not excessively penalizing purchasers?
    239. We also seek comment on whether and to what extent overage 
penalties are contained in commercial agreements for the provision of 
Ethernet business data services. Is it reasonable to include such 
penalties in agreements for Ethernet business data services in non-
competitive areas? If so, how do these contracts calculate these 
penalties? If the Commission decides to eliminate overage penalties or 
impose limitations on them, how should it implement those decisions? 
Would there be any need for the Commission to consider adopting any 
transitional rules to facilitate implementation? Should such a 
prohibition apply solely to non-competitive markets or more broadly to 
all markets?
    240. Competitive LECs have asserted certain provisions in incumbent 
LEC tariff pricing plans that apply upon expiration of a purchaser's 
agreement to buy services tend to lock purchasers into re-committing to 
purchase under those plans under essentially the same prices, terms and 
conditions of their previous agreements. These provisions include 
requirements for automatic renewal of subscription agreements under the 
same terms and conditions as a previous agreement and requirements that 
force buyers to pay higher,

[[Page 36059]]

undiscounted month-to-month rates immediately upon expiration of an 
agreement. Competitive LECs claim these provisions impair competition 
and inhibit technology transitions. We seek comment on the 
reasonableness of such provisions in tariffs and commercial agreements 
in areas where competition is not present. We also seek comment on 
existing so-called ``evergreen'' provisions in some tariff pricing 
plans that allow customers to extend service under the same prices, 
terms and conditions for certain periods of time following the 
expiration of an agreement, including whether we should require such 
provisions in tariffs and commercial agreements in non-competitive 
markets.
    241. Incumbent LEC tariff pricing plans commonly contain provisions 
related to the expiration of a purchaser's agreement. It is inherent in 
the relatively long-term nature of the need for and provision of 
business data services that parties generally must renegotiate their 
agreements at the expiration of an agreement in order to continue the 
service arrangement. Parties typically negotiate the terms and 
conditions of a subsequent agreement as they approach the end of the 
term of an existing agreement. The provisions we seek comment on--
automatic renewals and requirements to revert to undiscounted, month to 
month rates--may impose unreasonable constraints on purchasers whose 
agreements have expired in light of the long term nature of broadband 
data services agreements and the substantial logistics required to move 
purchases to other providers or construct facilities to self-provision.
    242. Provisions requiring automatic renewal of agreements are 
included in certain incumbent LEC tariff pricing plans. For example, 
the Commitment Discount Plan (CDP) in Verizon Tariff No. 1 states 
``[i]f the CDP Customer does not notify the Telephone Company of its 
choice during the two (2) month extension, a new CDP will begin based 
on the previously effective commitment period.'' We propose to prohibit 
automatic renewal provisions in tariff pricing plans and contract 
tariffs for the provision of TDM based broadband data services in non-
competitive areas as an unreasonable constraint on purchasers' ability 
to modify their commitments or seek alternative providers to supply 
their needs. We seek comment on whether automatic renewal provisions 
are unreasonable. We also seek comment on how common they are and how 
frequently they are invoked in practice. What is the practical impact 
of such provisions on purchasers' options at the expiration of an 
agreement? How do they impact the dynamics between the parties as they 
renegotiate their arrangements? How do they impact the flexibility and 
the timeframe customers have to negotiate or to develop alternative 
sources of supply? Do competitive LECs also impose automatic renewal 
provisions in their business data service sales agreements? We also 
seek comment on whether such provisions are used in commercial 
agreements for Ethernet business data services? Additionally, are such 
provision included in agreements for managed services sold to retail 
end users? Finally, we seek comment on whether such a prohibition 
should apply solely to non-competitive markets or more broadly to all 
markets?
    243. Given the comments in the record, we are particularly 
concerned that incumbent providers have the incentive and ability to 
use the expiration of a contract as an opportunity to increase charges 
for ongoing service and use that as leverage to induce customers to 
recommit to their pricing plans. In areas without sufficient 
competition, these provisions have the potential to put increased 
pressure on customers to renew contracts with incumbent providers, even 
if the terms are unfavorable, to avoid paying higher rates for an 
extended period of time. We therefore believe that any provision that 
enables a provider to increase its rates upon the expiration of either 
a tariff or commercial agreement for TDM or Ethernet-based service in 
areas without sufficient competition is unreasonable under section 201 
of the Act.
    244. We seek comment on our view and on the following additional 
questions. How do such provisions constrain purchasers' options at the 
end of an agreement? Could the reversion to month to month rates be 
understood as, in effect, a penalty enforcing the re-subscription to a 
subsequent agreement? How reasonable is it to assess month to month 
rates, after a purchaser has already fulfilled its commitments under a 
previous agreement which presumably compensated the incumbent LEC for 
the circuits involved? Do competitive LECs also impose such a 
requirement at the expiration of their sales agreements? If we were to 
require the modification of such provisions, should the Commission 
determine that evergreen provisions are a more reasonable alternative?
    245. We note that incumbent LECs argue that one of the benefits to 
a provider of offering term discount plans is that the plans allow it 
``to recover its costs over the life of the plan.'' If the life of the 
plan has ended, and the incumbent LEC has presumably recovered its 
costs apart from on-going maintenance costs, is there any justification 
for allowing the incumbent LEC to increase the price and charge higher 
rates upon termination? How do these higher rates compare to the 
shortfall penalties that customers pay if they terminate their plans 
early? We also seek comment on whether an automatic reversion to 
undiscounted rates is a feature common to IP based Ethernet commercial 
agreements. To the extent such provisions appear in Ethernet commercial 
agreements, should the Commission consider prohibiting or otherwise 
restricting them? Finally, should such any such prohibition or 
restriction apply solely to non-competitive markets or more broadly to 
all markets?
    246. We also seek comment on so-called ``evergreen'' provisions 
that allow a purchaser to continue to purchase services under the same 
terms and conditions following the expiration of an agreement as it had 
under the expired agreement. We seek comment on whether the Commission 
should require the inclusion of evergreen provisions in tariff pricing 
plans and commercial agreements for business data services in non-
competitive markets. Would requiring carriers to provide evergreen 
status on a monthly basis following the expiration of an agreement 
provide purchasers flexibility in assessing their options or 
transitioning their purchases to IP based services? Would it be 
reasonable to impose such a requirement on providers in markets without 
sufficient competition, which would be assured additional purchases of 
their services under terms they have already agreed to?
    247. We also seek comment on whether Ethernet commercial agreements 
commonly include evergreen provisions to ensure continued service at 
the same rates, terms and conditions following the expiration of an 
agreement. Are such provisions more common in Ethernet agreements than 
in TDM pricing plans? With regard to applying this framework to the 
provision of Ethernet-based business data service, do parties face the 
same constraints when negotiating agreements for TDM services and 
Ethernet-based services after a contract's expiration? Are there 
special terms and conditions that only apply when parties are 
negotiating a move from a provider's TDM services to a provider's 
Ethernet-based services and, if so, what impact do those terms and 
conditions have on the provision of Ethernet services? We also seek 
comment on whether a

[[Page 36060]]

mandate for evergreen provisions should apply solely to non-competitive 
markets or more broadly to all markets.
    248. We seek comment on whether required evergreen status should be 
time limited. If so, what would be a reasonable period of time that 
would provide flexibility to purchasers but also not unreasonably 
extend uncertainty for providers in non-competitive areas? Should 
customers be allowed to pay monthly rates equal to those under the 
original agreement for up to one year past the contract's expiration? 
Would this provide sufficient time to account for the average length of 
contract negotiations and to protect the interests of both parties? Do 
contract renewal negotiations typically extend beyond one year, and if 
they do, are there examples of providers that are willing to continue 
offering rates at the same level as those in the expired deal? We seek 
comment on this time period and whether a shorter or longer term would 
be more appropriate.

G. Alternative Approaches To Reforming BDS That Fulfill Core Goals

    249. In addition to seeking comment on the new regulatory framework 
outlined above, we invite commenters to suggest alternative frameworks 
to apply to BDS. Are there other regulatory frameworks that would 
minimize regulation where competition is sufficient to constrain BDS 
rates, terms, and conditions and focus regulatory action on 
circumstances in which sufficient competition is lacking? All proposals 
should address the commercial practicalities and administrative 
feasibility of applying the alternative framework and explain how it 
furthers the Commission's core goals of promoting investment, 
innovation, competition, and protecting customers in the BDS 
marketplace.
    250. In Part V.D.2 above, we invite comment a Competitive Market 
Test that focuses on product markets, customer classes, business 
density, and the number of facilities-based providers in a given 
geographic area, such as the census block. In this section, we seek 
comment on alternative approaches and criteria for determining whether 
or not a market is competitive. Commenters proposing such an 
alternative should explain how it will further the Commission's core 
goals in application and address administrative feasibility.
    251. In Part V.D.5 we ask for comment as to which provider(s) 
specific rules in a non-competitive market should apply and how the 
Commission should determine whether to apply specific regulation to a 
particular provider, including the use of market shares, in non-
competitive markets. In this section, we seek alternative proposals 
that would ensure that the Commission limits regulation to that which 
is necessary to ensure just and reasonable rates, terms and conditions 
within a non-competitive market while still encouraging new market 
entrants. Should we use a test of market power and, if so, how should 
market power be defined and how would such a market-power test be 
applied in a way that minimizes burdens on providers and the 
Commission? As to the scope of regulation, should we focus on the 
conditions in non-competitive markets and consider regulations that 
would apply generally or should we apply specific rules only to certain 
entrants, and if so, which ones? And how can we maintain and/or create 
incentives for new entry? How should we consider the potential presence 
of barriers to entry and policies that might serve to lower artificial 
barriers to entry? In general, what is the best form of regulation of a 
non-competitive market? As in Part V.D.5, we ask commenters to consider 
the impact of alternative new regulatory frameworks on investment and 
innovation.
    252. For any proposed frameworks submitted in response to this 
section, commenters should explain how any triggers would be applied, 
which provider(s) would be subject to regulation and how such 
regulation would be implemented and enforced. For example, would there 
be tariffs or another mechanism? How would any alternative market test 
be applied, and would there be a process for challenges? Commenters 
submitting proposals they believe are simpler than the framework 
proposed above should explain why and how the administration would 
differ from the alternative proposals in this FNPRM.
    253. While we have focused in the immediately preceding paragraphs 
on alternative tests of market competitiveness, we also encourage 
commenters to consider and suggest higher-level alternative regulatory 
regimes that would further the Commission's core goals.

H. Deregulation of the Pricing Process

    254. In this section, we consider modifications to existing pricing 
mechanisms to implement the technology neutral regulatory framework for 
business data services proposed above. The proposed actions are 
intended to remove significant regulatory burdens, maintain price cap 
constraints where necessary to ensure just and reasonable rates, and 
create incentives to facilitate the technology transitions. First, we 
propose to replace the current pricing flexibility regime with rules 
based on the results of the Competitive Market Test. Under such rules, 
we would move competitive services out of price caps and move non-
competitive services into a structure that provides the protections of 
price caps while allowing providers to negotiate individual contracts. 
Second, we propose a path to detariff TDM business data services while 
maintaining price caps on a detariffed basis. Finally, we seek comment 
on a voluntary mechanism that would provide carriers with the 
flexibility to adjust price cap rates for TDM BDS when replacement 
packet-based business data services are available.
    255. We recognize that in this FNPRM we propose a number of changes 
to our interrelated regulatory rules. Specifically, in addition to the 
proposals in this section, we propose adopting a price cap productivity 
factor and relying on price cap TDM rates as benchmarks for non-
competitive IP rates. We seek comment on any impacts that various 
proposals may have on each other.
1. Replacement of Pricing Flexibility Rules
    256. In this section, we seek comment on the rules that will apply 
to TDM services currently subject to regulation under price caps as 
well as the pricing flexibility rules under the new regulatory 
framework. Here, we propose and seek comment on changes to the existing 
pricing flexibility rules.
    257. We propose to treat competitive TDM and packet-based BDS on a 
technology neutral basis and propose further to remove TDM BDS 
determined to be competitive under the Competitive Market Test from 
price cap regulation and apply the competitive regulatory framework 
proposed above to these services. We seek comment on these proposals. 
Are there any reasons to treat competitive TDM differently from other 
competitive business data services? Are there implementation concerns 
with regulating these competitive services in this manner? Why or why 
not? If so, we seek proposals for addressing such concerns. If we adopt 
these proposals, should we require mandatory detariffing?
    258. The Competitive Market Test will likely find some business 
data services are non-competitive and draw boundaries for such findings 
on a level more granular than an MSA, the current pricing flexibility 
boundary. Accordingly, it is possible that such non-competitive 
business data services may currently be regulated under price

[[Page 36061]]

caps, Phase I pricing flexibility or Phase II pricing flexibility 
rules. Regardless of their current status, a non-competitive finding is 
a determination that we cannot rely on competition to constrain rates, 
terms and conditions to just and reasonable levels. We thus would need 
to have rules in place to constrain rates to just and reasonable 
levels. Our analysis of the application of the pricing flexibility 
rules indicates that customers have often benefited from individually 
negotiated contracts, and we believe that allowing such contracts will 
facilitate the development of a competitive market where possible. In 
order to constrain rates to just and reasonable levels and preserve the 
benefit of negotiated contracts where available, we propose to subject 
non-competitive TDM business data services, regardless of the currently 
applicable price cap and pricing flexibility rules, to a single, light-
handed price cap regime that protects customers while providing 
flexibility to facilitate competition as it evolves. Specifically, we 
propose to apply the substance of the current Phase I pricing 
flexibility requirements to TDM business data services offered in non-
competitive areas and seek comment on this proposal. Do parties support 
this proposal, why or why not? What concerns, administrative or 
otherwise, are raised by this proposal? Commenters asserting such 
services should be treated differently based on their current 
regulatory status should explain why that is consistent with the 
overall framework we propose in this order.
    259. We seek comment on what changes to our current Phase I pricing 
flexibility rules are necessary to apply their substance to non-
competitive TDM business data services. We propose to base our 
application of those rules and any necessary rule modifications on our 
authority under sections 201 and 202 of the Act. We seek comment on 
this proposal.

I. Additional Regulatory Incentives for Price Cap Carriers

    260. We seek comment on potential regulatory forbearance and 
flexibility that will permit price cap incumbent LECs to continue to 
facilitate the technology transition, and to have increased incentives 
to develop innovative products and services.
    261. We believe that implementation of our proposal for broadband 
data services offered in competitive markets would require that we 
forbear from the tariffing requirements in section 203 of the Act to 
the extent a BDS provider is currently subject to those requirements. 
We seek comment on this view and on the benefits of detariffing to 
customers and carriers in a competitive area. We also seek comment on 
whether the Commission should forbear from sections 204 and 205 of the 
Act. We propose forbearing to the extent necessary to implement our 
proposed framework and to condition the forbearance on the continuing 
existence of a competitive market under the Competitive Market Test. We 
expressly contemplate that should a market become non-competitive, then 
all of the regulation of non-competitive markets would apply, including 
price cap regulation. We invite comment on these proposals and on 
whether such conditional forbearance would meet the statutory 
forbearance criteria.
    262. We propose the Commission make a similar finding for BDS in 
non-competitive areas, including TDM services under the section 10(a) 
standard, allowing forbearance from the tariffing requirements of 
section 203 of the Act, but continuing to require price cap regulation. 
We seek comment on this proposal, including the costs and benefits of 
tariffing in a non-competitive market or a market in which competition 
may be evolving over time. How would such a regulatory approach work to 
meet the goals of our proposed framework? How should the Commission 
consider the effect of any such forbearance on competition as set forth 
in section 10(b)? If the Commission decides to forbear from section 
203, should it require mandatory detariffing as it did with interstate 
interexchange services or should it allow permissive tariffing? What 
would be the benefits of either approach? Should the Commission 
consider forbearing from sections 204 and 205 for these services? Would 
relief from tariffing and other provisions meet the statutory 
forbearance criteria? Would such relief provide additional incentives 
for innovation and development of new services? How would such relief 
benefit consumers and businesses? If providers continue to file similar 
information with the Commission as a tariff, we ask whether this 
impacts commenters' views on the benefits and burdens of such approach.
    263. While we find above that TDM and packet-based BDS are in the 
same product market, these services are not identical and we also 
recognize significant switching costs in the market. We believe our 
regulatory framework can and should take account of legitimate 
differences in the provision of these services. We seek comment on how 
to do so and how to harmonize our goal of technological neutrality with 
the application of price cap regulation? Are there other methods of 
regulation that we should consider applying to these services or 
packet-based BDS to achieve our goals?
    264. We note that without tariff filings, carriers would not 
receive the protection pursuant to section 204(a) of the Act of deemed 
lawful status for filing tariffs on a streamlined basis. This status 
immunizes carriers from damages liability for the periods in which the 
streamlined tariffs are in effect. We seek comment on how removing this 
protection would impact carriers and customers and the remedies 
available for rate challenges, including potential retroactive refunds. 
Should we provide carriers the option of permissive tariffing that 
would allow incumbent LECs to retain the ``deemed lawful'' protections 
of section 204(a) if the carrier should choose that option?
    265. How, if at all, should the Commission modify its price cap 
filing rules in light of any forbearance from tariffing requirements? 
Under current rules, price cap incumbent LECs are required to submit a 
yearly filing to demonstrate that the carrier's API does not exceed its 
PCI. Would any additional rules be necessary to provide for adding new 
services? We seek comment on how any such filing should occur. Should 
the Commission maintain the yearly annual access charge filing 
requirement for this showing? Are there other alternatives that would 
ensure compliance with the price cap rules? Without tariff filings, how 
should the Commission best ensure that price cap incumbent LECs are 
offering rates consistent with their price cap filings? How should the 
Commission address a violation? Absent tariff filings, how would the 
Commission examine the newly filed rates or require the price cap 
incumbent LEC to modify its rates, to the extent appropriate, in the 
event of a violation? Would the Commission need to take formal action 
against the carrier and, if so, what form would that take? Are there 
other means for the Commission to review changes to a carrier's rates 
without the tariff filing requirement? Would the public disclosure 
requirement discussed below be sufficient?
    266. What additional rules or procedures would be necessary to 
address rate or discount plan changes that would have resulted in a 
tariff filing absent forbearance? For example, under our current rules, 
a price cap LEC that grandfathers or otherwise discontinues a rate 
discount plan would be reducing the rate options for that service, 
which would constitute a rate restructure pursuant to section 61.49(e) 
of our rules, requiring the carrier to file supporting

[[Page 36062]]

materials sufficient to make the adjustments to each affected API and 
SBI. Such a change may or may not impact the price cap, depending on 
the impact such a change will have on customer choices going forward. 
For example, if the price cap LEC grandfathers a service that has no 
customers, it potentially will have no impact on the carrier's API or 
SBI. The same is not true when a carrier grandfathers a pricing plan 
with substantial customers. We seek comment on what, if any, new 
requirements are necessary to ensure effective operation of the price 
cap as carriers begin to discontinue various discount plans.
    267. Even if the Commission decides to forbear from tariffing 
requirements, we understand the importance of transparency for the 
price cap incumbent LEC's TDM rates. Accordingly, we propose to require 
price cap incumbent LECs to publicly disclose the rates, terms, and 
conditions for services currently subject to tariffing requirements. We 
seek comment on this proposal. How should disclosure of rates be 
implemented? Is posting on a carrier's Web site sufficient? Should the 
public disclosure requirement be limited to non-competitive markets?
    268. As the technology transition continues to progress, one option 
for promoting an efficient move from TDM services to packet-based 
business data services is to allow BDS providers, on an entirely 
voluntary basis, the option to place some or all of their packet-based 
services under price cap regulation by including them in the special 
access basket. Moving these services into the basket would create 
flexibility for the provider to make rate adjustments to services 
within the confines of the cap. This would allow carriers flexibility 
to set prices for both packet-based services and TDM services based on 
the relative cost of and demand for these services, as would be the 
case in a competitive market. At the same time, the price cap would 
minimize the carriers' ability to charge non-competitive prices. We 
seek comment on this voluntary option. If the Commission were to permit 
this option, how should it be implemented? Would it incentivize 
technology transitions? Should packet-based services be placed in a 
separate service category and/or subcategories within the special 
access basket? If so, should pricing flexibility within the packet-
based service category and/or subcategories be limited to an annual 
increase of five percent, relative to the percentage change in the PCI, 
the same percentage that applies to existing special access service 
categories and subcategories? Should providers be able to utilize this 
option at any time, or should there be a window or multiple windows of 
opportunity for when it would be available?

J. Forbearance Grants and Deemed Grants

1. Verizon Deemed Grant
    269. As discussed above, in 2006 Verizon's Enterprise Broadband 
Forbearance Petition was deemed granted by operation of law after the 
Commission did not act on that petition within the statutory time 
limit. Consistent with Enterprise Broadband Forbearance Orders and with 
the Commission's unanimous commitment to apply the AT&T Forbearance 
Order to Verizon, we propose to reverse the Verizon deemed grant to the 
extent it encompasses forbearance relief not granted other carriers. We 
additionally propose that this decision would extend to Hawaiian Tel 
and to the legacy Verizon portions of FairPoint and Frontier, which 
were ``Verizon telephone companies'' at the time of the deemed grant. 
We invite comment on these proposals and ask whether such action would 
be consistent with the statutory forbearance criteria.
2. Other Forbearance Actions
    270. In this FNPRM, we propose a number of interrelated changes to 
our regulation of business data services, many of which would allow or 
require carriers to detariff business data services that are presently 
provided subject to the tariffing requirements in section 203. 
Implementing those proposed changes would require that we expand the 
prior forbearance from section 203 to additional business data services 
providers and additional business data services. We believe we should 
expand that forbearance to the extent necessary to implement any 
regulatory changes we adopt in this proceeding. We invite comment on 
this view and on whether such forbearance would be consistent with the 
statutory forbearance criteria.
3. Legal Standard and Procedure
    271. We believe that we have statutory authority to reverse a 
forbearance grant and a forbearance ``deemed grant'' by the failure of 
the Commission to act within the deadline of section 10(c). As the D.C. 
Circuit has observed, the Commission's forbearance actions--and the 
forbearance relief ``deemed granted'' to Verizon--are ``not chiseled in 
marble.'' Instead, the Commission may ``reassess'' that forbearance as 
it ``reasonably see[s] fit based on changes in market conditions, 
technical, capabilities, or policy approaches to regulation'' of 
business data services. We invite comment on the legal standard we 
would need to meet to reverse forbearance that has been deemed granted. 
Where, as here, Verizon does not oppose reversal of its deemed granted 
forbearance to place it on the same footing with other carriers as part 
of our proposed new framework, we believe that this standard is met. We 
invite comment on this analysis.
    272. While we choose to address potential forbearance reversal in 
this rulemaking proceeding, we do not here consider whether rulemaking 
procedures are required for a reversal of forbearance. Nor are we, in 
taking this procedural approach here, classifying forbearance 
proceedings as necessarily requiring rulemaking procedures. The 
Commission has previously declined to classify forbearance as either 
adjudication or rulemaking. Rather, we find only that it is appropriate 
to address the proposed reversal here through a rulemaking proceeding.

K. Monitoring the Marketplace Going Forward

    273. To update the analysis of the BDS industry going forward, we 
propose to conduct a periodic collection of data every three years, 
starting with the collection of year-end 2017 data. We seek comment on 
this proposal and alternative mechanisms that would assure our market 
definitions and competition analysis are updated on a regular basis.
1. Mandatory Periodic Collection
    274. We propose to require BDS providers to submit information 
similar to what was collected previously for 2013, starting in 2018 and 
submitting 2017 data. In light of our experience with the data 
collection and analysis conducted, significantly paring down the number 
of providers required to report and the amount of reported information 
to those data categories most relevant to our analysis is appropriate. 
As with the earlier collection, we plan to focus on obtaining data on 
market structure, pricing, demand, and responses to competitive 
pressures. We propose, however, to eliminate many of the questions 
directed at providers related to terms and conditions, coverage 
footprints for ``best efforts'' services, marketing materials, 
disconnection policies, and short term and long-range promotional and 
advertising strategies. Our prior experience shows that the burden on 
filers of collecting such information going forward is not justified by 
the corresponding benefits of having this information for our core

[[Page 36063]]

market analysis. We do not underestimate the importance of best efforts 
service, however, but can account for this service by using the 
information already collected by the Commission annually pursuant to 
the FCC Form 477 (Local Telephone Competition and Broadband Reporting). 
We also propose to not collect data from BDS purchasers on a mandatory 
basis and to instead use voluntary survey sampling of purchasers as 
discussed below. These changes would substantially decrease the burden 
on filers while providing the Commission with the data necessary to 
periodically update its analysis.
2. Providers Covered by the Periodic Collection Requirement
    275. We propose to narrow the scope of our collection to minimize 
burdens on smaller providers where possible without compromising our 
analysis. While we would require all price cap incumbent LECs to 
provide data, we are considering excluding from the periodic collection 
those competitive providers below a set threshold based on either 
location with connection, number of BDS customers, or BDS revenues.
    276. We continue to analyze whether the exclusion of providers 
below various thresholds will significantly impact the results of our 
price regressions and other methods of analysis. We seek comment on 
this proposal generally and ask for commenters to suggest appropriate 
thresholds and to quantify the potential impact of any exclusion on our 
analysis of the BDS industry.
3. Required Data and Information
    277. Based on what we have learned, the most valuable data to our 
analysis is on the providers' locations with connections and billing 
information. Accordingly, we propose to require incumbent LECs to 
report locations where they have connections and provided BDS over the 
applicable period consistent with the information collected for 
questions II.B.2-3 in the 2015 Collection. Competitive providers would 
report locations where they have in-service or idle connections 
consistent with the reporting requirements for questions II.A.3-4 in 
the 2015 Collection. The reported locations would include all locations 
to which the competitive provider has a fiber connection (whether idle 
or in-service). Providers would also submit monthly billing information 
for the applicable period to the billed circuit element and linked to 
the served location consistent with the reporting requirements for 
questions II.A.12-14 for competitive providers and II.B.4-6 for 
incumbent LECs in the 2015 Collection.
    278. Other categories of information required from providers as 
taken from the 2015 Collection would include the reporting of:
     BDS revenues for applicable period separated by customer 
and technology as required by questions II.A.15-16 for competitive 
providers and questions II.B.8-9 for incumbent LECs;
     Wire centers subject to price cap regulation by incumbent 
LECs for the applicable period as required by question II.B.7;
     Fiber network maps and information on fiber nodes by 
competitive providers as required by question II.A.5; and
     Information on recent RFPs from competitive providers as 
required by question II.A.11.
    279. During the course of the Bureau's review of the collected 2013 
data and ex parte discussions with stakeholders, we have also 
identified additional categories of questions or variations of previous 
categories of questions for which we propose to collect from all 
covered providers to assist with updating the Commission's analysis. 
These categories are as follows:
     A report on the different categories of BDS offered, 
including the different bandwidth speeds offered and the performance 
level guarantees offered with each type of service;
     Descriptions of how the provider structures its market 
operations to focus on particular classes of customers and the package 
of services marketed to each customer class;
     Information on BDS customer churn data, wins and losses 
over the applicable period, and the provider type to whom they are 
winning or losing customers to the extent known;
     Internal business documents assessing competitive 
pressures in the marketplace and changes to business operations in 
response to competitive pressures;
     Information to better track customer purchases across 
providers;
     Data on managed services purchased, which include a BDS 
component; and
     Information specific to the sale of leased lines to, and 
use by, carrier customers.
    280. We believe this additional information would help the 
Commission further assess BDS demand by different classes of customers, 
the needs of those customer classes, and the level of competition in 
the marketplace. These changes would also address recommendations for 
improvements by our outside economic consultant. We seek comment on the 
proposed data points discussed above. In addition, depending on the 
ultimate criteria adopted for a Competitive Market Test, we seek 
comment on alternative data points for collection so the Commission can 
better measure the effectiveness of the Competitive Market Test 
criteria and revaluate and update its market definitions.
4. Voluntary Survey of Purchasers
    281. We propose to not require BDS purchasers to submit data on a 
mandatory basis as with the previous collection given the burdens 
associated with such reporting compared to the value of the data for 
our analysis. The Commission instead proposes to conduct, with the 
assistance of a third-party, a voluntary survey of BDS purchasers, 
starting in 2017. The survey would include a sampling of wholesale and 
retail customers, a sampling of businesses of different sizes: small, 
medium, and large, and a sampling of mobile wireless providers.
    282. The survey would collect information on, but not limited to, 
the BDS needs of the customer (e.g., establishing virtual or private 
networks, accessing data centers or cloud-based services, accessing the 
Internet, and processing credit card transactions, among other 
information), the number of business locations requiring service, the 
performance levels required by the customer (e.g., the service 
guarantees required on reliability, latency, packet loss, jitter, and 
mean time to repair), the purchaser's bandwidth requirements 
(symmetrical and/or asymmetrical), the BDS provider(s) they purchase 
from, the purchase and substitutability of ``best efforts'' services to 
meet their BDS needs, the extent to which they purchase BDS using fixed 
wireless, other potential BDS substitutes, number of available 
providers to fulfill BDS needs in a given area, types of BDS typically 
purchased by the customer (e.g., Ethernet at certain speeds or DS1s and 
DS3s), prices typically paid for each type of BDS, any problems 
encountered with obtaining BDS (availability, timing, problematic terms 
and conditions, and the like), total BDS expenditures over the prior 
calendar year, the extent to which purchaser buys TDM products and 
plans to purchase such legacy services over the next three years. We 
seek comment on this proposal and on other potential categories of 
information to include in the survey.
5. Timing of the Collection
    283. We believe that a periodic collection every three years is 
reasonable for our oversight needs. We

[[Page 36064]]

seek comment on this view. This collection period would minimize the 
burden on filers while still allowing the Commission to timely gather 
data to update its analysis and monitor competition. The BDS industry 
is changing and significant developments can occur from year-to-year. 
By collecting data every three years, the Commission can effectively 
take stock of these changing trends. That said, we propose to conduct 
the first periodic collection in 2018, for year-end 2017 data. This 
would mean more than a three-year gap from the 2013 data but is 
reasonable to give covered providers time to update their systems to 
better track the information requested.

III. Procedural Matters

A. Ex Parte Requirements

    284. This proceeding shall be treated as a ``permit-but-disclose'' 
proceeding in accordance with the Commission's ex parte rules. Persons 
making ex parte presentations must file a copy of any written 
presentation or a memorandum summarizing any oral presentation within 
two business days after the presentation (unless a different deadline 
applicable to the Sunshine period applies). Persons making oral ex 
parte presentations are reminded that memoranda summarizing the 
presentation must (1) List all persons attending or otherwise 
participating in the meeting at which the ex parte presentation was 
made, and (2) summarize all data presented and arguments made during 
the presentation. Memoranda must contain a summary of the substance of 
the ex parte presentation ad not merely a list of the subjects 
discussed. More than a one or two sentence description of the views and 
arguments presented is generally required. If the oral presentation 
consisted in whole or in part of the presentation of data or arguments 
already reflected in the presenter's written comments, memoranda or 
other filings in the proceeding, the presenter may provide citations to 
such data or arguments in his or her prior comments, memoranda, or 
other filings (specifying the relevant page and/or paragraph numbers 
where such data or arguments can be found) in lieu of summarizing them 
in the memorandum. Documents shown or given to Commission staff during 
ex parte meetings are deemed to be written ex parte presentations and 
must be filed consistent with rule 1.1206(b). In proceedings governed 
by rule 1.49(f) or for which the Commission has made available a method 
of electronic filing, written ex parte presentations and memoranda 
summarizing oral ex parte presentations, and all attachments thereto, 
must be filed through the electronic comment filing system available 
for that proceeding, and must be filed in their native format (e.g., 
.doc, .xml, .ppt, searchable .pdf). Participants in this proceeding 
should familiarize themselves with the Commission's ex parte rules.

B. Paperwork Reduction Act Analysis

    285. This FNPRM contains proposed new information collection 
requirements. The Commission, as part of its continuing effort to 
reduce paperwork burdens, invites the general public and the OMB and 
other Federal agencies to comment on the information collection 
requirements contained in this document, as required by the PRA, Public 
Law 104-13. In addition, pursuant to the Small Business Paperwork 
Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we 
seek specific comment on how we might further reduce the information 
collection burden for small business concerns with fewer than 25 
employees.

C. Initial Regulatory Flexibility Analysis

    286. As required by the Regulatory Flexibility Act of 1980 (RFA), 
the Commission has prepared an Initial Regulatory Flexibility Analysis 
(IRFA) for this FNPRM, of the possible significant economic impact on 
small entities of the policies and rules addressed in this document. 
The IRFA is set forth as Appendix D. Written public comments are 
requested on this IRFA. Comments must be identified as responses to the 
IRFA and must be filed by the deadlines for comments on the FNPRM 
provided on or before the dates indicated on the first page of this 
document. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, will send a copy of this FNPRM, including 
the IRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration (SBA).

IV. Ordering Clauses

    287. Accordingly, it is ordered that, pursuant to sections 1, 2, 
4(i)-(j), 10, 201(b), 202(a), 203, 204(a), 205, 303(r), and 403 of the 
Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i)-(j), 
160, 201(b), 202(a), 203, 204(a), 205, 303(r), and 403 this Tariff 
Investigation Order and FNPRM is adopted.
    288. It is further ordered that, pursuant to the applicable 
procedures set forth in sections 1.415 and 1.419 of the Commission's 
Rules, 47 CFR 1.415, 1.419, interested parties may file comments on the 
FNPRM and the application of the prohibition on all-or-nothing 
provisions in the tariff pricing plans subject to the tariff 
investigation to existing agreements on or before June 28, 2016, and 
reply comments on or before July 26, 2016.
    289. It is further ordered that the Commission's Consumer & 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this FNPRM, including the Initial Regulatory Flexibility 
Analyses to the Chief Counsel for Advocacy of the Small Business 
Administration.

Initial Regulatory Flexibility Act Analysis

    1. As required by the Regulatory Flexibility Act of 1980, as 
amended (RFA), the Commission has prepared this Initial Regulatory 
Flexibility Analysis (IRFA) of the possible significant economic impact 
on a substantial number of small entities from the policies and rules 
proposed in this FNPRM. The Commission requests written public comment 
on this IRFA. Comments must be identified as responses to the IRFA and 
must be filed by the deadlines for comments on the FNPRM provided in 
the item. The Commission will send a copy of the FNPRM, including this 
IRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration (SBA). In addition, the FNPRM and IRFA (or summaries 
thereof) will be published in the Federal Register.

A. Need for, and Objectives of, the Proposed Rules

    2. Technology-Neutral Framework. In the FNPRM the Commission 
proposes to replace the existing, fragmented regulatory regime 
applicable to business data services (BDS) (i.e., special access 
services) with a new technology-neutral framework--the Competitive 
Market Test--which subjects non-competitive markets to tailored 
regulation, and competitive markets to minimal oversight. The pricing 
flexibility framework adopted in 1999 based regulatory relief from 
dominant carrier regulations on the presence of third-party 
collocations in the incumbent local exchange carrier's (LEC's) wire 
centers, which were considered proxies for competition in the 
marketplace. The Commission's review of the 2015 Collection data 
supports the Commission's earlier findings that collocations are a poor 
proxy for predicting the entry of facilities-based competition and the 
1999 regime retained unnecessary regulation in areas that were likely 
competitive and deregulated over large areas where

[[Page 36065]]

competition was unlikely to occur. The Commission therefore proposes to 
abandon the collocation-based competition showings for determining 
regulatory relief for incumbent LECs and, instead, proposes to apply a 
new Competitive Market Test and seeks comment on a regulatory framework 
going forward.
    3. Competitive Analysis. The Commission sets forth its analysis of 
the extent of competition in the supply of BDS, based on its analysis 
of the 2015 Collection, and stakeholders' comments, and seeks comment 
on these findings. As far as the BDS product market, the Commission 
finds that ``best efforts'' BIAS do not appear to be a substitute for 
BDS whereas packet-based BDS, including HFC, is a substitute for TDM-
based BDS, and product markets are subdivided by customer requirements 
and BDS performance characteristics. As far as the BDS geographic 
market, geographic concentration on any measure is high. The Commission 
found that supply of BDS with a bandwidth in excess of 50 Mbps tends to 
be more competitive than supply of BDS with lower bandwidths and 
allowing ILECs to offer contract tariffs benefits BDS purchasers and 
suppliers. The Commission seeks comment on how many competitive choices 
are necessary to ensure a competitive market, how important is 
potential competition, whether facility-based supply beyond half a mile 
has a material effect on prices and whether prices vary by the type of 
supply. Finally, the Commission seeks comment on a white paper prepared 
by an outside econometrician engaged by the Commission, Dr. Marc 
Rysman, conducting an independent competition analysis of the BDS 
market.
    4. Competitive Market Test. As a replacement to the pricing 
flexibility rules, the Commission proposes a Competitive Market Test to 
determine the extent to which particular geographic areas and customer 
classes are subject to sufficient competition. In the FNPRM, the 
Commission proposes to define ``business data services'' (BDS) as a 
telecommunications service that transports data between two or more 
designated points at a rate of at least 1.5 Mbps in both directions 
(upstream/downstream) with prescribed performance requirements that 
include bandwidth, reliability, latency, jitter, and packet loss. The 
Commission, however, proposes excluding ``best effort'' services, e.g., 
mass market broadband Internet access service (BIAS) such as DSL and 
cable modem broadband access. The Commission is considering a test, 
which focuses on bandwidth, different customer classes, business 
density, and the number of providers in areas consisting of census 
blocks where each block in the relevant market meets the specified 
criteria. The Commission asks about applying the Competitive Market 
Test across all areas served by price cap carriers every three years to 
account for changes in business density and the presence of facilities-
based providers in geographic areas. The Commission asks to what extent 
and how the Commission should give providers and purchasers an 
opportunity to challenge the determinations rendered.
    5. Rules Applicable to All Markets. The Commission proposes limited 
requirements applicable to all competitive and non-competitive BDS 
markets. First, the Commission seeks comment on prohibiting the use of 
nondisclosure agreements (NDAs) in BDS commercial agreements that 
restrict parties ability to provide information to the Commission, 
effectively require legal compulsion to produce information, and limit 
parties disclosure to a response to a request by the Commission (e.g. 
Notice of Proposed Rulemaking). Second, the Commission asks for comment 
on the appropriate treatment of the three types of tariff terms 
identified as unreasonable in the accompanying Tariff Investigation 
Order- ``all-or-nothing'' provisions, shortfall penalties, and early 
termination fees--as well as other contractual terms and conditions 
that have been subject to public comment. The Commission seeks comment 
on whether these provisions should be applied in non-competitive 
markets or more generally in all markets.
    6. Non-Competitive Markets. The Commission proposes a tailored set 
of rules to safeguard customers in non-competitive markets, including 
the use of price regulation. In the FNPRM, the Commission proposes to 
continue to apply price cap regulation to time-division multiplexing 
(TDM)-based BDS in non-competitive markets, including non-competitive 
areas subject to pricing flexibility. The Commission also seeks comment 
on the application of rate regulation in non-competitive markets to 
packet-based BDS. The Commission proposes to incorporate into its price 
cap system a productivity-based ``X-factor''--an adjustment to the 
price ceiling carriers can change reflecting the extent to which 
carriers overall outperform economy-wide productivity to ensure they 
are passing these gains to ratepayers while recovering their costs of 
service. We seek comment on the methodologies and data sources we 
should use to calculate the X-factor, including a staff-produced 
productivity study, and the corresponding price cap adjustments as well 
as the components of the price cap system.
    7. Anchor Pricing and Benchmarking. In the FNPRM, the Commission 
proposes to adopt an anchor pricing or benchmarking approach for BDS in 
non-competitive markets to replace the interim rule adopted in the 
Emerging Wireline Order. We likewise believe that that anchor or 
benchmark pricing would not be appropriate in competitive markets. The 
Commission considers three options: (1) Relying on regulated TDM-based 
services pricing to anchor prices for similar packet-based services, 
(2) establishing a price for packet-based BDS which could serve as an 
anchor for similar packet-based services, and (3) initially using 
reasonably comparable prices for TDM-based services as a benchmark for 
packet-based services to determine whether those rates are just and 
reasonable. The Commission proposes to adopt the third option but seeks 
comment on this proposal and any associated implementation issues. Upon 
implementation of anchor pricing or benchmarking, we propose to 
continue forbearing from tariffing all packet-based services and to 
expand forbearance to include all price cap carriers and all packet-
based services because this will allow for greater commercial 
negotiation and innovation. For carriers subject to these requirements, 
we propose to require them to publically disclose their generally 
available rates, terms and conditions and seek comment on this 
proposal. The Commission seeks comment on whether any reporting 
requirements should be imposed and whether the complaint and 
declaratory ruling process is reasonable to ensure compliance with the 
proposed framework. The Commission also seeks proposals for ensuring 
just and reasonable wholesale rates applicable in non-competitive 
markets such as whether providers are charging higher rates for 
wholesale than retail BDS, whether we should require public disclosure 
of these rates.
    8. Terms and Conditions. The Commission proposes generally 
prohibiting tariff and other contractual ``tying'' arrangements that 
condition the sale of BDS in a non-competitive market on the sale of 
such services in a competitive market. The Commission also proposes 
prohibiting automatic renewal provisions in tariff pricing plans and 
contract tariffs for the provision of TDM-based broadband data services 
in non-competitive areas. The Commission proposes to find unreasonable 
any provision that enables a provider to increase its rates upon the

[[Page 36066]]

expiration of either a tariff or commercial agreement for TDM-based or 
Ethernet-based service in non-competitive areas. Finally, the 
Commission seeks comment on tariff or commercial agreements containing 
percentage commitments to increase commitments if they reach a 
percentage threshold, overage penalties for going over volume 
commitments, automatic renewal provisions, undiscounted month-to-month 
pricing, and ``evergreen'' provisions that allow a purchaser to 
continue under same terms and conditions as under an expired agreement. 
In addition to seeking comment on the new regulatory framework, the 
Commission invites comment on alternative frameworks to apply to BDS.
    9. Pricing Deregulation. The Commission proposes a set of 
deregulatory rules to govern competitive markets, using the Act's 
statutory authority to ensure that the provision of telecommunications 
services is just and reasonable. The Commission proposes that tariffs 
should not be used as part of the regulation of any BDS. The Commission 
proposes removing TDM-based BDS determined to be competitive from price 
cap regulation and apply a competitive regulatory framework, proposing 
a path to detariff time-division multiplexing (TDM)-based services 
while maintaining price caps. The Commission proposes forbearing from 
tariffing requirements to the extent necessary to implement our 
proposed framework, conditioned on the continuing presence of 
competition. The Commission proposes a similar finding for BDS in non-
competitive areas, including TDM-based services but continue to require 
price cap regulation. The Commission seeks comment on how the 
Commission should modify its filing rules if it forbears from tariffing 
requirements. The Commission proposes to apply Phase I pricing 
flexibility requirements to TDM-based BDS in non-competitive areas and 
seeks comment on this proposal and any necessary changes to this 
approach.
    10. Forbearance Grants and Deemed Grants. In order for the new 
regulatory framework be applied in a technology-neutral manner, the 
Commission proposes to eliminate the current exemption for certain 
Verizon services from the basic provisions of the Act governing just 
and reasonable offerings of telecommunications services. The Commission 
invites comment on the legal standard we would need to meet to reverse 
Verizon's forbearance that has been deemed granted, stating its belief 
that this standard is met in a rulemaking proceeding. Additionally, the 
Commission proposes extending this decision to reverse forbearance to 
Hawaiian Telecom and to the legacy Verizon portions of FairPoint and 
Frontier and invites comment on these proposals. At the same time, the 
Commission proposes to expand forbearance to the extent necessary to 
implement any regulatory changes adopted in this proceeding, many of 
which would allow or require carriers to detariff BDS, and invites 
comment on this proposal.

B. Legal Basis

    11. The legal basis for any action that may be taken pursuant to 
the FNPRM is contained in sections 1, 2, 4(i)-(j), 10, 201, 202(a), 
203, 204(a), 205, 208, 251, 303(r), and 403 of the Communications Act 
of 1934, as amended, 47 U.S.C. 151, 152, 154(i)-(j), 160, 201(b), 
202(a), 203, 204(a), 205, 208, 251, 303(r), and 403.

C. Description and Estimate of the Number of Small Entities To Which 
the Rules Would Apply

    12. The RFA directs agencies to provide a description of, and where 
feasible, an estimate of the number of small entities that may be 
affected by the proposed rules, if adopted. The RFA generally defines 
the term ``small entity'' as having the same meaning as the terms 
``small business,'' ``small organization,'' and ``small governmental 
jurisdiction.'' In addition, the term ``small business'' has the same 
meaning as the term ``small-business concern'' under the Small Business 
Act. A small-business concern'' is one which: (1) Is independently 
owned and operated; (2) is not dominant in its field of operation; and 
(3) satisfies any additional criteria established by the Small Business 
Administration (SBA).
1. Total Small Entities
    13. Our proposed action, if implemented, may, over time, affect 
small entities that are not easily categorized at present. We therefore 
describe here, at the outset, three comprehensive, statutory small 
entity size standards. First, nationwide, there are a total of 
approximately 28.2 million small businesses, according to the SBA, 
which represents 99.7% of all businesses in the United States. In 
addition, a ``small organization'' is generally ``any not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' Nationwide, as of 2007, there were 
approximately 1,621,215 small organizations. Finally, the term ``small 
governmental jurisdiction'' is defined generally as ``governments of 
cities, towns, townships, villages, school districts, or special 
districts, with a population of less than fifty thousand.'' Census 
Bureau data for 2011 indicate that there were 90,056 local governmental 
jurisdictions in the United States. We estimate that, of this total, as 
many as 89,327 entities may qualify as ``small governmental 
jurisdictions.'' Thus, we estimate that most governmental jurisdictions 
are small.
2. Broadband Internet Access Service Providers
    14. The rules adopted in the Order apply to broadband Internet 
access service providers. The Economic Census places these firms, whose 
services might include Voice over Internet Protocol (VoIP), in either 
of two categories, depending on whether the service is provided over 
the provider's own telecommunications facilities (e.g., cable and DSL 
ISPs), or over client-supplied telecommunications connections (e.g., 
dial-up ISPs). The former are within the category of Wired 
Telecommunications Carriers, which has an SBA small business size 
standard of 1,500 or fewer employees. These are also labeled 
``broadband.'' The latter are within the category of All Other 
Telecommunications, which has a size standard of annual receipts of 
$32.5 million or less. These are labeled non-broadband. According to 
Census Bureau data for 2007, there were 3,188 firms in the first 
category, total, that operated for the entire year. Of this total, 3144 
firms had employment of 999 or fewer employees, and 44 firms had 
employment of 1,000 employees or more. For the second category, the 
data show that 2,383 firms operated for the entire year. Of those, 
2,346 had annual receipts below $32.5 million per year. Consequently, 
we estimate that the majority of broadband Internet access service 
provider firms are small entities.
    15. The broadband Internet access service provider industry has 
changed since this definition was introduced in 2007. The data cited 
above may therefore include entities that no longer provide broadband 
Internet access service, and may exclude entities that now provide such 
service. To ensure that this FRFA describes the universe of small 
entities that our action might affect, we discuss in turn several 
different types of entities that might be providing broadband Internet 
access service. We note that, although we have no specific information 
on the number of small entities that provide broadband Internet access 
service over unlicensed spectrum, we include these entities in our 
Final Regulatory Flexibility Analysis.

[[Page 36067]]

3. Wireline Providers
    16. Incumbent Local Exchange Carriers (Incumbent LECs). Neither the 
Commission nor the SBA has developed a small business size standard 
specifically for incumbent LEC services. The closest applicable size 
standard under SBA rules is for the category Wired Telecommunications 
Carriers. Under that size standard, such a business is small if it has 
1,500 or fewer employees. According to Commission data, 1,307 carriers 
reported that they were incumbent LEC providers. Of these 1,307 
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have 
more than 1,500 employees. Consequently, the Commission estimates that 
most providers of incumbent LEC service are small businesses that may 
be affected by rules adopted pursuant to the Order.
    17. Competitive Local Exchange Carriers (Competitive LECs), 
Competitive Access Providers (CAPs), Shared-Tenant Service Providers, 
and Other Local Service Providers. Neither the Commission nor the SBA 
has developed a small business size standard specifically for these 
service providers. The appropriate size standard under SBA rules is for 
the category Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 1,442 carriers reported that they were 
engaged in the provision of either competitive local exchange services 
or competitive access provider services. Of these 1,442 carriers, an 
estimated 1,256 have 1,500 or fewer employees and 186 have more than 
1,500 employees. In addition, 17 carriers have reported that they are 
Shared-Tenant Service Providers, and all 17 are estimated to have 1,500 
or fewer employees. In addition, 72 carriers have reported that they 
are Other Local Service Providers. Of the 72, seventy have 1,500 or 
fewer employees and two have more than 1,500 employees. Consequently, 
the Commission estimates that most providers of competitive local 
exchange service, competitive access providers, Shared-Tenant Service 
Providers, and other local service providers are small entities that 
may be affected by rules adopted pursuant to the Order.
    18. We have included small incumbent LECs in this present RFA 
analysis. As noted above, a ``small business'' under the RFA is one 
that, inter alia, meets the pertinent small business size standard 
(e.g., a telephone communications business having 1,500 or fewer 
employees), and ``is not dominant in its field of operation.'' The 
SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope. We have therefore included 
small incumbent LECs in this RFA analysis, although we emphasize that 
this RFA action has no effect on Commission analyses and determinations 
in other, non-RFA contexts.
    19. Interexchange Carriers. Neither the Commission nor the SBA has 
developed a small business size standard specifically for providers of 
interexchange services. The appropriate size standard under SBA rules 
is for the category Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 359 carriers have reported that they are 
engaged in the provision of interexchange service. Of these, an 
estimated 317 have 1,500 or fewer employees and 42 have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
interexchange carriers are small entities that may be affected by rules 
adopted pursuant to the Order.
    20. Operator Service Providers (OSPs). Neither the Commission nor 
the SBA has developed a small business size standard specifically for 
operator service providers. The appropriate size standard under SBA 
rules is for the category Wired Telecommunications Carriers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 33 carriers have reported that 
they are engaged in the provision of operator services. Of these, an 
estimated 31 have 1,500 or fewer employees and two have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
OSPs are small entities that may be affected by rules adopted pursuant 
to the Order.
    21. Prepaid Calling Card Providers. Neither the Commission nor the 
SBA has developed a small business size standard specifically for 
prepaid calling card providers. The appropriate size standard under SBA 
rules is for the category Telecommunications Resellers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 193 carriers have reported that they are 
engaged in the provision of prepaid calling cards. Of these, an 
estimated all 193 have 1,500 or fewer employees and none have more than 
1,500 employees. Consequently, the Commission estimates that the 
majority of prepaid calling card providers are small entities that may 
be affected by rules adopted pursuant to the Order.
    22. Local Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 213 carriers have reported 
that they are engaged in the provision of local resale services. Of 
these, an estimated 211 have 1,500 or fewer employees and two have more 
than 1,500 employees. Consequently, the Commission estimates that the 
majority of local resellers are small entities that may be affected by 
rules adopted pursuant to the Order.
    23. Toll Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 881 carriers have reported 
that they are engaged in the provision of toll resale services. Of 
these, an estimated 857 have 1,500 or fewer employees and 24 have more 
than 1,500 employees. Consequently, the Commission estimates that the 
majority of toll resellers are small entities that may be affected by 
rules adopted pursuant to the Order.
    24. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a size standard for small businesses specifically applicable 
to Other Toll Carriers. This category includes toll carriers that do 
not fall within the categories of interexchange carriers, operator 
service providers, prepaid calling card providers, satellite service 
carriers, or toll resellers. The closest applicable size standard under 
SBA rules is for Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 284 companies reported that their primary 
telecommunications service activity was the provision of other toll 
carriage. Of these, an estimated 279 have 1,500 or fewer employees and 
five have more than 1,500 employees. Consequently, the Commission 
estimates that most Other Toll Carriers are small entities that may be 
affected by the rules and policies adopted pursuant to the Order.
    25. 800 and 800-Like Service Subscribers. Neither the Commission 
nor the SBA has developed a small business size standard specifically 
for 800 and 800-like service (toll free) subscribers. The appropriate 
size standard under SBA rules is for the

[[Page 36068]]

category Telecommunications Resellers. Under that size standard, such a 
business is small if it has 1,500 or fewer employees. The most reliable 
source of information regarding the number of these service subscribers 
appears to be data the Commission collects on the 800, 888, 877, and 
866 numbers in use. According to our data, as of September 2009, the 
number of 800 numbers assigned was 7,860,000; the number of 888 numbers 
assigned was 5,588,687; the number of 877 numbers assigned was 
4,721,866; and the number of 866 numbers assigned was 7,867,736. We do 
not have data specifying the number of these subscribers that are not 
independently owned and operated or have more than 1,500 employees, and 
thus are unable at this time to estimate with greater precision the 
number of toll free subscribers that would qualify as small businesses 
under the SBA size standard. Consequently, we estimate that there are 
7,860,000 or fewer small entity 800 subscribers; 5,588,687 or fewer 
small entity 888 subscribers; 4,721,866 or fewer small entity 877 
subscribers; and 7,867,736 or fewer small entity 866 subscribers.
4. Wireless Providers--Fixed and Mobile
    26. The broadband Internet access service provider category covered 
by this Order may cover multiple wireless firms and categories of 
regulated wireless services. Thus, to the extent the wireless services 
listed below are used by wireless firms for broadband Internet access 
service, the proposed actions may have an impact on those small 
businesses as set forth above and further below. In addition, for those 
services subject to auctions, we note that, as a general matter, the 
number of winning bidders that claim to qualify as small businesses at 
the close of an auction does not necessarily represent the number of 
small businesses currently in service. Also, the Commission does not 
generally track subsequent business size unless, in the context of 
assignments and transfers or reportable eligibility events, unjust 
enrichment issues are implicated.
    27. Wireless Telecommunications Carriers (except Satellite). Since 
2007, the Census Bureau has placed wireless firms within this new, 
broad, economic census category. Under the present and prior 
categories, the SBA has deemed a wireless business to be small if it 
has 1,500 or fewer employees. For the category of Wireless 
Telecommunications Carriers (except Satellite), census data for 2007 
show that there were 1,383 firms that operated for the entire year. Of 
this total, 1,368 firms had employment of 999 or fewer employees and 15 
had employment of 1,000 employees or more. Since all firms with fewer 
than 1,500 employees are considered small, given the total employment 
in the sector, we estimate that the vast majority of wireless firms are 
small. Wireless Communications Services. This service can be used for 
fixed, mobile, radiolocation, and digital audio broadcasting satellite 
uses. The Commission defined ``small business'' for the wireless 
communications services (WCS) auction as an entity with average gross 
revenues of $40 million for each of the three preceding years, and a 
``very small business'' as an entity with average gross revenues of $15 
million for each of the three preceding years. The SBA has approved 
these definitions. 218-219 MHz Service. The first auction of 218-219 
MHz spectrum resulted in 170 entities winning licenses for 594 
Metropolitan Statistical Area (MSA) licenses. Of the 594 licenses, 557 
were won by entities qualifying as a small business. For that auction, 
the small business size standard was an entity that, together with its 
affiliates, has no more than a $6 million net worth and, after federal 
income taxes (excluding any carry over losses), has no more than $2 
million in annual profits each year for the previous two years. In the 
218-219 MHz Report and Order and Memorandum Opinion and Order, we 
established a small business size standard for a ``small business'' as 
an entity that, together with its affiliates and persons or entities 
that hold interests in such an entity and their affiliates, has average 
annual gross revenues not to exceed $15 million for the preceding three 
years. A ``very small business'' is defined as an entity that, together 
with its affiliates and persons or entities that hold interests in such 
an entity and its affiliates, has average annual gross revenues not to 
exceed $3 million for the preceding three years. These size standards 
will be used in future auctions of 218-219 MHz spectrum.
    28. 2.3 GHz Wireless Communications Services. This service can be 
used for fixed, mobile, radiolocation, and digital audio broadcasting 
satellite uses. The Commission defined ``small business'' for the 
wireless communications services (``WCS'') auction as an entity with 
average gross revenues of $40 million for each of the three preceding 
years, and a ``very small business'' as an entity with average gross 
revenues of $15 million for each of the three preceding years. The SBA 
has approved these definitions. The Commission auctioned geographic 
area licenses in the WCS service. In the auction, which was conducted 
in 1997, there were seven bidders that won 31 licenses that qualified 
as very small business entities, and one bidder that won one license 
that qualified as a small business entity.
    29. 1670-1675 MHz Services. This service can be used for fixed and 
mobile uses, except aeronautical mobile. An auction for one license in 
the 1670-1675 MHz band was conducted in 2003. One license was awarded. 
The winning bidder was not a small entity.
    30. Wireless Telephony. Wireless telephony includes cellular, 
personal communications services, and specialized mobile radio 
telephony carriers. As noted, the SBA has developed a small business 
size standard for Wireless Telecommunications Carriers (except 
Satellite). Under the SBA small business size standard, a business is 
small if it has 1,500 or fewer employees. According to Commission data, 
413 carriers reported that they were engaged in wireless telephony. Of 
these, an estimated 261 have 1,500 or fewer employees and 152 have more 
than 1,500 employees. Therefore, a little less than one third of these 
entities can be considered small.
    31. Broadband Personal Communications Service. The broadband 
personal communications services (PCS) spectrum is divided into six 
frequency blocks designated A through F, and the Commission has held 
auctions for each block. The Commission initially defined a ``small 
business'' for C- and F-Block licenses as an entity that has average 
gross revenues of $40 million or less in the three previous calendar 
years. For F-Block licenses, an additional small business size standard 
for ``very small business'' was added and is defined as an entity that, 
together with its affiliates, has average gross revenues of not more 
than $15 million for the preceding three calendar years. These small 
business size standards, in the context of broadband PCS auctions, have 
been approved by the SBA. No small businesses within the SBA-approved 
small business size standards bid successfully for licenses in Blocks A 
and B. There were 90 winning bidders that claimed small business status 
in the first two C-Block auctions. A total of 93 bidders that claimed 
small business status won approximately 40 percent of the 1,479 
licenses in the first auction for the D, E, and F Blocks. On April 15, 
1999, the Commission completed the reauction of 347 C-, D-, E-, and F-
Block licenses in Auction No. 22. Of the 57 winning bidders in that 
auction, 48

[[Page 36069]]

claimed small business status and won 277 licenses.
    32. On January 26, 2001, the Commission completed the auction of 
422 C and F Block Broadband PCS licenses in Auction No. 35. Of the 35 
winning bidders in that auction, 29 claimed small business status. 
Subsequent events concerning Auction 35, including judicial and agency 
determinations, resulted in a total of 163 C and F Block licenses being 
available for grant. On February 15, 2005, the Commission completed an 
auction of 242 C-, D-, E-, and F-Block licenses in Auction No. 58. Of 
the 24 winning bidders in that auction, 16 claimed small business 
status and won 156 licenses. On May 21, 2007, the Commission completed 
an auction of 33 licenses in the A, C, and F Blocks in Auction No. 71. 
Of the 12 winning bidders in that auction, five claimed small business 
status and won 18 licenses. On August 20, 2008, the Commission 
completed the auction of 20 C-, D-, E-, and F-Block Broadband PCS 
licenses in Auction No. 78. Of the eight winning bidders for Broadband 
PCS licenses in that auction, six claimed small business status and won 
14 licenses.
    33. Specialized Mobile Radio Licenses. The Commission awards 
``small entity'' bidding credits in auctions for Specialized Mobile 
Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz bands 
to firms that had revenues of no more than $15 million in each of the 
three previous calendar years. The Commission awards ``very small 
entity'' bidding credits to firms that had revenues of no more than $3 
million in each of the three previous calendar years. The SBA has 
approved these small business size standards for the 900 MHz Service. 
The Commission has held auctions for geographic area licenses in the 
800 MHz and 900 MHz bands. The 900 MHz SMR auction began on December 5, 
1995, and closed on April 15, 1996. Sixty bidders claiming that they 
qualified as small businesses under the $15 million size standard won 
263 geographic area licenses in the 900 MHz SMR band. The 800 MHz SMR 
auction for the upper 200 channels began on October 28, 1997, and was 
completed on December 8, 1997. Ten bidders claiming that they qualified 
as small businesses under the $15 million size standard won 38 
geographic area licenses for the upper 200 channels in the 800 MHz SMR 
band. A second auction for the 800 MHz band was held on January 10, 
2002 and closed on January 17, 2002 and included 23 BEA licenses. One 
bidder claiming small business status won five licenses.
    34. The auction of the 1,053 800 MHz SMR geographic area licenses 
for the General Category channels began on August 16, 2000, and was 
completed on September 1, 2000. Eleven bidders won 108 geographic area 
licenses for the General Category channels in the 800 MHz SMR band and 
qualified as small businesses under the $15 million size standard. In 
an auction completed on December 5, 2000, a total of 2,800 Economic 
Area licenses in the lower 80 channels of the 800 MHz SMR service were 
awarded. Of the 22 winning bidders, 19 claimed small business status 
and won 129 licenses. Thus, combining all four auctions, 41 winning 
bidders for geographic licenses in the 800 MHz SMR band claimed status 
as small businesses.
    35. In addition, there are numerous incumbent site-by-site SMR 
licenses and licensees with extended implementation authorizations in 
the 800 and 900 MHz bands. We do not know how many firms provide 800 
MHz or 900 MHz geographic area SMR service pursuant to extended 
implementation authorizations, nor how many of these providers have 
annual revenues of no more than $15 million. One firm has over $15 
million in revenues. In addition, we do not know how many of these 
firms have 1,500 or fewer employees, which is the SBA-determined size 
standard. We assume, for purposes of this analysis, that all of the 
remaining extended implementation authorizations are held by small 
entities, as defined by the SBA.
    36. Lower 700 MHz Band Licenses. The Commission previously adopted 
criteria for defining three groups of small businesses for purposes of 
determining their eligibility for special provisions such as bidding 
credits. The Commission defined a ``small business'' as an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues not exceeding $40 million for the preceding three years. 
A ``very small business'' is defined as an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
that are not more than $15 million for the preceding three years. 
Additionally, the lower 700 MHz Service had a third category of small 
business status for Metropolitan/Rural Service Area (MSA/RSA) 
licenses--``entrepreneur''--which is defined as an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues that are not more than $3 million for the preceding 
three years. The SBA approved these small size standards. An auction of 
740 licenses (one license in each of the 734 MSAs/RSAs and one license 
in each of the six Economic Area Groupings (EAGs)) commenced on August 
27, 2002, and closed on September 18, 2002. Of the 740 licenses 
available for auction, 484 licenses were won by 102 winning bidders. 
Seventy-two of the winning bidders claimed small business, very small 
business or entrepreneur status and won a total of 329 licenses. A 
second auction commenced on May 28, 2003, closed on June 13, 2003, and 
included 256 licenses: 5 EAG licenses and 476 Cellular Market Area 
licenses. Seventeen winning bidders claimed small or very small 
business status and won 60 licenses, and nine winning bidders claimed 
entrepreneur status and won 154 licenses. On July 26, 2005, the 
Commission completed an auction of 5 licenses in the Lower 700 MHz band 
(Auction No. 60). There were three winning bidders for five licenses. 
All three winning bidders claimed small business status.
    37. In 2007, the Commission reexamined its rules governing the 700 
MHz band in the 700 MHz Second Report and Order. An auction of 700 MHz 
licenses commenced January 24, 2008 and closed on March 18, 2008, which 
included, 176 Economic Area licenses in the A Block, 734 Cellular 
Market Area licenses in the B Block, and 176 EA licenses in the E 
Block. Twenty winning bidders, claiming small business status (those 
with attributable average annual gross revenues that exceed $15 million 
and do not exceed $40 million for the preceding three years) won 49 
licenses. Thirty three winning bidders claiming very small business 
status (those with attributable average annual gross revenues that do 
not exceed $15 million for the preceding three years) won 325 licenses.
    38. Upper 700 MHz Band Licenses. In the 700 MHz Second Report and 
Order, the Commission revised its rules regarding Upper 700 MHz 
licenses. On January 24, 2008, the Commission commenced Auction 73 in 
which several licenses in the Upper 700 MHz band were available for 
licensing: 12 Regional Economic Area Grouping licenses in the C Block, 
and one nationwide license in the D Block. The auction concluded on 
March 18, 2008, with 3 winning bidders claiming very small business 
status (those with attributable average annual gross revenues that do 
not exceed $15 million for the preceding three years) and winning five 
licenses.
    39. 700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard 
Band Order, the Commission adopted size standards for ``small 
businesses'' and ``very small businesses'' for purposes of

[[Page 36070]]

determining their eligibility for special provisions such as bidding 
credits and installment payments. A small business in this service is 
an entity that, together with its affiliates and controlling 
principals, has average gross revenues not exceeding $40 million for 
the preceding three years. Additionally, a very small business is an 
entity that, together with its affiliates and controlling principals, 
has average gross revenues that are not more than $15 million for the 
preceding three years. SBA approval of these definitions is not 
required. An auction of 52 Major Economic Area licenses commenced on 
September 6, 2000, and closed on September 21, 2000. Of the 104 
licenses auctioned, 96 licenses were sold to nine bidders. Five of 
these bidders were small businesses that won a total of 26 licenses. A 
second auction of 700 MHz Guard Band licenses commenced on February 13, 
2001, and closed on February 21, 2001. All eight of the licenses 
auctioned were sold to three bidders. One of these bidders was a small 
business that won a total of two licenses.
    40. Cellular Radiotelephone Service. Auction 77 was held to resolve 
one group of mutually exclusive applications for Cellular 
Radiotelephone Service licenses for unserved areas in New Mexico. 
Bidding credits for designated entities were not available in Auction 
77. In 2008, the Commission completed the closed auction of one 
unserved service area in the Cellular Radiotelephone Service, 
designated as Auction 77. Auction 77 concluded with one provisionally 
winning bid for the unserved area totaling $25,002.
    41. Private Land Mobile Radio (``PLMR''). PLMR systems serve an 
essential role in a range of industrial, business, land transportation, 
and public safety activities. These radios are used by companies of all 
sizes operating in all U.S. business categories, and are often used in 
support of the licensee's primary (non-telecommunications) business 
operations. For the purpose of determining whether a licensee of a PLMR 
system is a small business as defined by the SBA, we use the broad 
census category, Wireless Telecommunications Carriers (except 
Satellite). This definition provides that a small entity is any such 
entity employing no more than 1,500 persons. The Commission does not 
require PLMR licensees to disclose information about number of 
employees, so the Commission does not have information that could be 
used to determine how many PLMR licensees constitute small entities 
under this definition. We note that PLMR licensees generally use the 
licensed facilities in support of other business activities, and 
therefore, it would also be helpful to assess PLMR licensees under the 
standards applied to the particular industry subsector to which the 
licensee belongs.
    42. As of March 2010, there were 424,162 PLMR licensees operating 
921,909 transmitters in the PLMR bands below 512 MHz. We note that any 
entity engaged in a commercial activity is eligible to hold a PLMR 
license, and that any revised rules in this context could therefore 
potentially impact small entities covering a great variety of 
industries.
    43. Rural Radiotelephone Service. The Commission has not adopted a 
size standard for small businesses specific to the Rural Radiotelephone 
Service. A significant subset of the Rural Radiotelephone Service is 
the Basic Exchange Telephone Radio System (BETRS). In the present 
context, we will use the SBA's small business size standard applicable 
to Wireless Telecommunications Carriers (except Satellite), i.e., an 
entity employing no more than 1,500 persons. There are approximately 
1,000 licensees in the Rural Radiotelephone Service, and the Commission 
estimates that there are 1,000 or fewer small entity licensees in the 
Rural Radiotelephone Service that may be affected by the rules and 
policies proposed herein.
    44. Air-Ground Radiotelephone Service. The Commission has 
previously used the SBA's small business size standard applicable to 
Wireless Telecommunications Carriers (except Satellite), i.e., an 
entity employing no more than 1,500 persons. There are approximately 
100 licensees in the Air-Ground Radiotelephone Service, and under that 
definition, we estimate that almost all of them qualify as small 
entities under the SBA definition. For purposes of assigning Air-Ground 
Radiotelephone Service licenses through competitive bidding, the 
Commission has defined ``small business'' as an entity that, together 
with controlling interests and affiliates, has average annual gross 
revenues for the preceding three years not exceeding $40 million. A 
``very small business'' is defined as an entity that, together with 
controlling interests and affiliates, has average annual gross revenues 
for the preceding three years not exceeding $15 million. These 
definitions were approved by the SBA. In May 2006, the Commission 
completed an auction of nationwide commercial Air-Ground Radiotelephone 
Service licenses in the 800 MHz band (Auction No. 65). On June 2, 2006, 
the auction closed with two winning bidders winning two Air-Ground 
Radiotelephone Services licenses. Neither of the winning bidders 
claimed small business status.
    45. Aviation and Marine Radio Services. Small businesses in the 
aviation and marine radio services use a very high frequency (VHF) 
marine or aircraft radio and, as appropriate, an emergency position-
indicating radio beacon (and/or radar) or an emergency locator 
transmitter. The Commission has not developed a small business size 
standard specifically applicable to these small businesses. For 
purposes of this analysis, the Commission uses the SBA small business 
size standard for the category Wireless Telecommunications Carriers 
(except Satellite), which is 1,500 or fewer employees. Census data for 
2007, which supersede data contained in the 2002 Census, show that 
there were 1,383 firms that operated that year. Of those 1,383, 1,368 
had fewer than 100 employees, and 15 firms had more than 100 employees. 
Most applicants for recreational licenses are individuals. 
Approximately 581,000 ship station licensees and 131,000 aircraft 
station licensees operate domestically and are not subject to the radio 
carriage requirements of any statute or treaty. For purposes of our 
evaluations in this analysis, we estimate that there are up to 
approximately 712,000 licensees that are small businesses (or 
individuals) under the SBA standard. In addition, between December 3, 
1998 and December 14, 1998, the Commission held an auction of 42 VHF 
Public Coast licenses in the 157.1875-157.4500 MHz (ship transmit) and 
161.775-162.0125 MHz (coast transmit) bands. For purposes of the 
auction, the Commission defined a ``small'' business as an entity that, 
together with controlling interests and affiliates, has average gross 
revenues for the preceding three years not to exceed $15 million 
dollars. In addition, a ``very small'' business is one that, together 
with controlling interests and affiliates, has average gross revenues 
for the preceding three years not to exceed $3 million dollars. There 
are approximately 10,672 licensees in the Marine Coast Service, and the 
Commission estimates that almost all of them qualify as ``small'' 
businesses under the above special small business size standards and 
may be affected by rules adopted pursuant to the Order.
    46. Advanced Wireless Services (AWS) (1710-1755 MHz and 2110-2155 
MHz bands (AWS-1); 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and 
2175-2180 MHz bands (AWS-2); 2155-2175 MHz band (AWS-3)). For the AWS-1 
bands, the Commission has defined a ``small business'' as an entity

[[Page 36071]]

with average annual gross revenues for the preceding three years not 
exceeding $40 million, and a ``very small business'' as an entity with 
average annual gross revenues for the preceding three years not 
exceeding $15 million. For AWS-2 and AWS-3, although we do not know for 
certain which entities are likely to apply for these frequencies, we 
note that the AWS-1 bands are comparable to those used for cellular 
service and personal communications service. The Commission has not yet 
adopted size standards for the AWS-2 or AWS-3 bands but proposes to 
treat both AWS-2 and AWS-3 similarly to broadband PCS service and AWS-1 
service due to the comparable capital requirements and other factors, 
such as issues involved in relocating incumbents and developing 
markets, technologies, and services.
    47. 3650-3700 MHz band. In March 2005, the Commission released a 
Report and Order and Memorandum Opinion and Order that provides for 
nationwide, non-exclusive licensing of terrestrial operations, 
utilizing contention-based technologies, in the 3650 MHz band (i.e., 
3650-3700 MHz). As of April 2010, more than 1270 licenses have been 
granted and more than 7433 sites have been registered. The Commission 
has not developed a definition of small entities applicable to 3650-
3700 MHz band nationwide, non-exclusive licensees. However, we estimate 
that the majority of these licensees are Internet Access Service 
Providers (ISPs) and that most of those licensees are small businesses.
    48. Fixed Microwave Services. Microwave services include common 
carrier, private-operational fixed, and broadcast auxiliary radio 
services. They also include the Local Multipoint Distribution Service 
(LMDS), the Digital Electronic Message Service (DEMS), and the 24 GHz 
Service, where licensees can choose between common carrier and non-
common carrier status. At present, there are approximately 36,708 
common carrier fixed licensees and 59,291 private operational-fixed 
licensees and broadcast auxiliary radio licensees in the microwave 
services. There are approximately 135 LMDS licensees, three DEMS 
licensees, and three 24 GHz licensees. The Commission has not yet 
defined a small business with respect to microwave services. For 
purposes of the FRFA, we will use the SBA's definition applicable to 
Wireless Telecommunications Carriers (except satellite)--i.e., an 
entity with no more than 1,500 persons. Under the present and prior 
categories, the SBA has deemed a wireless business to be small if it 
has 1,500 or fewer employees. The Commission does not have data 
specifying the number of these licensees that have more than 1,500 
employees, and thus is unable at this time to estimate with greater 
precision the number of fixed microwave service licensees that would 
qualify as small business concerns under the SBA's small business size 
standard. Consequently, the Commission estimates that there are up to 
36,708 common carrier fixed licensees and up to 59,291 private 
operational-fixed licensees and broadcast auxiliary radio licensees in 
the microwave services that may be small and may be affected by the 
rules and policies adopted herein. We note, however, that the common 
carrier microwave fixed licensee category includes some large entities.
    49. Offshore Radiotelephone Service. This service operates on 
several UHF television broadcast channels that are not used for 
television broadcasting in the coastal areas of states bordering the 
Gulf of Mexico. There are presently approximately 55 licensees in this 
service. The Commission is unable to estimate at this time the number 
of licensees that would qualify as small under the SBA's small business 
size standard for the category of Wireless Telecommunications Carriers 
(except Satellite). Under that SBA small business size standard, a 
business is small if it has 1,500 or fewer employees. Census data for 
2007, which supersede data contained in the 2002 Census, show that 
there were 1,383 firms that operated that year. Of those 1,383, 1,368 
had fewer than 100 employees, and 15 firms had more than 100 employees. 
Thus, under this category and the associated small business size 
standard, the majority of firms can be considered small.
    50. 39 GHz Service. The Commission created a special small business 
size standard for 39 GHz licenses--an entity that has average gross 
revenues of $40 million or less in the three previous calendar years. 
An additional size standard for ``very small business'' is: An entity 
that, together with affiliates, has average gross revenues of not more 
than $15 million for the preceding three calendar years. The SBA has 
approved these small business size standards. The auction of the 2,173 
39 GHz licenses began on April 12, 2000 and closed on May 8, 2000. The 
18 bidders who claimed small business status won 849 licenses. 
Consequently, the Commission estimates that 18 or fewer 39 GHz 
licensees are small entities that may be affected by rules adopted 
pursuant to the Order.
    51. Broadband Radio Service and Educational Broadband Service. 
Broadband Radio Service systems, previously referred to as Multipoint 
Distribution Service (MDS) and Multichannel Multipoint Distribution 
Service (MMDS) systems, and ``wireless cable,'' transmit video 
programming to subscribers and provide two-way high speed data 
operations using the microwave frequencies of the Broadband Radio 
Service (BRS) and Educational Broadband Service (EBS) (previously 
referred to as the Instructional Television Fixed Service (ITFS)). In 
connection with the 1996 BRS auction, the Commission established a 
small business size standard as an entity that had annual average gross 
revenues of no more than $40 million in the previous three calendar 
years. The BRS auctions resulted in 67 successful bidders obtaining 
licensing opportunities for 493 Basic Trading Areas (BTAs). Of the 67 
auction winners, 61 met the definition of a small business. BRS also 
includes licensees of stations authorized prior to the auction. At this 
time, we estimate that of the 61 small business BRS auction winners, 48 
remain small business licensees. In addition to the 48 small businesses 
that hold BTA authorizations, there are approximately 392 incumbent BRS 
licensees that are considered small entities. After adding the number 
of small business auction licensees to the number of incumbent 
licensees not already counted, we find that there are currently 
approximately 440 BRS licensees that are defined as small businesses 
under either the SBA or the Commission's rules.
    52. In 2009, the Commission conducted Auction 86, the sale of 78 
licenses in the BRS areas. The Commission offered three levels of 
bidding credits: (i) A bidder with attributed average annual gross 
revenues that exceed $15 million and do not exceed $40 million for the 
preceding three years (small business) received a 15 percent discount 
on its winning bid; (ii) a bidder with attributed average annual gross 
revenues that exceed $3 million and do not exceed $15 million for the 
preceding three years (very small business) received a 25 percent 
discount on its winning bid; and (iii) a bidder with attributed average 
annual gross revenues that do not exceed $3 million for the preceding 
three years (entrepreneur) received a 35 percent discount on its 
winning bid. Auction 86 concluded in 2009 with the sale of 61 licenses. 
Of the ten winning bidders, two bidders that claimed small business 
status won 4 licenses; one bidder that claimed very small business 
status won three licenses; and two bidders that

[[Page 36072]]

claimed entrepreneur status won six licenses.
    53. In addition, the SBA's Cable Television Distribution Services 
small business size standard is applicable to EBS. There are presently 
2,436 EBS licensees. All but 100 of these licenses are held by 
educational institutions. Educational institutions are included in this 
analysis as small entities. Thus, we estimate that at least 2,336 
licensees are small businesses. Since 2007, Cable Television 
Distribution Services have been defined within the broad economic 
census category of Wired Telecommunications Carriers; that category is 
defined as follows: ``This industry comprises establishments primarily 
engaged in operating and/or providing access to transmission facilities 
and infrastructure that they own and/or lease for the transmission of 
voice, data, text, sound, and video using wired telecommunications 
networks. Transmission facilities may be based on a single technology 
or a combination of technologies.'' The SBA has developed a small 
business size standard for this category, which is: All such firms 
having 1,500 or fewer employees. To gauge small business prevalence for 
these cable services we must, however, use the most current census data 
that are based on the previous category of Cable and Other Program 
Distribution and its associated size standard; that size standard was: 
All such firms having $13.5 million or less in annual receipts. 
According to Census Bureau data for 2007, there were a total of 996 
firms in this category that operated for the entire year. Of this 
total, 948 firms had annual receipts of under $10 million, and 48 firms 
had receipts of $10 million or more but less than $25 million. Thus, 
the majority of these firms can be considered small.
    54. Narrowband Personal Communications Services. In 1994, the 
Commission conducted an auction for Narrowband PCS licenses. A second 
auction was also conducted later in 1994. For purposes of the first two 
Narrowband PCS auctions, ``small businesses'' were entities with 
average gross revenues for the prior three calendar years of $40 
million or less. Through these auctions, the Commission awarded a total 
of 41 licenses, 11 of which were obtained by four small businesses. To 
ensure meaningful participation by small business entities in future 
auctions, the Commission adopted a two-tiered small business size 
standard in the Narrowband PCS Second Report and Order. A ``small 
business'' is an entity that, together with affiliates and controlling 
interests, has average gross revenues for the three preceding years of 
not more than $40 million. A ``very small business'' is an entity that, 
together with affiliates and controlling interests, has average gross 
revenues for the three preceding years of not more than $15 million. 
The SBA has approved these small business size standards. A third 
auction was conducted in 2001. Here, five bidders won 317 (Metropolitan 
Trading Areas and nationwide) licenses. Three of these claimed status 
as a small or very small entity and won 311 licenses.
    55. Paging (Private and Common Carrier). In the Paging Third Report 
and Order, we developed a small business size standard for ``small 
businesses'' and ``very small businesses'' for purposes of determining 
their eligibility for special provisions such as bidding credits and 
installment payments. A ``small business'' is an entity that, together 
with its affiliates and controlling principals, has average gross 
revenues not exceeding $15 million for the preceding three years. 
Additionally, a ``very small business'' is an entity that, together 
with its affiliates and controlling principals, has average gross 
revenues that are not more than $3 million for the preceding three 
years. The SBA has approved these small business size standards. 
According to Commission data, 291 carriers have reported that they are 
engaged in Paging or Messaging Service. Of these, an estimated 289 have 
1,500 or fewer employees, and two have more than 1,500 employees. 
Consequently, the Commission estimates that the majority of paging 
providers are small entities that may be affected by our action. An 
auction of Metropolitan Economic Area licenses commenced on February 
24, 2000, and closed on March 2, 2000. Of the 2,499 licenses auctioned, 
985 were sold. Fifty-seven companies claiming small business status won 
440 licenses. A subsequent auction of MEA and Economic Area (``EA'') 
licenses was held in the year 2001. Of the 15,514 licenses auctioned, 
5,323 were sold. One hundred thirty-two companies claiming small 
business status purchased 3,724 licenses. A third auction, consisting 
of 8,874 licenses in each of 175 EAs and 1,328 licenses in all but 
three of the 51 MEAs, was held in 2003. Seventy-seven bidders claiming 
small or very small business status won 2,093 licenses. A fourth 
auction, consisting of 9,603 lower and upper paging band licenses was 
held in the year 2010. Twenty-nine bidders claiming small or very small 
business status won 3,016 licenses.
    56. 220 MHz Radio Service--Phase I Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. Phase I licensing was conducted 
by lotteries in 1992 and 1993. There are approximately 1,515 such non-
nationwide licensees and four nationwide licensees currently authorized 
to operate in the 220 MHz band. The Commission has not developed a 
small business size standard for small entities specifically applicable 
to such incumbent 220 MHz Phase I licensees. To estimate the number of 
such licensees that are small businesses, we apply the small business 
size standard under the SBA rules applicable to Wireless 
Telecommunications Carriers (except Satellite). Under this category, 
the SBA deems a wireless business to be small if it has 1,500 or fewer 
employees. The Commission estimates that nearly all such licensees are 
small businesses under the SBA's small business size standard that may 
be affected by rules adopted pursuant to the Order.
    57. 220 MHz Radio Service--Phase II Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. The Phase II 220 MHz service is 
subject to spectrum auctions. In the 220 MHz Third Report and Order, we 
adopted a small business size standard for ``small'' and ``very small'' 
businesses for purposes of determining their eligibility for special 
provisions such as bidding credits and installment payments. This small 
business size standard indicates that a ``small business'' is an entity 
that, together with its affiliates and controlling principals, has 
average gross revenues not exceeding $15 million for the preceding 
three years. A ``very small business'' is an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
that do not exceed $3 million for the preceding three years. The SBA 
has approved these small business size standards. Auctions of Phase II 
licenses commenced on September 15, 1998, and closed on October 22, 
1998. In the first auction, 908 licenses were auctioned in three 
different-sized geographic areas: Three nationwide licenses, 30 
Regional Economic Area Group (EAG) Licenses, and 875 Economic Area (EA) 
Licenses. Of the 908 licenses auctioned, 693 were sold. Thirty-nine 
small businesses won licenses in the first 220 MHz auction. The second 
auction included 225 licenses: 216 EA licenses and 9 EAG licenses. 
Fourteen companies claiming small business status won 158 licenses.
5. Satellite Service Providers
    58. Satellite Telecommunications Providers. Two economic census 
categories address the satellite industry. The first category has a 
small business size standard of $30 million or less in average annual 
receipts, under SBA

[[Page 36073]]

rules. The second has a size standard of $30 million or less in annual 
receipts.
    59. The category of Satellite Telecommunications ``comprises 
establishments primarily engaged in providing telecommunications 
services to other establishments in the telecommunications and 
broadcasting industries by forwarding and receiving communications 
signals via a system of satellites or reselling satellite 
telecommunications.'' For this category, Census Bureau data for 2007 
show that there were a total of 570 firms that operated for the entire 
year. Of this total, 530 firms had annual receipts of under $30 
million, and 40 firms had receipts of over $30 million. Consequently, 
we estimate that the majority of Satellite Telecommunications firms are 
small entities that might be affected by our action.
    60. The second category of Other Telecommunications comprises, 
inter alia, ``establishments primarily engaged in providing specialized 
telecommunications services, such as satellite tracking, communications 
telemetry, and radar station operation. This industry also includes 
establishments primarily engaged in providing satellite terminal 
stations and associated facilities connected with one or more 
terrestrial systems and capable of transmitting telecommunications to, 
and receiving telecommunications from, satellite systems.'' For this 
category, Census Bureau data for 2007 show that there were a total of 
1,274 firms that operated for the entire year. Of this total, 1,252 had 
annual receipts below $25 million per year. Consequently, we estimate 
that the majority of All Other Telecommunications firms are small 
entities that might be affected by our action.
6. Cable Service Providers
    61. Because section 706 requires us to monitor the deployment of 
broadband using any technology, we anticipate that some broadband 
service providers may not provide telephone service. Accordingly, we 
describe below other types of firms that may provide broadband 
services, including cable companies, MDS providers, and utilities, 
among others.
    62. Cable and Other Program Distributors. Since 2007, these 
services have been defined within the broad economic census category of 
Wired Telecommunications Carriers; that category is defined as follows: 
``This industry comprises establishments primarily engaged in operating 
and/or providing access to transmission facilities and infrastructure 
that they own and/or lease for the transmission of voice, data, text, 
sound, and video using wired telecommunications networks. Transmission 
facilities may be based on a single technology or a combination of 
technologies.'' The SBA has developed a small business size standard 
for this category, which is: All such firms having 1,500 or fewer 
employees. To gauge small business prevalence for these cable services 
we must, however, use current census data that are based on the 
previous category of Cable and Other Program Distribution and its 
associated size standard; that size standard was: All such firms having 
$13.5 million or less in annual receipts. According to Census Bureau 
data for 2007, there were a total of 2,048 firms in this category that 
operated for the entire year. Of this total, 1,393 firms had annual 
receipts of under $10 million, and 655 firms had receipts of $10 
million or more. Thus, the majority of these firms can be considered 
small.
    63. Cable Companies and Systems. The Commission has also developed 
its own small business size standards, for the purpose of cable rate 
regulation. Under the Commission's rules, a ``small cable company'' is 
one serving 400,000 or fewer subscribers, nationwide. Industry data 
that there are currently 4,600 active cable systems in the United 
States. Of this total, all but nine cable operators are small under the 
400,000 subscriber size standard. In addition, under the Commission's 
rules, a ``small system'' is a cable system serving 15,000 or fewer 
subscribers. Current Commission records show 4,945 cable systems 
nationwide. Of this total, 4,380 cable systems have less than 20,000 
subscribers, and 565 systems have 20,000 or more subscribers, based on 
the same records. Thus, under this standard, we estimate that most 
cable systems are small entities.
    64. Cable System Operators. The Communications Act of 1934, as 
amended, also contains a size standard for small cable system 
operators, which is ``a cable operator that, directly or through an 
affiliate, serves in the aggregate fewer than 1 percent of all 
subscribers in the United States and is not affiliated with any entity 
or entities whose gross annual revenues in the aggregate exceed 
$250,000,000.'' The Commission has determined that an operator serving 
fewer than 677,000 subscribers shall be deemed a small operator, if its 
annual revenues, when combined with the total annual revenues of all 
its affiliates, do not exceed $250 million in the aggregate. Based on 
available data, we find that all but ten incumbent cable operators are 
small entities under this size standard. We note that the Commission 
neither requests nor collects information on whether cable system 
operators are affiliated with entities whose gross annual revenues 
exceed $250 million, and therefore we are unable to estimate more 
accurately the number of cable system operators that would qualify as 
small under this size standard.
    65. The open video system (OVS) framework was established in 1996, 
and is one of four statutorily recognized options for the provision of 
video programming services by local exchange carriers. The OVS 
framework provides opportunities for the distribution of video 
programming other than through cable systems. Because OVS operators 
provide subscription services, OVS falls within the SBA small business 
size standard covering cable services, which is ``Wired 
Telecommunications Carriers.'' The SBA has developed a small business 
size standard for this category, which is: All such firms having 1,500 
or fewer employees. According to Census Bureau data for 2007, there 
were a total of 955 firms in this previous category that operated for 
the entire year. Of this total, 939 firms had employment of 999 or 
fewer employees, and 16 firms had employment of 1,000 employees or 
more. Thus, under this second size standard, most cable systems are 
small and may be affected by rules adopted pursuant to the Order. In 
addition, we note that the Commission has certified some OVS operators, 
with some now providing service. Broadband service providers (BSPs) are 
currently the only significant holders of OVS certifications or local 
OVS franchises. The Commission does not have financial or employment 
information regarding the entities authorized to provide OVS, some of 
which may not yet be operational. Thus, again, at least some of the OVS 
operators may qualify as small entities.
7. Electric Power Generators, Transmitters, and Distributors
    66. Electric Power Generators, Transmitters, and Distributors. The 
Census Bureau defines an industry group comprised of ``establishments, 
primarily engaged in generating, transmitting, and/or distributing 
electric power. Establishments in this industry group may perform one 
or more of the following activities: (1) Operate generation facilities 
that produce electric energy; (2) operate transmission systems that 
convey the electricity from the generation facility to the distribution 
system; and (3) operate distribution systems that convey electric power 
received from the generation facility or

[[Page 36074]]

the transmission system to the final consumer.'' The SBA has developed 
a small business size standard for firms in this category: ``A firm is 
small if, including its affiliates, it is primarily engaged in the 
generation, transmission, and/or distribution of electric energy for 
sale and its total electric output for the preceding fiscal year did 
not exceed 4 million megawatt hours.'' Census Bureau data for 2007 show 
that there were 1,174 firms that operated for the entire year in this 
category. Of these firms, 50 had 1,000 employees or more, and 1,124 had 
fewer than 1,000 employees. Based on this data, a majority of these 
firms can be considered small.

D. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities

    67. The Commission proposes to prohibit the use of non-disclosure 
agreements that restrict parties to a BDS tariff or commercial 
agreement from sharing the terms of such agreements with the 
Commission. In the event of detariffing, the Commission proposes on 
requiring price cap incumbent LECs to publicly disclose the rates, 
terms and conditions for services currently subject to tariffing 
requirements and seeks comment on this proposal.
    68. In order to calculate a productivity X-factor, the Commission 
invites comment on whether we should require price cap LECs to submit 
their expense matrix data from 2005 to 2015 and, if so, whether should 
we require that these data be reported using the categories previously 
required under the Commission's rules and, if not, what categories 
should we specify, and whether the benefits from these data outweigh 
the burdens. The Commission asks whether we should require the price 
cap LECs to submit cost studies to help us determine business data 
services productivity growth and if so, what methodology should we 
specify for those costs studies. The Commission asks whether the 
benefits from relying on company-specific data from these cost studies, 
as opposed to economy-wide or industry-wide data, outweigh the burdens. 
Furthermore, the Commission proposes that if it adopts a new X-factor 
or otherwise requires adjustments to the price cap indices, price cap 
carriers would implement the associated rate decreases by submitting 
Tariff Review Plans (TRPs) and special access tariff revisions for all 
rate elements associated with special access and seeks comment on this 
proposal.
    69. In the FNPRM, the Commission proposes to require providers of 
BDS subject to anchor pricing or benchmarking to publically disclose 
generally available terms and conditions. The Commission seeks comment 
on whether any requirements should be imposed to ensure compliance with 
our proposed rules and, if so, what form they should take. The 
Commission seeks comment on whether we should require compliance 
certification from providers as well as any other requirements we 
should consider and the costs and benefits.
    70. The Commission also proposes a future periodic data collection 
that will allow the Commission to update periodically its 
identification of competitive and non-competitive markets. Beginning in 
2018 (i.e., year-end 2017 data), the Commission proposes collecting 
data every three years from incumbent LEC providers to update the 
Commission's competitive analysis and monitor the BDS marketplace. The 
Commission proposes essentially a paired-down version of the 2015 
Collection. Specifically, the Commission proposes collecting data on 
locations with connections, fiber routes, and monthly billing 
information, revenues, requests for proposals, and wire center 
locations by regulatory type as well as new categories of information 
for collection, e.g., churn data, data on managed services, internal 
documents showing competitive pressure assessments and operational 
responses. Meanwhile, the Commission proposes omitting purchasers of 
BDS from the mandatory collection, instead proposing to hire a third-
party to voluntarily survey purchaser customer classes.

E. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities and Significant Alternatives Considered

    71. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include (among others) the following four alternatives: (1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities. We expect to consider all of these factors when we have 
received substantive comment from the public and potentially affected 
entities.
    72. The Commission proposes to apply a Competitive Market Test to 
determine whether there is sufficient competition to constrain prices 
for BDS. The Commission proposes two alternatives for applying the 
Competitive Market Test, favoring one based on bright-line triggers--
business density and the number of competitors--which will offer 
clearer rules and be administratively less burdensome for providers to 
present the case.
    73. The Commission seeks comment on whether data from various 
sources proposed in a staff study provide a reasonable basis for 
calculating a productivity-based X factor but seeks comment on 
alternative sources of data that would more precisely calculate 
productivity increases in the provision of business data services. The 
Commission seeks comment on whether the additional precision associated 
with obtaining those data and using them to calculate a productivity-
based X-factor outweigh the associated burdens. In particular, the 
Commission proposes calculating the X-factor using economy-wide and 
industry-wide data as opposed to company-specific data from cost 
studies, but asks whether the added precision from company-wide data 
outweighs the burdens.
    74. For competitive areas, the Commission proposes removing 
significant regulatory burdens imposed on BDS providers. Specifically, 
the Commission proposes removing TDM-based BDS determined to be 
competitive under the Competitive Market Test from price cap regulation 
and apply a competitive regulatory framework--proposing a path to 
detariff TDM-based services while maintaining price caps on a 
detariffed basis. The Commission also seeks comment on a voluntary 
mechanism that would provide carriers with flexibility to adjust price 
cap rates for TDM-based services when replacement packet-based services 
are available.
    75. The Commission recognizes that applying heightened regulation 
to services largely unregulated previously may impose burdens on 
providers and purchasers. The Commission, therefore, asks commenters 
whether there should be an implementation period to give providers 
sufficient time to bring markets into compliance with the applicable 
regulatory obligations, and seek comment on the length of any 
implementation period.
    76. As noted above, in the FNPRM, the Commission seeks comment on 
whether we should extend the Tariff Investigation Order's prohibition 
on all-or-nothing provisions a general prohibition for business data 
services, including both tariffed offerings and commercial agreements 
and whether

[[Page 36075]]

such a prohibition should be imposed in noncompetitive markets or in 
all markets. The Commission asks what additional management or tracking 
burdens would this impose on incumbent LECs and how significant would 
they be, whether such costs or burdens can be quantified, and how such 
administrative burdens compare with the benefits of added flexibility 
for customers in the business data services market. The Commission also 
asks about whether allowing customers to treat their purchases under 
one Ethernet commercial agreement as separate purchases impose any 
burdens on providers of business data services and whether the benefits 
of increase flexibility outweigh any such burdens.
    77. In the FNPRM, the Commission proposes to periodically collect 
data from incumbent LEC providers going forward to update the 
Commission's analysis and monitor the marketplace for BDS. The 
Commission took several steps to minimize the economic impact on small 
providers and proposes exempting purchasers from the collection 
requirements. The Commission proposes narrowing the scope of the 
collection to minimize burdens on smaller providers while providing the 
Commission with the data necessary to periodically update its analysis. 
The Commission seeks comment on whether it is possible to exclude 
smaller competitive LECs from the collection without adversely 
affecting the Commission's analysis of the BDS market. The Commission 
is considering excluding competitive providers below a set threshold 
based on either locations with connections, number of customers, or 
revenues and ask commenters to suggest appropriate thresholds and to 
quantify the potential impact of any exclusion on the Commission's 
analysis. The Commission proposes a collection that is significantly 
less burdensome then the 2015 Collection, largely omitting questions on 
terms and conditions and narrative responses. The Commission proposes 
to omit purchasers, largely smaller entities, from the mandatory 
periodic collection, instead proposing to hire a third party to conduct 
a voluntary survey of customer classes. Furthermore, the proposed three 
year periodic collection period, as opposed to annual or quarterly, 
would minimize the burden on filers.
    78. As SBA observed, changes in special access (BDS) prices may 
have an impact on small carriers including small competitive carriers. 
In the FNPRM, the Commission proposes modifying the existing regulatory 
regime applicable to BDS. Any such actions will accrue to the benefit 
of all carriers, including small competitive carriers, as it will 
ensure the availability of business data services at just and 
reasonable rates.

F. Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rules

    79. None.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 2016-12058 Filed 6-2-16; 8:45 am]
BILLING CODE 6712-01-P