October 20, 2016 at 4:53 pm ET
Why the FCC Chose Not to Regulate Ethernet Bulk Data Prices
When the Federal Communications Commission unveiled a new regulation to regulate the $45 billion “business data services” market, many in the industry were surprised the rules didn’t include price caps on newer, Ethernet-based technology.
A nonbinding agreement reached this summer between two key players — incumbent carrier Verizon and the competitive-carrier trade group INCOMPAS — included Ethernet price caps. The goal for both the FCC and some in the industry is to curb anti-competitive pricing of the bulk data connections that power ATMs, retail transactions and cell phone towers.
Most observers — including some inside the FCC itself — expected the commission’s final rule to track closely to the Verizon/INCOMPAS deal. The rule, which is actually quite different from that agreement, is currently on circulation among the five commissioners. A vote on it could come at any time, but it has not been included on the docket for the commission’s open meeting on Oct. 27.
There are competing reasons why the commission excluded Ethernet price caps in the rule, according to FCC sources.
The main reason, according to one senior FCC official, is that a thorough examination of its marketplace data showed insufficient evidence that the Ethernet market was noncompetitive. The official said that recent data revealed an uptick in Ethernet competition, driven in part by the entrance of cable companies into the bulk data marketplace. It would be premature to regulate the price at this point.
A separate FCC official told Morning Consult there are additional reasons, beyond the main argument about inconclusive data, that explain why the commission didn’t include Ethernet price caps in its latest version. This official said the FCC lacked the pricing data that would make the caps capable of effectively withstanding a legal challenge.
In addition, the official said some regulators were concerned by unworkable provisions in the Verizon/INCOMPAS proposal to cap Ethernet prices by census blocks.
What’s more, the same official said regulators were worried about industry reaction to earlier FCC orders that exempted some bulk data providers from regulation.
In its current version of the rule, the commission asserted its authority to regulate Ethernet services in the future and laid out a complaints process to challenge uncompetitive prices. But it rankled many professionals in the competitive carrier community that regulators didn’t take the next step and mandate a price cap regime for Ethernet services.
There could be logistical challenges presented by the Ethernet-pricing framework in the Verizon/INCOMPAS plan. To determine Ethernet competitiveness, the plan envisions a marketplace test that would examine competition census block by census block. Regulators would impose varying price caps, where appropriate, on each block.
A census-block approach could be onerous for all parties involved. FCC regulators would struggle to formulate a coherent regulatory system. Providers would be unable to offer a flat rate to customers operating in multiple census blocks, and they would have to keep close administrative tabs on the prices charged to each client.
The Verizon/INCOMPAS proposal got around this problem for older services by declaring that all services operating under a certain speed are noncompetitive. It then imposed a blanket price cap on them, a provision the FCC ultimately adopted.
The pricing plan for the older services was practical in part because of the large amount of historical data concerning price points in that marketplace. The commission didn’t have the same amount of data on the newer and historically less regulated Ethernet market.
Without that data, there was concern that a court could rule that a blanket Ethernet price cap was arbitrary and overturn it.
Another possible reason for avoiding Ethernet price caps involves exemptions that the commission provided to several incumbent carriers on Ethernet connections beginning in 2006. One FCC official says the Ethernet price caps were scrapped partially out of concern about upsetting these carriers, who may have felt the commission was reneging on an older agreement.
Not everyone at the FCC agrees with that view. The other official said that neither the exemption orders nor the possibility of a court challenge were factors in the regulator’s decision. The FCC had already decided that the Ethernet marketplace data was inconclusive, rendering price caps unnecessary for now.
If the data had found evidence of a noncompetitive marketplace, a closer look at the price points would likely have been required to formulate a cap capable of holding up in a court of law.
And while it’s true that census block-based market tests are complicated, some officials still believe they could be made workable in an Ethernet price-cap regime in the future. It’s just not clear yet whether that is needed.