Because reliability and high quality communications is vital to the economy, telecoms tends to be a heavily regulated industry. Indeed, a telecoms operator’s fortune is often won or lost based on how well it pushes its envelope of services while still complying with the law.
The high impact of federal regulations in the United States has turned the job of the Federal Communications Commission (FCC) Chairman into a powerful role with broad influence over the shape of the US telecom market. And now, with the Trump administration in charge and a Republican at the helm of the FCC for the first time in eight years, recent decisions by the new FCC have somewhat reversed the course of FCC regulations in the past eight years.
Here to explain and interpret the new rulings in the key area of business data services (BDS) is Andrew Lipman (pictured above), Senior Partner and head of the telecom and media group at Morgan Lewis, an international law firm of 2,000 lawyers and about 30 offices across the US, Europe, and Asia. Andy has been practicing telecom law for over 35 years and his telecom practice, which is global in nature, is one of the largest telecom legal practices in the world.
Dan Baker: Andy, can you first tell us the scope of what Business Data Services covers — and a bit of the regulatory history in this area?
Andrew Lipman: Sure, Dan. BDS involves high speed private line services and includes DS1, DS3 and above, OCN services, Ethernet services, copper over Ethernet services and other advanced services.
Now, believe it or not, the BDS proceeding has been ongoing at the FCC since 2005.
In fact, it was initiated by AT&T which was complaining about SBC’s private line rates — and this was before SBC acquired AT&T. That’s how long the proceeding has been pending.
And late last year, the Democrats, under Chairman Wheeler, were sympathetic to the concerns of Level 3, Windstream, CLECs, and the wireless carriers who were large lesees of private line services to towers and cell sites. The plan was to reduce and cap the rates that the incumbent phone companies could charge for these services. They were also looking to regulate certain of the BDS rates that cable companies and metro fiber companies and others charge for these services.
By mid November 2016, the issue came to a head and the plan was vigorously opposed by AT&T, CenturyLink, and Frontier. With the exception of Verizon and Windstream, most independent phone companies opposed the plan since it would cap or reduce their rates.
Of course, what happened in the interim was the presidential election, and so now the balance of power has shifted to the Republicans. Post-inauguration day, we now have a new FCC chairman, Ajit Pai, who was the senior Republican on the FCC.
And one of Pai’s first actions — knowing this open BDS docket was out there — was to proceed with it, and he ruled in a 180 degree opposite direction to what Chairman Wheeler was proposing.
What an extraordinary turn of events. Please tell us about Chairman Pai’s ruling on BDS and its impact on the US telecom scene. And is there a consensus on how competitiveness the carrier market is for BDS?
Well, Dan, controversy over the “state of competition” in recent years has led to one of the most intensive data collection efforts in FCC history. And the new Republican FCC examining the data believe the historical record clearly shows that private line services — formerly called “special access” and now BTS — are strongly competitive, in sharp contrast to the findings of the Democrats in late 2016.
So acting on that record, Chairman Pai essentially deregulated them, first deregulating business data service above a DS3, and ultimately plans to de-tariff them. Second, for any transport service — even DS1 and DS3 — the commission is going to deregulate those too.
Third, in the local connections arena (called channel terminations) the FCC is going to subject those local private line circuits to a competitive market test. And the local test is whether or not there is (1) a cable company within the county or (2) whether 50% of the census blocks of a county have a cable company or competitive provider access within a half a mile. Either prong of that two prong test is applicable.
Now for those local channel termination services where there’s no competition — which again is a relatively small number of markets — then FCC will regulate and cause rates to come down slightly year after year.
So basically, they’ll be subjecting those DS1 and DS3 channel terminations to light touch regulation. The order was adopted on a 2 to 1 vote, both Republican commissioners, Chairman Pai and Commissioner Michael O’Reilly voting in favor of it. Commissioner Mignon Clyburn voted as a Democrat against it.
For services that remain tariffed, there will be a short transition period of six months. However, once a service is de-tariffed, the transition period concludes.
So what impact will all this have on the competitive landscape? And what are opponents of the decision saying?
Well, Democratic Commissioner Clyburn dissented, arguing strenuously that the order opens the door to immediate price hikes and she said it hurts rural areas, hospitals, and other users of private line services.
A number of carriers: Windstream, British Telecom, INCOMPAS trade association, and others objected as well. But the Republican Commissioners nonetheless felt that the market is and will be sufficiently competitive to relieve these carriers from regulation. The commission said that it was not going to regulate cable companies in the provision of private line services nor regulate metro fiber companies’ BDS services like those of Zayo, Light Tower, and others.
The competitive carriers who were especially active in this docket, particularly Sprint and Windstream, were looking for a much longer transition than six months. Usually, the Commission gives a year or more, often 2 years, to provide a gradual glide past to mitigate the rate shock. So, the short transition period was notable.
Another impact will be felt by operators such as Granite and other Wholesale Platform competitive carriers that are offering wholesale platform services. You may remember them as UNE-P and the Commission was pressured last year by AT&T, Verizon, and CenturyLink to drop that service, and the commission essentially said UNE-P will continue “until we act on special access or BDS.”
Well, since the commission has now “acted on BDS” with its decision, then UNE-P services also will be deregulated effective with the adoption of this decision.
Sounds like these regulatory changes are quite a realignment. Maybe the traditional ILECs and incumbents like AT&T will get a breather to make some revenue as they also transition to the new IP services environment. Is that the right way to read this?
Yes, I think it will have a significant impact on the incumbent carrier side of the house. Chairman Pai felt the BDS market was competitive and further capping rates would have stifled investment.
Chairman Pai and the Trump administration clearly favor, as a general rule, light-handed regulation and also appear to favor facilities-based competitors as opposed to those who resell or bundle networks.
And Chairman Ajit also feels if there are any competitive abuses or violations, customers would still be able to file complaints with the FCC, providing a safeguard.
What about the appeal of the ruling? What’s happening there and what are the chances that an appeal will succeed?
The parties will undoubtedly take this decision to court. They will most likely appeal it to the US Court of Appeals for the DC Circuit.
Of course, the mere filing of an appeal doesn’t prevent an FCC order from going into effect. The order will go into effect once it’s published in the federal register.
To prevent an order from going into effect would require filing a motion to stay before the Court of Appeals, and those are rarely granted but have been granted where warranted, such as in the prison inmate calling decision of the FCC earlier this year. You would basically have to show two key things: 1) likelihood of success on the merit, and 2) irreparable harm. And by harm, the court means the kind of harm that could not be mediated by monetary damages — generally, difficult, but not impossible, to prove.
So I think it’s certainly possible, but an uphill battle for the decision to be stayed and also difficult but doable, albeit a challenging argument to have a court overturn on appeal. The courts have been increasingly deferential to FCC decision making, but we will see an appeal and the appeal will probably percolate for about a year. On appeal, the Court may take interest in the zigzagging of this BDS Order from November 2016 under the Democrats to April 2017 under the Republicans and take a closer scrutiny.
Whatever the eventual outcome, you’ve shown that Chairman Wheeler and Chairman Ajit have totally different views.
Yes, Wheeler was more friendly to social media and Silicon Valley companies. He was a more sympathetic friend of competitors such as CLECs and more willing to use regulation as a tool, which he thought necessary to protect smaller competitors and ultimately consumers.
Pai, on the other hand, believes the marketplace is the best arbiter of these issues and he favors facility-based competition. He feels that genuine competition comes from infrastructure and generates jobs. I think he looks at the FCC as a more neutral arbiter, an umpire calling balls and strikes, rather than trying to influence the decision.
What about VoIP operators and the newer cloud player providers who offer an array of IT and comms services? What’s the new regulatory climate look like for those kinds of OTT players?
We know those types of companies very well, and I think that Pai would certainly like to see those companies around and prosper. I don’t think he plans on subjecting them to any more regulations. They are generally very lightly regulated today: they pay some USF fees and are subject to some 911 fees, but for the most part, the FCC has preempted states from regulating them. In fact, that happened just this week in a deregulatory case involving VoIP in Minnesota.
The FCC has for years deliberately side-stepped the issue of whether or not VoIP providers are communications companies or information service companies. Recently, under the Democrats, VoIP providers were able for the first time to apply and obtain their own blocks of numbers. There’s a lot of investment interest in those kinds of managed service companies too.
Data centers are another big set of players, and because they do not provide transmission on a common carrier basis, they are neither as a general rule regulated at the FCC or state level. Now if they expand or morph into different lines of business, then they could be regulated.
Please tell us something about Morgan Lewis. A firm with two thousand lawyers must be one of the biggest in the US.
We are in fact a global firm and one of the few with a large telecom practice. Here, we have a large telecom group, and we operate internationally. Our lawyers are licensed for practice throughout Europe, Asia, Latin America, Caribbean and the US.
We represent carriers and regulators across a broad scope. We also do a lot of carrier contracts with large enterprise users. For instance, we handle dispute resolution for them and arbitrate between international carriers. And in that niche we have many decades of relationships with international carriers doing business in the US. We assist in their tax, regulatory filings, contracts, employment issues and dispute resolution.
We continue to believe that international carriers coming to the US need legal representation as they enter the US market. Many international carriers feel that doing business with US carriers is no different than doing business in Asia with Asian carriers or Europe with European carriers. But in reality, it’s entirely different because of the US’s unique fee structure, regulatory environment, and obligations/responsibilities in cyber security and privacy.
Oftentimes skeletal agreements lead to misunderstandings and significant disputes. So resolving these issues on the front end often saves significant dollars and headache on the backend.
Good advice, Andy. And thank you for your expert commentary on these important regulatory changes.
This article was originally published by Top Operator and has been reproduced with their permission.