The Need for Better Analysis of High Capacity Services

In 1999, the Federal Communications Commission (“FCC”) began to grant incumbent local exchange carriers (“LECs”) pricing flexibility on special access services in some Metropolitan Statistical Areas (“MSAs”) when specific evidence of competitive alternatives is present. The propriety of that deregulatory move by the FCC has been criticized by the purchasers of such services ever since. Proponents of special access price regulation rely on three central arguments to support a retreat to strict price regulation: (1) the market(s) for special access and similar services is unduly concentrated; (2) rates of return on special access services, computed using FCC ARMIS data, are very high; and (3) prices for special access services are lower in more heavily regulated markets than in markets with the most pricing flexibility. As shown in this Policy Paper, these arguments, even if factually correct (which they are not), do not prove the presence of undue market power and, therefore, the need for additional price regulation. Moreover, those lines of inquiry do not consider the potential costs or risks of regulatory intervention, which must be part of any serious cost/benefit analysis. That said, given the importance of this issue, we provide several recommendations for policymakers that are evaluating the special access regulatory paradigm. First and foremost, data collection must be improved. Second, any revision to the special access price regulation paradigm must be subject to a stringent cost/benefit test, with explicit consideration of the costs of regulation. Finally, when gathering and analyzing more comprehensive data, policymakers should distinguish between economic definitions of “geographic market” and geographic areas for proper and efficient administration of its special access rules