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Special Access

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Special Access Data Collection Overview

"Special access lines are dedicated high-capacity connections used by businesses and institutions to transmit their voice and data traffic. For example, wireless providers use special access lines to funnel voice and data from cell towers to wired telephone and broadband networks. Small businesses, governmental branches, hospitals and medical offices, and even schools and libraries use special access for the first leg of communications with the home office. Branch banks and gas stations even use special access for ATMs and credit card readers. The FCC has the obligation to ensure that special access lines are provided at reasonable rates and on reasonable terms and conditions."

Derived From: Government Accountability Office, FCC Needs to Improve its Ability to Monitor and Determine the Extent of Competition in Dedicated Access Services, Report 07-80 (Nov. 2006).

Government agencies and businesses rely on “special access” services (also known as “dedicated access”) to meet their voice and data telecommunications needs (i.e., large volumes of long-distance services, secure point-to-point data transmissions, and reliable Internet access).1 The federal government, with its extensive network of agency offices spread throughout the nation, is a major consumer of these services. Due to increasing data transmission needs, these dedicated access services are a growing segment of the telecommunications market and represented about $16 billion in revenues in 2005 for the major providers of those services—the largest incumbent telecommunications firms (i.e., AT&T Corporation [formerly SBC Communications], BellSouth Corporation, Qwest Communications, and Verizon Communications). The incumbent firms have an essentially ubiquitous local network that generally reaches all of the business locations in their local areas. For long-distance or other telecommunications companies (such as Sprint Nextel, Time Warner Telecom, and Level 3 Communications) to provide their services to large business customers, they often purchase dedicated access services on a wholesale basis from the incumbents for local connectivity. The incumbent firms have stated that the majority of the dedicated access services they sell are sold wholesale to other carriers. Alternatively, competitors may build out to reach customers using their own facilities, or purchase connections from other competitive carriers that have built out to those businesses, resulting in “facilities-based” competition. The Telecommunications Act of 1996 (the 1996 Act), allowed the major incumbent firms to compete in the long-distance market;2 therefore, incumbent firms are now competing to provide businesses with long- distance services as well as acting as a wholesale supplier of local connectivity to their competitors.

The Federal Communications Commission (FCC), which is an independent United States government agency, regulates interstate and international communications by radio, television, wire, satellite, and cable. Because the major incumbent firms initially controlled all dedicated access connections, prices for these services have traditionally been regulated by FCC. In 1991, FCC implemented a system of regulations that altered the manner in which the incumbent firms established interstate dedicated access prices. FCC “capped” the prices that could be charged by the large incumbent firms. (Those firms are hereafter called “price-cap incumbents.”)3 The 1996 Act, which Congress designed to foster a procompetitive, deregulatory national policy framework for the United States telecommunications industry, led FCC to reconsider its current regulatory framework for access prices, including whether and how to remove price-cap incumbents’ access services from price caps and tariff regulation once they are subject to substantial competition.

In 1999, FCC issued the Pricing Flexibility Order,4 which, among other things, permitted the deregulation of prices for dedicated access services in metropolitan statistical areas (MSA)5 where price-cap incumbents could show that certain “competitive triggers” had been met. The competitive trigger refers to the extent to which competitors have “colocated” equipment in a price-cap incumbent’s wire center (i.e., an aggregation point on a local telecommunications’ network).6 FCC determined that once a certain level of colocation in wire centers throughout a metropolitan area had been achieved, it was a good predictor that competitors had made significant, irreversible sunk investments in facilities, and indicated the likelihood that a competitor could eventually extend its own network to reach its customers. In FCC’s view, sufficient sunk investments of this sort would constrain monopoly behavior by price-cap incumbents. Accordingly, FCC determined that colocation at the wire center level can reasonably serve as a measure of competition in a given MSA, rather then looking to more granular assessments of the level of competition at a building level or at the level of individual customers. FCC also determined that the colocation-based triggers would not be overly burdensome on parties and on FCC’s limited resources as would be more granular assessments. The United States Court of Appeals for the District of Columbia affirmed FCC’s decision to grant additional pricing flexibility to price-cap incumbents through a series of colocation-based triggers.7

Depending on the extent of competitive colocation that is achieved in an MSA, FCC grants either partial or full pricing flexibility to the price-cap incumbent carriers.8

FCC’s pricing flexibility pertains to two separate components of dedicated access services—the end user channel termination and dedicated transport. In general, the end user channel termination component (sometimes referred to as a “local loop”) connects an end user’s location (e.g., the corporate headquarters or field office) with the nearest incumbent’s serving wire center. The dedicated transport component connects one wire center to another wire center or to another carrier’s point of presence. Figure 1 illustrates these components in MSAs with different levels of pricing flexibility for channel terminations and the pricing that applies for each component. In the MSA on the left-hand side of the figure, the price-cap incumbent has received phase I flexibility for channel terminations. As figure 1 shows, with phase I flexibility, the price- cap price is still available for channel terminations. In the MSA on the right-hand side of the figure, the incumbent has received phase II flexibility for channel terminations, and the price-flex price is used. If a competitor is colocated in the wire center as the figure illustrates, FCC has noted that the potential exists for the competitor to build out its own network to end user B.

In 2000, prior to its granting any pricing flexibility, FCC further reformed its price-cap rules. That reform was initiated by a group of incumbent firms and long-distance companies, called the Coalition for Affordable Local and Long Distance Service (CALLS).9 The CALLS plan was envisioned as a 5-year transitional regime to resolve, among other things, price-cap issues.10 Specifically, as FCC adopted, the CALLS plan provided for yearly reductions in price caps for dedicated access services based on agreed-upon percentages. The percentage decreases were 3 percent in 2000 and 6.5 percent each year from 2001 through 2003. Beginning in 2004, price-cap rates have essentially been frozen, with no further decreases in prices, with the exception of adjustments based on cost factors outside of the incumbents’ control (e.g., taxes and fees). The “CALLS Order” was intended to run until June 30, 2005, but the order remains in place until FCC adopts a subsequent plan.

In 2001, concurrently with the scheduled decreases in price caps resulting from the CALLS Order, FCC began granting pricing flexibility to price-cap incumbents. Some level of pricing flexibility has since been granted to the four major price-cap incumbents in 215 of the 369 MSAs in the United States and Puerto Rico. These four price-cap incumbents have received full price deregulation (phase II for all circuit components) in 112 MSAs. Only 3 of the 100 largest MSAs in the United States and Puerto Rico are not under any pricing flexibility.11

In January 2005, in response to a petition that AT&T filed in 2002, FCC initiated a rulemaking proceeding on dedicated access price regulation to examine whether the pricing flexibility rules should remain intact or be revised.12 The basic economic theory underlying FCC’s regulatory approach postulates that greater competition should constrain incumbent pricing power and drive prices toward the marginal cost of providing those dedicated access services. However, competitors and business customers have raised concerns that, in places where FCC has granted phase II pricing flexibility, prices have incongruously risen. Concerns also have been raised that the competitive triggers that FCC used were inadequate to accurately judge the extent of competition in the market. Price-cap incumbents, on the other hand, generally oppose the petition. They contend that their dedicated access rates are reasonable, that there is robust competition in the dedicated access market, and that the colocation-based triggers are an accurate metric for competition. FCC’s rulemaking is still ongoing.

Recent mergers of major telecommunications firms—SBC’s acquisition of AT&T (and subsequently assuming the AT&T name); Verizon’s merger with MCI; and, more recently, AT&T’s proposed purchase of BellSouth— have further complicated the issues surrounding dedicated access services. As long-distance companies, the former AT&T and MCI were two of the largest purchasers of dedicated access services from the incumbents and were major competitors for providing large business customers with telecommunications services. At the federal level, FCC and the Department of Justice (DOJ) reviewed these mergers.13 DOJ filed separate civil antitrust complaints on October 27, 2005, seeking to enjoin the proposed acquisitions. DOJ found the likely effect of these acquisitions would be to lessen competition substantially for dedicated access in 19 metropolitan areas.14 FCC approved the proposed mergers on October 31, 2005, subject to the parties’ agreeing to certain commitments, including freezing the prices for dedicated access for 30 months.15 More recently, AT&T announced plans to purchase BellSouth. Concerns have been raised that this proposed merger also may lessen competition in the dedicated access market. FCC’s review of this merger is ongoing.

The availability of unbundled network elements (UNE) also complicates the issues surrounding facilities-based competition in dedicated access because they are functional equivalents to certain dedicated access services, but, where available, are generally less expensive than dedicated access services.16 The 1996 Act gave the FCC broad power to require incumbent firms to make UNEs available to competitive carriers to provide them with local connectivity.17 Recently, a federal appellate court upheld FCC’s fourth attempt to impose UNE rules.18 Under the new rules, FCC modified its unbundling framework19 for high-capacity loops and transport. The Commission adopted a wire-center-based analysis that used the number of access lines and fiber colocations in a wire center as proxies to determine impairment for high-capacity loops and dedicated transport.20 Where such triggers are not met, the incumbent must make UNEs available at rates based on forward-looking economic costs.21 FCC hopes that this framework will lead to the right incentives for both incumbents and competitors to invest rationally in the telecommunications market.

Broadband Plan Recommendations

"Special access circuits are usually sold by incumbent local exchange carriers (LECs) and are used by businesses and competitive providers to connect customer locations and networks with dedicated, high-capacity links.79 Special access circuits play a significant role in the availability and pricing of broadband service. For example, a competitive provider with its own fiber optic network in a city will frequently purchase special access connections from the incumbent provider in order to serve customer locations that are “off net.” For many broadband providers, including small incumbent LECs, cable companies and wireless broadband providers, the cost of purchasing these high-capacity circuits is a significant expense of offering broadband service, particularly in small, rural communities. 

The FCC regulates the rates, terms and conditions of these services primarily through interstate tariffs filed by incumbent LECs. However, the adequacy of the existing regulatory regime in ensuring that rates, terms and conditions for these services be just and reasonable has been subject to much debate.

Much of this criticism has centered on the FCC’s decisions to deregulate aspects of these services. In 1999, the FCC began to grant pricing flexibility for special access services in certain metropolitan areas. Since 2006, the FCC has deregulated many of the packet-switched, high-capacity Fast Ethernet and Gigabit Ethernet transport services offered by several incumbent LECs. Business customers, community institutions and network providers regard these technologies as the most ef- ficient method for connecting end-user locations and broadband networks to the Internet.

The FCC is currently considering the appropriate analytical framework for its review of these offerings. The FCC needs to establish an analytical approach that will resolve these debates comprehensively and ensure that rates, terms and conditions for these services are just and reasonable.

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