CLEC End Game is Ethernet Re-Regulation

Wednesday, March 16th, 2016

There’s no question that copper-based TDM services are in rapid decline.  AT&T’s access lines (copper last mile connections) are no exception – they have declined by almost 65% (more than 30 million lines, if you can believe it) since 2009.

Yet, despite all the evidence pointing to the end of the copper era, the competitive local exchange carriers (CLECs) seem hell bent on championing the imposition of greater regulation on quickly disappearing copper-based TDM special access services.  On its face, this appears to be a peculiar use of energy, resources, and political capital.  And, sure enough, recent statements by the CLECs participating in this proceeding confirm that their agenda has changed.  Notwithstanding that this proceeding was initiated to address the regulatory status of TDM services, CLECs are now asking the Commission to take a sharp left turn and use this proceeding to impose old fashioned, monopoly-era rate regulation on incumbent local exchange carriers’ (ILECs’) last mile fiber Ethernet connections.

If the Commission wants to consider that change, of course, it would have to initiate a new proceeding that tees up that issue; it cannot simply bootstrap that issue into a proceeding about TDM services.  But even then, undoing the FCC’s grant of forbearance for fiber Ethernet services now would be a very heavy lift. Forbearance was not designed to be an on/off switch that can be flipped at the Commission’s whim, but to provide permanent relief when regulations are no longer necessary.

And there is absolutely no substantive basis for revoking forbearance for Ethernet services.  To the contrary, the marketplace for these services is even more competitive than when the Commission granted forbearance nearly a decade ago.   ILECs, CLECs, cable companies and others have invested billions to build-out fiber infrastructure in the race to provide high-speed business services.  Data collected in the special access proceeding show that these networks are so extensive that they reach virtually every census block that today has any demand for special access services.  And a recent industry analysis shows that today there are nine major U.S. Ethernet competitors with port shares of at least four percent, the majority of which are not ILECs, but are instead CLECs and cable companies.  In fact, Level 3, a CLEC, is the second largest Ethernet provider in the country.

Because the data so sharply demonstrates the presence of robust competition, the CLECs resort to trying to exclude competitors from the analysis – in particular, cable companies.  But that tactic cannot be credited because cable is an important facilities-based special access competitor that goes head-to-head against ILEC and CLEC special access services and has multiple technologies in its arsenal, including fiber-based Ethernet, HFC-over Ethernet, and 100+ Mbps broadband Internet service.  Cable companies are now able to deploy Ethernet over their near-ubiquitous HFC architecture, allowing them to provide lower speed (10-20 Mbps) symmetrical Ethernet services across their footprints without requiring any major infrastructure upgrades.  As the cable industry trade association recently confirmed, “[v]irtually any area with special access demand will contain cable company facilities that serve, or are capable of serving, business customers.”

Another argument offered by CLECs is that broadband regulation is necessary because  the coming 5G wireless revolution will require lots of additional infrastructure like microcells and backhaul, and CLECs must be able to purchase ILEC Ethernet last mile services at regulated rates to compete.  But that’s exactly backwards.  Putting aside the fact that standards for 5G won’t be final until 2018 and engineers are already envisioning microcells deployed using new self-backhaul techniques, the construction of new 5G Ethernet backhaul facilities will only spur more competition by increasing demand for backhaul.  As Sprint’s experience shows, there will be no shortage of competitors bidding to build 5G Ethernet backhaul.  In response to its 2010 Sprint Network Vision RFP, which requested bids for building out Ethernet backhaul to 38,000 macrocell sites, Sprint awarded contracts to dozens of parties vying to build, including CLECs and cable companies.

The same competitors that successfully competed to build Sprint’s backhaul network will be similarly well-positioned to provide 5G Ethernet backhaul, especially given the location of their fiber facilities.  CLECs and cable companies have a huge amount of fiber already deployed in dense urban business districts – precisely the areas where 5G densification will be necessary.  With fiber already ringing these regions, CLECs and cable companies will, undoubtedly, compete vigorously to build out any required backhaul.  Indeed, Verizon appears to be preparing for this very eventuality with the purchase of XO and its extensive fiber network outside of Verizon’s wireline footprint.

In short, the Ethernet market is already robustly competitive, and the coming 5G revolution will provide even more opportunities for competition to flourish.  As the cable industry has astutely pointed out, imposing unnecessary rate regulation on a highly competitive market will only undercut everyone’s incentives to invest in facilities-based infrastructure, creating dependence on below-cost ILEC facilities. And this will, ironically, reduce real competition in the Ethernet market.  The CLECs attempt to transform this proceeding into something that it’s not should be rejected.

By Caroline Van Wie, AT&T Assistant Vice President of Federal Regulatory