United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Government Reform, House of 

Representatives 

November 2006 TELECOMMUNICATIONS 

FCC Needs to Improve 

Its Ability to Monitor 

and Determine the 

Extent of Competition 

in Dedicated Access 

Services 

 

GAO-07-80 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2006

TELECOMMUNICATIONS 

FCC Needs to Improve Its Ability to 

Monitor and Determine the Extent of 

Competition in Dedicated Access 

Services 

Highlights of GAO-07-80, a report to the 

Chairman, Committee on Government 

Reform, House of Representatives

Government agencies and businesses 

that require significant capacity to

meet voice and data needs depend on

dedicated access services. This 

segment of the telecommunications

market generated about $16 billion in 

revenues for the major incumbent 

telecommunications firms in 2005. 

The Federal Communications 

Commission (FCC) has historically 

regulated dedicated access prices. 

With the Telecommunications Act of 

1996, FCC reformed its rules to rely

on competition to bring about costbased pricing. Starting in 2001, FCC 

granted pricing flexibility on the basis 

of a proxy measure of competition.

GAO examined (1) the extent that

alternatives are available in areas 

where FCC granted pricing flexibility, 

(2) how prices have changed since 

the granting of pricing flexibility, and 

the effect on government agencies, 

and (3) how FCC monitors 

competition. GAO’s work included

analyzing data on competitive 

alternatives, list prices, and average

revenue, and interviewing FCC 

officials and industry representatives. 

What GAO Recommends

GAO recommends that FCC better 

define effective competition, and 

consider additional data to measure 

and monitor competition. FCC 

disagreed that they need to better

define competition and collect 

additional data. GAO maintains that 

additional data collection is 

necessary for FCC to better fulfill its 

regulatory responsibilities. 

In the 16 major metropolitan areas we examined, available data suggest that 

facilities-based competitive alternatives for dedicated access are not widely

available. Data on the presence of competitors in commercial buildings 

suggest that competitors are serving, on average, less than 6 percent of the 

buildings with demand for dedicated access in these areas. For buildings

with higher levels of demand, facilities-based competition is more moderate, 

with 15 to 25 percent of buildings showing competitive alternatives, 

depending on the level of demand. Limited competitive build out in these 

MSAs could be caused by a variety of entry barriers, including government 

zoning restrictions and difficulty gaining access to buildings from building 

owners. In addition, where demand for dedicated access is relatively small, 

it is unlikely to be economically viable for competitors to extend their 

networks to the end user. FCC has also noted that, where competitors can 

lease unbundled network elements from incumbent providers, there may be 

less incentive for competitors to invest in their own facilities. 

Available data suggest that incumbents’ list prices and average revenues for 

dedicated access services have decreased since 2001, resulting from price 

decreases due to regulation and contract discounts. However, in areas 

where FCC granted full pricing flexibility due to the presumed presence of 

competitive alternatives, list prices and average revenues tend to be higher 

than or the same as list prices and average revenues in areas still under some 

FCC price regulation. According to the large incumbent firms, many large 

customers needing service in areas with pricing flexibility purchase 

dedicated access services under contracts that provide additional discounts. 

However, GAO found that contracts do not generally affect the differential

cited previously, and that contracts also contain various conditions or 

termination penalties competitors argue inhibit customer choice. 

Government agencies, to the extent that they purchase dedicated access off 

of General Services Administration contracts, are generally shielded from 

price increases due to prenegotiated rates. However, not all agencies

purchase off of these contracts. 

FCC uses various data to assess competition in dedicated access, but these 

data are limited in their ability to describe the state of competition 

accurately. For example, these data measure potential competition at one 

point in time and are not revisited or updated, even though competitors may 

enter bankruptcy or be bought by the incumbent firm. FCC also collects 

data from external parties through its rulemaking proceedings, but those 

parties have no obligation to provide data, and FCC has limited mechanisms 

to verify the reliability of any data submitted. FCC’s strategic plan and 

various rulemakings have defined FCC’s obligation to assess and ensure 

competition in dedicated access. FCC stated that gathering and analyzing 

additional data would be costly and burdensome. Yet without more 

complete and reliable data, FCC is unable to determine whether its 

deregulatory policies are achieving their goals. 

www.gao.gov/cgi-bin/getrpt?GAO-07-80.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact JayEtta Z. 

Hecker at 202-512-2834 or

HeckerJ@gao.gov. 
 Deregulation of Dedicated Access Services

Contents 

Letter 1

Results in Brief 12

Background 16

Facilities-Based Competition to End Users Does Not Appear to Be 

Extensive 19

Prices for Dedicated Access Services in MSAs with Phase II Pricing 

Flexibility Are on Average Higher Than Prices Elsewhere 27 

FCC Plays an Important Role in Ensuring Competition, but Lacks 

Sufficient Information to Determine the Success of Its 

Deregulatory Policies 36 

Conclusions 41

Recommendations for Executive Action 43 

Agency Comments 44 

Appendix I Objectives, Scope and Methodology 50 

Appendix II Analysis of Average Revenue Data and List Prices 62 

Appendix III Comments from the Federal Communications 

Commission 71 

Appendix IV GAO Contact and Staff Acknowledgments 76 

Tables 

Table 1: Conditions for Granting Different Phases of Pricing 

Flexibility in an MSA 16 

Table 2: Percentage of Buildings with a Fiber-Based Competitive 

Alternative by Demand (July 2006) 20 

Table 3: Change in Competitive Colocation in “Price-flex” Wire

Centers 24

Table 4: Examples of Contract Terms and Conditions 31 

Table 5: MSAs in Analysis, by Price-Cap Incumbent and Applicable 

Pricing Flexibility 50 

Table 6: GeoResults’ Dedicated Access Demand Model 54 

Page i GAO-07-80 
 Deregulation of Dedicated Access Services

Table 7: Summary Statistics of Average Revenue for Channel

Terminations, Unweighted Nominal Dollars 63 

Table 8: Summary Statistics of Average Revenue for Channel

Terminations, Unweighted Adjusted Dollars Using 

Telecommunications Price Index 64 

Table 9: Summary Statistics of Average Revenue for Channel

Terminations, Unweighted Adjusted Dollars Using General 

GDP Price Index 65 

Table 10: Summary Statistics of Average Revenue for Channel

Terminations, Weighted Adjusted Dollars Using the 

Telecommunications Price Index 66 

Table 11: Summary Statistics of List Price Comparisons for all DS-1 

Combinations in Nominal Dollars 67 

Table 12: Summary Statistics of List Price Comparisons for all DS-3 

Combinations in Nominal Dollars 69 

Figures 

Figure 1: Simplified Components of Dedicated Access Circuits 5 

Figure 2: Average Differences in Dedicated Access Prices Across 

All Terms and Zones in Nominal Dollars 29 

Figure 3: Change in Average Revenue for DS-1 and DS-3 Channel 

Terminations in Phase I and Phase II Areas 33 

Page ii GAO-07-80 
 Deregulation of Dedicated Access Services

Abbreviations 

ARMIS Automated Reporting Management Information System 

CALLS Coalition for Affordable Local and Long Distance Service 

DOJ Department of Justice 

FCC Federal Communications Commission 

GDP Gross Domestic Product 

GSA General Services Administration 

Mbps megabytes per second 

MSA Metropolitan Statistical Area 

RBOC Regional Bell Operating Company 

USDA Department of Agriculture 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page iii GAO-07-80 
United States Government Accountability Office

Washington, DC 20548 

November 29, 2006 

The Honorable Tom Davis 

Chairman 

Committee on Government Reform 

House of Representatives 

Dear Mr. Chairman: 

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 

 1

Because these services operate separately from the local “switched” telecommunications 

network used to route telephone calls, they are considered “dedicated.” Customers do not

consider switched access services to be a viable substitute for dedicated access because 

they do not offer the guaranteed bandwidth, high service levels, and security that dedicated 

access provides. 

Page 1 GAO-07-80 Deregulation of Dedicated Access Services
incumbent firms to compete in the long-distance market;2

 therefore, 

incumbent firms are now competing to provide businesses with longdistance 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 

 2

Upon a showing that local markets are open to competition, the Regional Bell Operating 

Companies (RBOC) were granted authority to enter the market for long distance services, 

pursuant to section 271 of the Communications Act of 1934, as amended by the 

Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996). 47 U.S.C. § 271. 

Originally, seven RBOCs formed after the break up of AT&T—Ameritech, Bell Atlantic, 

BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West. Through various

mergers, these companies have combined into four—AT&T, BellSouth, Qwest, and Verizon. 

3

Sections 203 and 204 of the Communications Act of 1934, as amended, establish tariff filing 

requirements applicable to common carriers. 47 U.S.C. §§ 203, 204. FCC implemented the 

rules establishing regulations, including the filing, form, content and notice, and the pricing 

rules and related requirements that apply to incumbent carriers subject to price-cap 

regulation. A tariff is the document filed by a carrier describing their services and the 

payments to be charged for such services. 

4

Access Charge Reform, CC Docket No. 96-262, Fifth Report and Order and Further Notice 

of Proposed Rulemaking, 14 FCC Rcd 14221 (1999) (Pricing Flexibility Order), aff’d, 

WorldCom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001). Price-cap incumbents must file a 

petition seeking pricing flexibility. 47 C.F.R. § 1.774.

Page 2 GAO-07-80 Deregulation of 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

 5

The Office of Management and Budget defines an MSA as an area having at least one 

urbanized area of 50,000 or more population, plus adjacent territory that has a high degree

of social and economic integration with the core as measured by commuting ties. 

6

FCC’s Expanded Interconnection Orders required price-cap incumbent firms to allow 

competing firms to install (“colocate”) certain network equipment in particular wire 

centers at reasonable terms and conditions. 47 CFR § 64.1401(a). 

7

Specifically, the court found that FCC made a reasonable policy determination that

colocation was a sufficient proxy for market power, and that the court had no basis upon 

which to require FCC to engage in a more searching analysis of competition before

granting pricing flexibility. WorldCom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001). See also 

Covad Communications Co. v. FCC, 450 F.3d 528 (D.C. Cir. 2006). The court noted that

under the 1996 Act, colocation can reasonably serve as a measure of competition in a given

market, particularly where it is superior to the various alternatives proposed by objecting 

petitioners. 

8

Competitive, nonincumbent firms are not subject to rate regulation and, therefore, do not

apply for pricing flexibility.

Page 3 GAO-07-80 Deregulation of Dedicated Access Services
• In MSAs where price-cap incumbents can demonstrate a certain level of 

competitive colocation, they would satisfy the triggers that would result in 

partial price deregulation (known as “phase I” flexibility). With phase I 

flexibility, FCC allows price-cap incumbents to offer customized contracts 

to customers that provide discounts off the price-capped “list prices.” This 

flexibility was designed to allow price-cap incumbents to more adequately

respond to competition, where price-cap regulation may be too 

constricting to allow the incumbent to lower its prices to respond to 

competitive pressures. Price-cap incumbents must file their contract terms 

and conditions—-on a day’s notice—with FCC and make that same 

contract available to other customers that meet the contract’s specified 

terms and conditions. Alternatively, for customers that do not sign up for 

contracts, incumbents are required to offer dedicated access at pricecapped prices. Those prices may include term and volume discounts (e.g.,

lower list prices may exist for 3-year or 5-year terms compared with 

month-to-month list prices or for purchasing greater amounts of dedicated

access). 

• In MSAs where price-cap incumbents can demonstrate a higher level of 

competitive colocation, price-cap incumbents may meet more stringent 

competitive triggers and qualify for greater price deregulation (known as 

“phase II” flexibility). Because FCC deems phase II areas to be sufficiently 

competitive to ensure that rates for dedicated access are just and 

reasonable, phase II flexibility frees the incumbent from price caps and 

allows it to raise or lower its list prices. Price-cap incumbents must still 

file these new “price-flex” list prices with FCC. As with phase I flexibility, 

contracts can be offered that provide additional discounts to respond to 

competitive pressures. 

• Where neither trigger for competition is met, price-cap incumbents’ prices

remain subject to FCC’s price cap and customers can only purchase 

dedicated access from the price-capped list prices (which can include 

volume and term discounts). 

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 

Page 4 GAO-07-80 Deregulation of Dedicated Access Services
of the figure, the price-cap incumbent has received phase I flexibility for 

channel terminations. As figure 1 shows, with phase I flexibility, the pricecap 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. 

Figure 1: Simplified Components of Dedicated Access Circuits 

Incumbent wire center End user B

Incumbent wire center

with colocated competitor

Channel

termination

XYZ Corp.

XYZ Corp.

MSA with phase I channel terminations MSA with phase II channel terminations MSA

boundary

Price-flex price

Dedicated transport

Price-flex price

Channel

termination

Price-cap price

End user A

Source: GAO.

Competitor

Incumbent

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, 

 9

CALLS consisted of four of the five largest incumbent firms and two of the three largest 

long-distance carriers at the time (mergers since then have reduced the number of 

incumbents and long-distance carriers). CALLS consisted of the AT&T Corporation, Bell 

Atlantic Telephone Companies, BellSouth Corporation, GTE Service Corporation, SBC 

Communications Inc., and Sprint Corporation. 

Page 5 GAO-07-80 Deregulation of Dedicated Access Services
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

 10Access Charge Reform, CC Docket Nos. 96-262, 94-1, 99-249, 96-45, Sixth Report and

Order in CC Docket Nos. 96-262 and 94-1, Report and Order in CC Docket No. 99-249, 

Eleventh Report and Order in CC Docket No. 96-45, 15 FCC Rcd 12962 (2000) (CALLS 

Order). See also Texas Office of Public Util. Counsel v. FCC, 265 F.3d 313 (5th Cir. 2001). 

11Price-cap incumbents have also received some level of pricing flexibility in the non-MSA 

areas of 14 states, and phase II flexibility for all circuit components in the non-MSA area of

1 state. The 3 MSAs of the top 100 in the United States and Puerto Rico without pricing

flexibility are San Juan-Bayamon, Puerto Rico; Youngstown-Warren, Ohio; and SarasotaBradenton, Florida. 

12Special Access Rates for Price Cap Local Exchange Carriers, WC Docket No. 05-25, 

Order and Notice of Proposed Rulemaking, 20 FCC Rcd 1994 (2005). 

Page 6 GAO-07-80 Deregulation of Dedicated Access Services
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 

 13Because mergers involve a change in the ownership or control of companies holding

licenses or lines needed to offer telecommunications services in the United States, merging

firms must apply to FCC for approval of the transfer of those licenses or lines. 47 U.S.C. §§

214(a); 310(d). The purpose of FCC’s review is to determine that the license transfers are in

the “public interest.” In making this determination, FCC considers several factors such as 

the effects of a merger on competition in the industry, the FCC’s ability to enforce its 

obligations under the 1996 Act and the deployment of advanced telecommunications 

services. When FCC finds a merger to be in the public interest, it will approve the transfers 

of licenses and lines necessary to allow the merger to go forward. If FCC finds the public 

interest harm outweighs the public interest benefit of a transaction, it may enter into

discussions with the merging parties, and ultimately, adopt conditions—that is, specific 

activities that the merged company would have to perform—that will change the balance of 

the public interest effects and thus enable FCC to find the license transfers to be in the 

public interest. 47 U.S.C. §§ 214(c); 303(r). FCC may, after taking the necessary steps, 

determine that the merger is not in the public interest and decline to approve the merger. 

Whatever FCC actions are taken in a particular case, interested parties (including, but not 

limited to, the merging companies) can file a lawsuit challenging FCC’s decision. Any party

filing such a lawsuit against an FCC decision bears the burden of proof in showing that the 

decision was “arbitrary and capricious” or beyond FCC’s authority. 

DOJ reviews mergers under federal antitrust laws to assess whether a merger may 

substantially lessen competition. If DOJ determines that a merger will substantially harm 

competition and, therefore, violates antitrust laws, it can bring a court action to stop the 

merger. DOJ also can negotiate an agreement with the merging companies, where the

merging companies agree to undertake activities that would eliminate the competitive 

harm of the merger, such as divesting certain properties. That agreement, called a 

proposed Final Judgment, is filed with the court and is legally enforceable upon

compliance with the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16(b)-(h) (“Tunney

Act”). Under a Tunney Act review, the court may enter the judgment if it concludes that it

is in the public interest. 

Page 7 GAO-07-80 Deregulation of Dedicated Access Services
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 

 14At the same time that the complaints were filed in the mergers between SBC and AT&T 

and MCI and Verizon, DOJ also filed stipulations and proposed Final Judgments that are 

designed to eliminate the anticompetitive effects of the acquisitions in the affected 

buildings. Under the proposed Final Judgments, defendants are required to divest, in most

situations, indefeasible rights of use for lateral connections to certain buildings located in a 

number of metropolitan areas. DOJ and defendants have stipulated that the proposed Final 

Judgments may be entered into after compliance with the Antitrust Procedures and 

Penalties Act, 15 U.S.C. § 16(b)-(h) (“Tunney Act”). These actions were consolidated. The

Tunney Act review is still ongoing. 

15Memorandum Opinion and Order, In the Matter of SBC Communications Inc. and AT&T

Corporation Applications for Approval of Transfer of Control, FCC WC Docket No. 05-65 

(rel. Nov. 17, 2005); and Memorandum Opinion and Order, In the Matter of Verizon

Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control, 

FCC WC Docket No. 05-75 (rel. Nov. 17, 2005). 

16A network element is defined as “a facility or equipment used in the provision of a

telecommunication service.” 47 U.S.C. § 153(29). 

17Congress left to the FCC the choice of elements to be “unbundled” specifying that it must 

“consider, at a minimum, whether . . . the failure to provide access to such network 

elements would impair the ability of the telecommunications carrier seeking access to 

provide the services that it would seek to offer.” 47 U.S.C. § 251(d)(2) (emphasis added). 

18Covad Communications Company v. FCC, 450 F.3d 528 (D.C. Cir. 2006). 

19Unbundled Access to Network Elements, WC Docket No. 04-313, CC Docket No. 01-338, 

Order on Remand, FCC 04-290 (rel. February 4, 2005) (Triennial Review Remand Order). 

Page 8 GAO-07-80 Deregulation of Dedicated Access Services
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. 

In light of these issues, this report discusses (1) the extent to which 

facilities-based competition to customer locations exists in areas where 

FCC granted pricing flexibility; (2) how prices for dedicated access 

services for businesses as well as federal government agencies have 

changed since phase II pricing flexibility; and (3) what data FCC uses to 

monitor competition in dedicated access services, along with the 

limitations, if any, that exist in its monitoring effort. We are not making a 

judgment on the legal sufficiency of competition in dedicated access 

services, including whether recent mergers violate antitrust laws or 

whether proposed remedies that DOJ identified would be sufficient to 

eliminate the competitive harm of the mergers. 

To determine the extent of facilities-based competition in areas where 

FCC has granted pricing flexibility, we analyzed data on dedicated access 

 20Competing carriers are impaired without access to DS-1 transport except on routes

connecting a pair of wire centers, where both wire centers contain at least four fiber-based 

colocators or at least 38,000 business access lines. Competing carriers are impaired 

without access to DS-3 or dark fiber transport except on routes connecting a pair of wire

centers, each of which contains at least three fiber-based colocators or at least 24,000 

business lines. Finally, competing carriers are not impaired without access to entrance 

facilities connecting an incumbent’s network with a competitor’s network in any instance. 

FCC adopted a 12-month plan for competing carriers to transition away from use of DS-1

and DS-3 capacity dedicated transport where they are not impaired, and an 18-month plan 

to govern transitions away from dark fiber transport. These transition plans apply only to

the embedded customer base, and do not permit competitors to add new dedicated 

transport UNEs in the absence of impairment. During the transition periods, competitive 

carriers will retain access to unbundled dedicated transport at a rate equal to the higher of

(1) 115 percent of the rate the requesting carrier paid for the transport element on June 15,

2004, or (2) 115 percent of the rate the state commission has established or establishes, if 

any, between June 16, 2004 and the effective date of FCC’s UNE Order. 

21The Commission has concluded that UNE prices must be based on each element’s Total 

Element Long-Run Incremental Cost (TELRIC). See 47 C.F.R. § 51.505(b); Verizon 

Communs., Inc. v. FCC, 535 U.S. 467, 523 (2002). TELRIC rates are akin to wholesale 

prices because competitors are supposed to economically be able to rent UNEs and then

use them to sell telecommunication services to their retail customers. Covad 

Communications Company v. FCC, supra. These rates are determined by states’ public 

utility commissions. 

Page 9 GAO-07-80 Deregulation of Dedicated Access Services
services in selected metropolitan areas from Telcordia® Technologies, 

Inc., a leading global provider of telecommunications network software 

and services, and GeoResults, which is a firm that the telecommunications 

industry has used extensively to analyze Telcordia data.22 We analyzed data

showing not only the extent that competitors continue to be colocated in

incumbent wire centers (FCC’s measure), but also data showing the extent 

to which competitors have equipment in commercial office buildings that

provides actual (or “lit”) service to end users of dedicated access services. 

We selected 16 metropolitan areas in which FCC has granted the price-cap

incumbents with varying phases of pricing flexibility.23 We selected 4 

metropolitan areas in the geographic areas broadly served by each of the 

four major price-cap incumbents (AT&T, BellSouth, Qwest, and Verizon). 

We also interviewed officials with price-cap incumbents and competitive 

firms, industry analysts, and representatives of major telecommunications 

customers. To describe how prices have changed since phase II pricing 

flexibility was granted, we used the following three methods to analyze 

changes in prices in areas where phase II flexibility was granted to areas 

where phase I flexibility was granted and areas still under the price cap. 

• We analyzed listed prices for channel terminations and dedicated 

transport for month-to-month, 3-year, and 5-year terms across 3 density 

zones.24 As previously noted, FCC requires price-cap incumbent firms to 

file list prices in all areas that they serve. Price-flex list prices are made 

generally available in areas with phase II flexibility. Price-cap list prices 

are made generally available to all customers in areas with phase I pricing 

flexibility as well as all other areas that remain subject to full price-cap 

regulation. 

 22Telcordia and COMMON LANGUAGE are registered trademarks and CLCI, CLEI, CLFI, 

CLLI, and NC/NCI are trademarks of Telcordia Technologies, Inc. 

23The 16 MSAs we included in our analysis were as follows: Atlanta, Georgia; Chicago, 

Illinois; Detroit, Michigan; Greenville, South Carolina; Los Angeles, California; Miami,

Florida; Minneapolis, Minnesota; New Orleans, Louisiana; New York, New York; Norfolk, 

Virginia; Phoenix, Arizona; Pittsburgh, Pennsylvania; Portland, Oregon; San Jose, 

California; Seattle, Washington; and Washington, D.C. 

24Typically, price-cap incumbents offer prices across different zones that reflect the 

concentration of business demand for dedicated access within a geographic area. Zones 

generally correspond with areas of relatively high, medium, and low business demand 

density. Zone 1 is generally considered as inclusive of the central business area, where a

large portion of businesses that would require DS-1 and DS-3 would reside. Prices are 

generally lower in zone 1 than in zones 2 or 3—with zone 3 generally having the highest 

prices, because costs to provide services are likely higher in less dense areas. Occasionally 

an incumbent will offer prices across five zones. In cases where an incumbent provided 

pricing across five zones, we analyzed prices associated with zones 1, 3, and 5. 

Page 10 GAO-07-80 Deregulation of Dedicated Access Services
• Because many larger customers may purchase dedicated access through 

various contracts with incumbents, we analyzed a substantial number of 

these contracts, which each price-cap incumbent firm also files with FCC. 

• We could not obtain specific data on the prices paid by individual 

customers purchasing dedicated access services at various pricing levels 

(i.e., month-to-month or 3-year terms, or different density zones) or under 

different contract options, or the exact amount of dedicated access 

purchased. Therefore, as a proxy for the average prices charged, we 

analyzed the average revenue that price-cap incumbents received from 

selling dedicated access in 56 selected MSAs under phase I flexibility or 

phase II flexibility for channel terminations. We compared changes in 

average revenue for channel terminations between the period prior to 

pricing flexibility being granted and 2005, and also compared average 

revenue in 2005 across areas under phase I flexibility, phase II flexibility, 

and remaining under the price cap. We obtained average revenue data for 

the 56 MSAs under pricing flexibility from the four major price-cap 

incumbents. We obtained average revenue data for price-cap areas from 

annual tariff review plans submitted to the FCC by price-cap incumbents. 

Because only 1 of the MSAs in the data provided to us by the price-cap

incumbents was under phase I flexibility for dedicated transport, we were 

unable to conduct a comparison of price trends for transport under 

different phases of pricing flexibility. These averages mask variation that

exists across MSAs and across price-cap incumbents. Because the data

provided by the price-cap incumbents are proprietary, we relied on these 

averages to examine overall trends in markets under different phases of 

pricing flexibility.25 We were unable to independently verify the reliability 

of these data. However, we performed logic tests that were based on listed 

prices and available discounts to determine if there were any major 

inaccuracies. 

In each of the three methods, we limited our analysis to prices for highcapacity dedicated access services at two speeds—1.544 megabytes per 

second (Mbps), which is known as a DS-1 circuit, and 45 Mbps, which is 

known as a DS-3 circuit—because they represent the majority of dedicated 

access revenues that the price-cap incumbent firms generate. We also 

were unable to collect data on prices that competitors charged; therefore, 

 25Not all of the major incumbent firms were able to include every discount that was based 

on price-flex contracts. One firm was unable to include discounts that were based on

revenue commitments; however, because these discounts are available in both phase I and

phase II areas, there is little reason to believe that these discounts would affect the prices 

available in phase II areas greater or less than it would affect prices in phase I areas. 

Page 11 GAO-07-80 Deregulation of Dedicated Access Services
those prices are excluded from this analysis. According to competitors, 

they could not provide data on prices because of nondisclosure 

agreements they have in place. We interviewed representatives from these

firms, and they provided anecdotal information about their prices. 

Furthermore, we were unable to measure the extent to which price trends 

related to cost trends, because these data were also unavailable.26 In 

addition, we analyzed available data on prices that two federal government 

departments paid under General Services Administration (GSA) contracts 

as well as prices paid under separate agency contracts. To determine what 

data FCC uses to monitor competition and any limitations that may exist 

to their monitoring efforts, we reviewed and analyzed FCC triggers for 

predicting competition as well as FCC data collection processes for 

determining and monitoring competition. We analyzed FCC’s strategic 

plan, performance budget, and measures used by the agency to track their

progress toward meeting their stated goals of increasing competition and 

choice for businesses. We also reviewed the rulemaking proceeding on

dedicated access and public comments filed in that proceeding. We 

conducted our work from November 2005 through October 2006 in 

accordance with generally accepted government auditing standards. See 

appendix 1 for a more detailed discussion of our objectives, scope, and 

methodology. 

In the 16 major metropolitan areas we examined, facilities-based 

competition for dedicated access services exists in a relatively small 

subset of buildings. Our analysis of data on the presence of competitors in 

commercial buildings suggests that competitors are serving, on average, 

less than 6 percent of the buildings with at least a DS-1 level of demand. 

Competition is more widespread where buildings have a higher level of 

demand. For the subset of buildings identified as likely having companies 

with a DS-3 level of demand, competitors have a fiber-based presence in 

about 15 percent of buildings on average. For buildings identified in our 

model with 2 DS-3s of demand, competitors have a fiber-based presence in 

24 percent of buildings on average. The data also show that the 

theoretically more competitive phase II areas generally have a lower 

percentage of lit buildings than phase I areas, indicating that FCC’s 

competitive triggers may not accurately predict competition at the 

Results in Brief 

 26FCC discontinued cost studies several years ago. In addition, FCC gave price-cap 

incumbents the option to accept the CALLS Order price decreases, or to have prices

reinitialized on the basis of detailed cost studies. No price-cap incumbents provided a cost

study. 

Page 12 GAO-07-80 Deregulation of Dedicated Access Services
building level. The data also show that there has been a decline in some 

MSAs in the level of competitive colocation in the wire centers used by the 

price-cap incumbents to obtain pricing flexibility. Limited competitive 

build out in these MSAs could be caused by a variety of entry barriers, 

including zoning restrictions, or difficulties in obtaining access to 

buildings from building owners that discourage competitors from 

extending their networks. In addition, where demand for dedicated access 

is relatively small, such as buildings with less than three or four DS-1s of 

demand, it is unlikely to be economically viable for competitors to extend

their networks to the end user. Incumbent firms have noted that, where 

competitors can lease UNEs from incumbent providers, there may be less 

incentive for competitors to invest in their own facilities. However, even if 

UNEs were not available, competitors still may find it uneconomical to 

extend their own networks to end users if their demand for dedicated

access is relatively low. 

Since FCC first began granting pricing flexibility in 2001, average revenue 

from channel terminations and average revenue for dedicated transport 

across the four major price-cap incumbents has generally decreased. This

suggests that average prices may have fallen as well and is generally what

would be expected with automatic decreases to the price-cap list prices 

required under FCC’s existing CALLS Order. Additionally, the decrease 

appears to be consistent with the prospect of competition that FCC 

predicted. However, our analysis of data from the four major price-cap 

incumbent firms and FCC, which was intended to determine how prices 

have changed since the granting of phase II pricing flexibility, generally 

shows that prices and average revenues are higher, on average, in phase II 

MSAs—where competition is theoretically more vigorous—than they are

in phase I MSAs or in areas where prices are still constrained by the price 

cap. 

• Since phase II pricing flexibility was first granted, list prices for dedicated 

access that apply under phase II, on average, have increased. Conversely, 

price-cap list prices available in phase I and price-cap areas were pushed 

downward over the same period—largely by the CALLS order. As a result, 

average list prices in areas with phase II flexibility are higher than average 

list prices in phase I and price-cap areas. 

• According to representatives of the price-cap incumbent firms, many 

customers that represent a significant amount of revenue purchase 

services under price-flex contracts that apply additional discounts to 

circuit components in areas with phase I or II pricing flexibility. However,

most of these contracts provide overall discounts off the list price, and,

Page 13 GAO-07-80 Deregulation of Dedicated Access Services
therefore, since price-flex list prices are higher on average than price-cap

list prices, prices will remain higher in phase II areas. Over time, however, 

our analysis shows that most contracts provide discounts that, coupled 

with CALLS Order decreases in phase I areas, can eliminate any increases 

in the list prices and result in an overall decrease in price when compared 

with prices that existed prior to pricing flexibility. For many contracts we 

were unable to determine their effect on net prices because certain data 

were unavailable. Competitors also argue that price-flex contracts require 

customers to meet contractual terms and conditions that may limit the 

ability of competing vendors to win that business. For example, contracts 

may include termination penalties that discourage customers from 

switching to competing firms during the length of the contract. 

• Not all customers are under price-flex contracts, and detailed data on the 

number of customers and circuits that are purchased at the price-flex list 

price were not available to us. Therefore, we compared average revenue 

data for dedicated access services under price-cap regulation (filed with 

the FCC), and under phase I or phase II flexibility (on the basis of data 

from 56 MSAs—27 phase II and 29 phase I—provided by the four major 

price-cap incumbents) to examine the net effect of changes in list prices 

and the application of contract discounts. Average revenue for channel 

terminations and dedicated transport for DS-1 and DS-3 has generally 

decreased over time, although the decline in average revenue for channel 

terminations is larger in phase I areas compared with phase II areas. 

Comparing average revenue across price-cap areas, phase I areas, and 

phase II areas as of 2005—the most recent period available—we found 

that average revenue in the 27 phase II areas is higher, on average, than it 

is in the 29 phase I areas and not statistically different that average 

revenue in areas that are still under a price cap. 

Although no total spending figures are available, the federal government is 

also a large consumer of dedicated access services. Our review of 

spending on dedicated access services by the Department of Agriculture 

(USDA) and DOJ indicated that they procured most of their services 

through the government-wide telecommunications contract, FTS2001. 

With FTS2001 expiring and GSA currently negotiating a new contract, it is

unclear what prices the government will pay for dedicated access services. 

FCC uses various data to assess competition for dedicated access, but 

most of these data have significant limitations in their ability to describe 

the presence, extent, or change in competition in any given area. For 

example, the data presented in a price flexibility petition measure 

potential competition at one point in time and FCC does not revisit or 

update them, even though competitors may enter bankruptcy or be bought

Page 14 GAO-07-80 Deregulation of Dedicated Access Services
by another firm. FCC also attempts to collect data from external parties 

through its rulemaking proceedings, but those parties generally have no 

obligation to provide data, and FCC has limited mechanisms to verify the

reliability or accuracy of any data submitted. For example, as part of its 

rulemaking proceeding on dedicated access, FCC requested data on price 

indices in price flexibility areas to determine how prices have changed in 

areas with varying levels of price deregulation; however, no incumbent 

firm provided these data. FCC’s strategic plan and various rulemakings 

have defined FCC’s obligation to assess and ensure competition for 

dedicated access. FCC has stated that gathering and analyzing additional 

data would be costly and burdensome. FCC has expressed concern about 

its ability to gather data without disturbing the market and also noted that 

any additional reporting requirements on incumbent firms or any 

requirements on competitive firms to report information on their networks 

would have to conform to the Paperwork Reduction Act27 and also proceed 

through a lengthy administrative process. Certainly, FCC must balance the 

additional costs of gathering more data with the potential benefit that 

might result from additional data. Yet without more complete and reliable 

measures of competition, FCC is unable to determine whether its 

deregulatory policies are achieving their goals. 

We are making recommendations to FCC to revisit the issues it initiated in

its rulemaking proceeding on dedicated access and to develop measures 

and methods to monitor competition on an ongoing basis that more 

accurately represents market developments and customer choice. We

provided copies of the draft report to FCC for its formal comment. FCC

did not disagree with the facts presented in the report but contended that

the report implied a need for regulatory price controls and consequently 

disagreed with the recommendations. Counter to FCC’s interpretation, the 

report does not call for the reregulation of dedicated access prices. 

Instead, the report concludes that in order to better meet its regulatory 

responsibilities, FCC needs a more accurate measure of effective 

competition and needs to collect more meaningful data. We also made 

 27The Paperwork Reduction Act sets standards for information collection. These standards

include avoiding unnecessary duplication; reducing burdens on the public and small 

entities; ensuring that collection is developed so that information is used in an efficient and 

effective manner; and using information technology to the maximum extent practicable to

reduce burden and improve data quality, agency efficiency, and responsiveness to the 

public. 44 U.S.C. §§ 3501 et. seq. In addition, pursuant to the Small Business Paperwork

Relief Act of 2002, Pub. L. No. 107-198, 44 U.S.C. § 3506(c)(4), FCC generally seeks specific 

comment on how it might “further reduce the information collection burden for small 

business concerns with fewer than 25 employees.” 

Page 15 GAO-07-80 Deregulation of Dedicated Access Services
copies of the draft report available to the major incumbent carriers. They 

generally disagreed with the information presented, stating that the data

we used were incomplete and unreliable. We recognize the limits of 

available data on the extent and effect of competition in the market for 

dedicated access services, but believe the data used provided a reasonable 

and sufficiently reliable picture of the extent of facilities-based 

competition. 

FCC is an independent United States government agency, directly 

responsible to Congress. Established by the Communications Act of 1934,

FCC is charged with regulating interstate and international 

communications by radio, television, wire, satellite, and cable. The 

Telecommunications Act of 1996 established that FCC should promote 

competition and reduce regulation to secure lower prices and higher 

quality services for American telecommunications consumers and 

encourage the rapid deployment of new telecommunications technologies. 

FCC’s strategic plan clarifies its support for these principles by stating that 

competition in the provision of communications services, both 

domestically and overseas, supports the Nation’s economy. 

After passage of the 1996 Act, FCC started several actions to encourage 

competition in the telecommunications market. As previously discussed, 

FCC instituted pricing flexibility where incumbents could meet specific 

competitive triggers. Table 1 summarizes the conditions under which 

incumbents could qualify for phase I or phase II flexibility. According to 

FCC, all of the applications for pricing flexibility have utilized the revenuebased triggers, and not the percentage of total wire centers in an MSA. 

Background 

Table 1: Conditions for Granting Different Phases of Pricing Flexibility in an MSA 

Level of pricing

flexibility 

Dedicated access 

components Requires installed colocation equipment from at least one competitor in: 

Partial (“phase I”) 

price deregulation 

Channel terminations to end 

users 

Wire centers with 65 percent of revenues or 50 percent of total wire 

centers 

Dedicated transportationaWire centers with 30 percent of revenues or 15 percent of total wire 

centers 

Full (“phase II”) price 

deregulation 

Channel terminations to end 

users 

Wire centers with 85 percent of revenues or 65 percent of total wire 

centers 

Dedicated transportationaWire centers with 65 percent of revenues or 50 percent of total wire 

centers 

Source: FCC Pricing Flexibility Order. 

Page 16 GAO-07-80 Deregulation of Dedicated Access Services
Note: In addition to the wire center requirements, price-cap incumbents must also demonstrate in 

their petitions for price flexibility that, in each wire center relied on in the applicant petition, at least 

one competitor relied on dedicated transport facilities provided by a nonincumbent carrier. 

a

Dedicated transport includes entrance facilities, direct-trunked transport, and the flat-rated portion of 

tandem-switched transport as well as dedicated access services other than channel terminations to 

end users. 

Phase I flexibility is essentially downward pricing flexibility. Under phase I 

flexibility, prices charged by price-cap incumbents are generally not 

expected to increase (except for changes to the price cap resulting from 

cost factors outside the price-cap incumbents’ control, such as taxes and

fees, or from increases in certain prices under the price cap, which would 

require the price-cap incumbent to lower other prices under the cap). 

Phase II flexibility allows price-cap incumbents to raise or lower their list

prices. Although prices are permitted to increase, under phase II flexibility 

competition is expected to constrain incumbent pricing power. The 

Pricing Flexibility Order noted that it is possible past regulation may have 

resulted in setting some prices below cost, and, therefore, some price 

increases would be expected under phase II flexibility,28 although the order 

does not speculate on which prices may increase or to what extent price

increases were expected. Regulation could have caused prices to be below 

costs in some areas because price-cap incumbents are required to offer the 

same “average” price throughout a geographic area, although costs may 

not be uniform throughout that area. As a result, the price-cap incumbent 

may have had to price certain services too high where costs were low, and

too low where costs were high. Therefore, if the triggers are correct, and 

sufficient competition does exist in phase II areas, one might expect prices 

in the more dense areas of metropolitan areas to decrease (perhaps as a 

result of contract offerings) because costs are likely lower in these areas. 

Prices in more sparsely populated parts of the MSA, with fewer 

businesses, may show some increases due to the likely higher cost of 

providing service in such areas. 

If the price-cap incumbents raise their prices, and there is not sufficient 

competition to constrain these prices, competitors’ input costs to serve 

business customers may rise. Generally speaking, economic theory holds 

that as competitors’ input costs increase, they would have greater 

incentive to search for an alternative supply of that input, or produce it 

themselves, leading to further entry by competitors into building their own 

facilities to compete with incumbents. Representatives of several 

 28Pricing Flexibility Order, 80. 

Page 17 GAO-07-80 Deregulation of Dedicated Access Services
competitive providers with whom we spoke stated that they generally 

prefer to provide service over their own facilities or to purchase from 

other competitive providers, wherever it is possible to do so, rather than 

use incumbent facilities because of price considerations, concerns over 

the reliability of the facilities, and the ability to quickly fix service 

problems should they arise. Alternative supply for dedicated access can

also be provided by competitors in the form of alternative technologies, 

such as point-to-point wireless connections. Some industry analysts when 

we spoke were encouraged by the prospect of fixed wireless and WiMax 

technology that could provide alternative dedicated access. However, 

according to these analysts, this technology is still being developed and 

has only been used in limited circumstances to replace high-capacity

dedicated access connections.29

An alternative theory suggests that an incumbent can discourage full 

facilities-based entry into the market by allowing competitors to lease the 

incumbent’s network at a price just equal to the competitors’ cost to build

out their own networks, thus making the competitors indifferent to leasing 

or building. This theory would suggest that prices will adjust to the point 

where it remains uneconomical for competitors to build their own 

facilities. By extension, this theory argues that full facilities-based 

competition is unlikely to ever occur, because the incumbent will 

discourage entry by keeping competitors on its own network, rather than 

risk splitting or losing the market. Representatives of incumbent firms 

have pointed out that the vast majority of their dedicated access services 

are sold to competitors on a wholesale basis. 

The federal government has been somewhat shielded from market 

developments through long-term contracts that GSA negotiated. 

Government agencies can acquire telecommunications services and 

dedicated access services through GSA’s FTS2001 contracts. FTS2001

contracts will soon be replaced by GSA’s “Networx” contracts, which are 

planned for award in 2007. FTS2001 was negotiated with set rates for 

dedicated access connections over the life of the contract. However, 

government agencies are not required to use the FTS2001 contract, and 

not all agencies purchase off of this contract. 

 29WiMAX is defined as Worldwide Interoperability for Microwave Access by the WiMAX 

Forum, and was formed in April 2001 to promote conformance and interoperability of the

IEEE 802.16 standard, officially known as WirelessMAN. The forum describes WiMAX as “a 

standards-based technology enabling the delivery of last mile wireless broadband access as

an alternative to cable and DSL.” 

Page 18 GAO-07-80 Deregulation of Dedicated Access Services
Facilities-Based 

Competition to End 

Users Does Not 

Appear to Be 

Extensive 

Based on the data available to us, facilities-based competition for 

dedicated access services to end users at the building level (i.e., analogous 

to channel terminations to end users) does not appear to be extensive in

the MSAs we examined, although moderate levels of competition appear 

where demand for dedicated access exceeds the DS-3 level. The data 

further suggest that there have been some declines in competition in wire 

centers used by incumbents to obtain pricing flexibility. These findings 

suggest that FCC’s competitive triggers—which look at competition at the 

wire center level—may not adequately predict competition at the building 

level throughout an MSA. The limited amount of facilities-based 

competition could be due to a variety of factors, including the high cost of 

constructing local telecommunications networks, government regulations, 

and limited competitive access to buildings. 

Competitive Alternatives 

Exist in a Relatively Small 

Subset of Buildings 

According to data from July 2006, facilities-based competitors have 

extended their networks to a relatively small subset of buildings in the 

MSAs that we examined.30 Of the buildings with a level of demand greater 

than the DS-1 level in our model, we found that only about 6 percent of 

buildings, on average, have a fiber-based competitor. Competition is more 

widespread where buildings have a higher level of demand. For the subset 

of buildings identified in our model as likely having companies with a DS-3 

worth of demand, competitors have a fiber-based presence in 15 percent

of buildings, on average. For buildings identified in our model with at least 

2 DS-3s of demand, competitors have a fiber-based presence in 25 percent 

of buildings, on average (see table 2). The data also show that phase II 

 30These figures are the product of the following two sources: (1) the number of buildings

believed to be served by competing firms present in the database and (2) estimates of the 

total number of commercial buildings in each MSA that include commercial businesses 

likely to demand dedicated access with at least a DS-1 level of service, at least one DS-3 of

service, or 2 DS-3s or greater of service. We used the Telcordia Location Registry (formerly 

“CLONES”) to make inferences about buildings lit by competitors. The Location Registry is

a hosted database of network locations and related network functions for the 

telecommunications industry. Estimates of commercial buildings with demand for 

dedicated access are derived from a proprietary model owned by GeoResults. That model

estimates likely demand generally on the basis of the type of business, number of

employees per business location, and existence and size of the corporate parent to that

business location. GeoResults reports that all major incumbent firms, as well as a number 

of competing firms, also use the model to forecast demand. 

We analyzed the extent to which competitors had extended their networks to end users

utilizing fiber and wireless based connections. While other transmission mediums are 

available (such as copper wire) competitors have generally built fiber networks that have

greater capacity and lower costs. See appendix I for additional information. 

Page 19 GAO-07-80 Deregulation of Dedicated Access Services
areas—which are the theoretically more competitive MSAs—generally

have a lower percentage of lit buildings than phase I areas. 

Table 2: Percentage of Buildings with a Fiber-Based Competitive Alternative by Demand (July 2006) 

MSAa

Buildings 

with 

demand of 

DS-1 or 

greater 

Number of 

buildings

with a “lit” 

competitor

Percent 

with a

competitor

Buildings 

with 

demand of 

DS-3

Number of 

buildings

with a “lit” 

competitor

Percent 

with a

competitor

Buildings 

with 

demand of 

2 DS-3s 

and 

greater 

Number of 

buildings

with a “lit” 

competitor

Percent 

with a

competitor

Phase II MSAs 

Atlanta 12,718 446 3.5% 278 25 9.0% 67 10 14.9%

Los Angeles 22,639 508 2.2% 650 26 4.0% 265 34 12.8%

Miami 14,300 363 2.5% 421 14 3.3% 136 21 15.4%

Norfolk 5,008 2,080b41.5% 56 35 62.5% 13 9 69.2%

Phoenix 7,981 297 3.7% 155 17 11.0% 51 5 9.8%

Pittsburgh 4,733 383 8.1% 78 15 19.2% 25 9 36.0%

Portland 3,683 126 3.4% 67 9 13.4% 26 3 11.5%

San Jose 4,653 287 6.2% 98 13 13.3% 20 2 10.0%

Total 75,715 4,490 5.9% 1,803 154 8.5% 603 93 15.4%

Phase I MSAs

Chicago 16,732 361 2.2% 325 37 11.4% 185 47 25.4%

Detroit 12,174 298 2.4% 168 13 7.7% 48 2 4.2%

Greenville 2,551 68 2.7% 28 5 17.9% 4 0 0.0%

Minneapolis 6,786 389 5.7% 147 31 21.1% 56 12 21.4%

New 

Orleans 3,540 207 5.8% 65 15 23.1% 37 9 24.3%

New York 34,650 2,354 6.8% 762 198 26.0% 380 158 41.6%

Seattle 4,951 188 3.8% 100 15 15.0% 51 14 27.5%

Washington, 

D.C. 20,472 1,967 9.6% 518 131 25.3% 146 40 27.4%

Total 101,856 5,832 5.7% 2,113 445 21.1% 907 282 31.1%

Grand total 177,571 10,322 5.8% 3,916 599 15.3% 1,510 375 24.8%

Source: GAO analysis of Telcordia and GeoResults data. 

a

This table includes the portions of the MSAs that are served by the incumbent firm. Therefore, we 

excluded portions of those MSAs where another incumbent firm provides service, but may not have

the same level of pricing flexibility. For example, both AT&T and Verizon serve parts of Los Angeles,

but we only considered those areas that AT&T serves, because AT&T has received phase II flexibility

for channel terminations in Los Angeles. 

Page 20 GAO-07-80 Deregulation of Dedicated Access Services
b

According to a local cable official, Norfolk’s high competition numbers are due to the local cable 

company’s long-term financial commitment to build a fiber optic network to provide business 

telecommunications services. 

The data in table 2 may overstate the availability of facilities-based 

competition to some extent. Some equipment that does not provide 

service, no longer provides service, or no longer exists may remain in the

database, falsely indicating a competitive presence. Several companies and 

government agencies, such as mobile telephone companies and GSA, are 

included in the number of competitors, even though they do not provide 

dedicated access connectivity for businesses. Also, according to 

GeoResults, cellular phone sites are significantly underrepresented in the 

number of buildings with demand for dedicated access. However, cellular 

sites with competitive fiber are included in the number of buildings with a 

fiber-based competitor. Furthermore, these numbers include bankrupt 

companies, such as Jato Communications and Ciera Network Systems, 

whose equipment is still listed in the database. It is unclear whether these 

assets are being used by another company or have been liquidated. These 

data also include equipment owned by the former AT&T and MCI prior to

the recent mergers. We did not filter out these data because DOJ has 

required divestiture of some of these assets and the courts have yet to 

finalize that action. DOJ’s analysis is discussed further later in this report. 

In addition, the results from table 2 also may understate facilities-based 

competition to some extent. Both incumbent and competitive firms 

voluntarily populate their network locations and functions into the 

database for the purposes of interconnection and network management. 

According to Telcordia, data on competitive firms may be less 

comprehensive than data on incumbent firms, but a precise estimate of 

underreporting is not available from Telcordia. In order to gauge the 

extent that the data are underreported, we compared entries in the 

database with lists of “lit” buildings provided to us by two of the largest 

competitive firms. One firm showed 465 lit buildings in the data they 

provided to us in the 16 MSAs we examined, of which, 436 showed the 

presence of a “lit” competitor, suggesting an underreporting error of a 

little over 6 percent. However, the database also showed this same 

competitor as being the sole competitive presence in 81 additional 

buildings that were not on the firm’s list of lit buildings, suggesting, that, 

for this competitor, the database is overreporting the level of competition 

by about 12 percent. However, the other firm from which we obtained data 

provided us a list with 693 lit buildings in the MSAs we examined, of 

which, 289 showed the presence of a “lit” competitor, indicating 

underreporting of about 400 buildings across the MSAs for this competitor. 

These two examples show that individual competitor’s presence may be

Page 21 GAO-07-80 Deregulation of Dedicated Access Services
underreported and overreported. One price-cap incumbent has suggested

that the database may be underreported by 30 percent, although 

representatives of GeoResults disagreed that the data are underreported to 

that extent. If the data were underreported by 30 percent, we would find a 

competitive presence in 8 percent of buildings with demand greater than 

DS-1; 20 percent of buildings with demand of DS-3, and about 32 percent 

of buildings with demand greater than 2 DS-3s. These estimates still 

suggest that competitive alternatives exist in a relatively small subset of 

buildings, with more moderate levels of competition in buildings where 

demand is higher. 

Because there is no compulsory process through which 

telecommunications companies report such data to FCC or private data

sources, no single public or private data source is universally recognized 

as comprehensive. As we have indicated, the data may be understating or

overstating competition to varying degrees. It is not clear the extent to 

which underreporting by competitors will be offset by the inclusion of 

bankrupt and merged companies. Regardless, this database is the most 

comprehensive available to us, and price-cap incumbent firms, such as 

AT&T and BellSouth, have used the database for similar purposes. We 

discuss data reliability in more detail in appendix I. 

Our competition analysis, while not a complete representation of 

competition, is a more granular view than that taken by FCC in its Pricing 

Flexibility Order—which was to extrapolate the state of competition 

throughout an MSA by the presence of competitors’ equipment colocated 

in incumbent firms’ wire centers. We analyzed the extent of competitive 

entry in a market at the level of individual buildings—that is, at individual

locations where business or government end users would choose from 

service providers to purchase dedicated access. In its review of the 

SBC/AT&T and Verizon/MCI mergers, DOJ’s Antitrust Division also 

adopted the building level as its basis of analysis. There is some 

disagreement among FCC, incumbent firms, and competitors on the 

appropriate level of analysis to judge the state of competition for 

dedicated access. For example, some observers have stated that the 

proper level of granularity for any competition analysis is not the presence

of a competitor within a building, but the presence of the competitor at the 

business location within that building. Competitors have pointed out that 

while they may have a connection to a building, they are unable to connect 

to businesses on all floors within that building. In this case, our analysis 

would be overstating the level of competition. However, that level of

detailed data is not available. 

Page 22 GAO-07-80 Deregulation of Dedicated Access Services
Another view taken by some observers is that, from a business’ 

perspective, demand for dedicated access will be determined by that 

business’ individual location and the other locations where the business 

needs dedicated access, such as field offices or branches. These other 

locations could be within the same MSA or could be spread out over 

several MSAs, several states, or even nationwide. For example, a bank may

have 30 or 40 locations in 12 states in one region of the country that 

require dedicated access. To serve that customer wholly over its own 

facilities, a competitor would need to extend its network to all of those 

locations. Alternatively, a competitor could compete for that customer 

against the incumbent, who likely has connections to all of the customer’s 

locations in that region, using some of its own facilities and some facilities 

purchased from the incumbent or from another competitor. Our analysis 

does not consider an individual customer’s total demand—a level of data

that is unavailable—but rather their demand within a building in an MSA. 

However, because the percentage of buildings in these MSAs with a 

competitor appears to be relatively small, our analysis suggests that it is 

unlikely that a single competitor would have very many of its own 

facilities to serve such a customer. 

FCC’s Metric Shows a 

Decline in the Extent of 

Colocation in Some MSAs 

since the Granting of 

Pricing Flexibility 

Using FCC’s competition metric—competitive colocation in incumbent 

wire centers—the data suggest that, for some MSAs, fewer competitors 

exist in the wire centers used by the incumbents to meet FCC’s 

competitive triggers than when the incumbents were granted pricing 

flexibility. In fact, in many MSAs we examined, some wire centers that had 

competitive colocation several years ago, appear to no longer have any 

competitive colocation. Price-cap incumbents have noted in the 

rulemaking proceeding on dedicated access that competitors will often 

bypass their wire centers, and that FCC’s trigger would not detect these

competitors. This analysis cannot test the extent to which formerly 

colocated competitors have removed equipment to bypass incumbent 

facilities, or the extent to which bypass occurs in general. Table 3 shows 

the change in the number of price-cap incumbents’ price-flex wire centers 

used to meet FCC’s competitive triggers in which competitors were 

colocated as of July 2006.

31

 31Because Telcordia’s database is used primarily for interconnection purposes, it is likely 

that there is little underreporting of competitors’ presence in price-cap incumbent wire 

centers. 

Page 23 GAO-07-80 Deregulation of Dedicated Access Services
Table 3: Change in Competitive Colocation in “Price-flex” Wire Centers 

Number of “price-flex” wire 

centers with competitive 

colocation

MSA 

In pricing 

flexibility 

application July 2006

Percentage

change

Phase I channel termination markets 

Chicago 58 42 (28)

Detroit 27 22 (19)

Greenville 5 5 0

Minneapolis 20 18 (10)

New Orleans 6 6 0

New York 80 75 (6)

Seattle 11 11 0

Washington, D.C. 46 39 (15)

Total 214 193 (10)

Phase II channel termination markets 

Atlanta 16 16 0

Los Angeles 64 64 0

Miami 38 38 0

Norfolk 15 15 0

Phoenix 19 18 (5)

Pittsburgh 34 22 (33)

Portland 10 10 0

San Jose 11 11 0

Total 256 227 (11)

Source: GAO analysis of Pricing Flexibility applications, and Telcordia and GeoResults data. 

Note: Percentages have been rounded. 

FCC does not monitor ongoing colocation to continually affirm that the 

triggers are met, even in situations where major mergers or bankruptcies 

may change the competitive landscape. According to FCC, continually 

deregulating and reregulating prices on the basis of such changes would 

not produce a desirable outcome and the costs of such actions would 

likely outweigh the potential benefits. 

Page 24 GAO-07-80 Deregulation of Dedicated Access Services
The recent telecommunications mergers between AT&T and SBC, and 

between Verizon and MCI—although still undergoing an Antitrust 

Procedures and Penalties Act (Tunney Act)32 review by the federal courts 

as of the date of this report—are also likely to decrease the number of 

buildings with a competitor for dedicated access in the MSAs we 

examined. DOJ’s Antitrust Division conducted a review of the effects these 

mergers would have on competition. DOJ concluded that, viewed as a 

whole, the transactions were likely to create substantial efficiencies that 

could benefit consumers. However, DOJ found that, for the vast majority 

of buildings in the MSAs it reviewed, no competitive providers of 

dedicated access facilities existed, which is consistent with the data in 

table 2. For the purposes of its merger review, however, DOJ did not 

review the state of competition in the dedicated access market as a whole,

but rather focused on the hundreds of buildings where the transactions 

would combine the only two firms that owned or controlled a direct fiberoptic connection to the building.33 For those buildings where the 

competitors were reduced from two to one, DOJ used the level of 

dedicated access demand in a building, coupled with the distance of the 

building from the nearest competitor’s network in the MSA, to determine 

whether competitors could be induced to enter. For a subset of the two to 

one buildings, potential entry was not sufficiently likely to offset the 

potential anticompetitive effect. For this subset of buildings, DOJ 

proposed a remedy designed to eliminate those anticompetitive effects, 

under which the companies would be required to divest “indefeasible 

rights of use” for connections to those buildings, along with transport 

facilities sufficient to enable purchasers to provide competing 

telecommunication services. The proposed divestiture involved hundreds 

of buildings in 8 metropolitan areas in Verizon’s franchised territory and 11

metropolitan areas in SBC’s franchised territory. Despite the divestiture, 

for the other set of two to one buildings where DOJ deemed entry to be 

likely, there will at least be an initial reduction in competition before any 

entry occurs. 

 32The Tunney Act requires that proposed consent judgments in antitrust cases brought by 

the United States be subject to a 60-day comment period, after which the courts shall 

determine whether entry of the proposed Final Judgment “is in the public interest.” 15

U.S.C. § 16(e)(1). 

33Dedicated access, as previously mentioned, can be provided over other mediums, such as 

copper wire, or using wireless technology; however, competitive firms have generally used

fiber-optic cable to build their networks. 

Page 25 GAO-07-80 Deregulation of Dedicated Access Services
Concerns have arisen that the proposed merger between AT&T and 

BellSouth may cause a further decline in competitive alternatives available 

in BellSouth’s territory. DOJ has also reviewed this merger, and, using the 

same criteria it used in the mergers between AT&T and SBC, and between 

Verizon and MCI, DOJ determined that AT&T could provide service over 

its own facilities to only a small minority of buildings in BellSouth’s 

territory. The potential of other competitors’ extending their networks to 

serve that minority of buildings was substantial enough to make 

divestitures, such as those ordered in the other mergers, unnecessary. 

FCC’s review of this proposed merger is still ongoing. 

Limited Competition Could 

Be Caused by a Variety of 

Factors 

The apparent limited competition at the building level could be caused by 

a variety of factors, including the high sunk costs—that is, costs that once 

incurred cannot be readily recovered—of constructing local networks, the 

cost of local government regulations, and limited access to buildings. All 

of these factors can increase competitors’ cost to deploy facilities and 

provide dedicated access services to locations within an MSA. 

Constructing a local telecommunications network can be extremely 

capital intensive. Most communications equipment has no other use and 

therefore can not be reused for alternative purposes. Because these 

investments would have virtually no alternative value if the business fails, 

competitors must have a certain level of expected revenue to extend their 

networks. The level of demand required for a competitor to build out its 

own facilities varied across the firms we interviewed depending on the 

extent to which the firm had already invested in the market, and the 

distance of the potential customer from the competitor’s network. Based 

purely on the expected returns on their capital investment and ignoring 

other potential barriers, representative from one firm estimated that they 

would need three to four DS-1s of demand, while representatives from two 

other firms estimated demand of greater than 2 DS-3s was required. 

However, one incumbent firm and one cable company noted that the 

necessary revenue to extend a nearby network into a building is relatively

low. Incumbent firms also have noted that the availability of UNEs may 

provide disincentives for competitive firms to extend their networks, 

because these rates are generally below the prices charged for dedicated

access services. Therefore, competitive firms may have an incentive to 

continue to lease UNEs as opposed to incurring the costs of extending 

their own networks. However, FCC has recently limited the availability of

UNEs. Others have argued that, as UNEs become less available to 

competitors, competitors may still find it uneconomical to extend their 

own networks to those end users, and will instead have to purchase those 

connections as dedicated access services from the incumbent. Moving 

Page 26 GAO-07-80 Deregulation of Dedicated Access Services
from UNE rates to dedicated access pricing effectively raised the cost of 

the competitor to serve the end user customer, and may create a 

disadvantage for the competitor in trying to win or retain that customer. 

In addition, local government regulations also can increase the cost of 

deploying these networks. The local government building and zoning 

permitting process often includes extensive inquiries into the planned 

construction activities of a competitor. This process can delay the 

deployment of competitive networks and raises competitors’ costs. 

Representatives of some competitive firms we interviewed also stated that

some cities have moratoriums on construction that prevent them from 

providing service to certain buildings. 

Lastly, competitors also noted that it may be difficult to provide service 

into buildings because some building owners may seek to charge 

competitors for extending their network into their buildings or may refuse 

access to additional carriers. This additional cost can be prohibitively 

expensive because the building owner may demand a percentage of the 

revenue that competitors earn in that building as a condition of granting 

access. In such cases, competitors are forced to lease dedicated access 

lines from the incumbent to serve customers in those buildings. 

Since FCC first began granting pricing flexibility in 2001, our comparison 

of prices and revenue across phase I flexibility and phase II flexibility 

suggests that list prices and revenue are higher on average for circuit 

components in areas under phase II flexibility (areas where competitive 

forces are presumed to be greatest) than in areas under phase I flexibility 

or under price caps. First, our comparison of 1,152 list prices for channel 

terminations and dedicated transport for both monthly and multiyear 

terms found that price-flex list prices were almost always higher than 

price-cap list prices. This is a result of the following two effects: (1) priceflex prices have increased over time on average and (2) the CALLS Order 

has pushed price-cap prices downward on average. However, according to

representatives of the incumbent firms, many of the largest customers in 

pricing flexibility markets are under price-flex contracts. Many of these 

contracts provide discounts off of the applicable price-cap or price-flex list 

price. Because of the differences in the underlying list prices, contract 

prices for dedicated access in phase II areas will still be higher than phase 

I areas. Some contracts also contain terms and conditions that, 

competitors argue, may limit a customer’s ability to choose other vendors. 

Third, average revenue for channel terminations and dedicated transport 

for DS-1 and DS-3 in 2005 are generally lower than average revenue in 2001

Prices for Dedicated 

Access Services in 

MSAs with Phase II 

Pricing Flexibility Are 

on Average Higher 

Than Prices 

Elsewhere 

Page 27 GAO-07-80 Deregulation of Dedicated Access Services
and 2002, although the decline in average revenue for channel 

terminations is larger in phase I areas compared with phase II areas. 

Furthermore, as of 2005, average revenue for channel terminations is 

higher, on average, in phase II areas than in phase I areas or price-cap 

areas. 

Although no total spending figures are available, the federal government is 

also a large consumer of dedicated access services, most of which are 

procured through the FTS2001 contracts. Our analysis of federal agencies’ 

spending found that while most dedicated access services were acquired

through FTS2001—which is acknowledged to have low prices—there were 

limited instances where agencies could be paying more, either by 

purchasing independently of FTS2001 or not using the lowest cost 

FTS2001 service provider. With FTS2001 expiring and GSA currently 

negotiating a new contract, it is unclear what prices the government will 

pay. 

Price-Flex List Prices Are 

Higher on Average Than 

Price-Cap List Prices 

Our comparison of 1,152 prices found that, as of June 2006, the price-flex

list price was on average higher than the price-cap price, regardless of 

whether the price was for channel terminations, interoffice mileage, DS-1 

or DS-3 service, different term arrangements, or different density zones. 

This is due to two effects. First, price-flex prices as of June 2006 are higher 

on average than list prices in effect just prior to FCC granting pricing 

flexibility. As previously discussed, FCC expected price increases in some 

areas, and these increases would likely be in areas where costs were 

higher and, therefore, regulation had pushed prices below costs. Our 

analysis showed that prices increased on average, regardless of density 

zone or any other parameters—although prices did increase more on 

average in lower density areas than higher density zones, and increased 

more for shorter term lengths than longer term lengths. Second, list prices 

available in areas where price caps remain (MSAs with phase I flexibility 

and MSAs under full price-cap regulation) decreased on average over the 

same period, mainly as a result of the CALLS Order. (See app. II for more 

information on this analysis and for results using data adjusted for 

inflation into 2005 dollars using the Bureau of Labor Statistics Producer 

Price Index for Wired Telecommunications Carriers. Adjusting prices 

using this price index does not change the result that prices are higher in 

phase II areas on average, or that prices have increased over time in phase 

II areas. However, adjusting prices using this price index resulted in pricecap prices increasing in constant terms over the period.) Average 

differences in dedicated access prices across all terms and zones are 

shown in figure 2. 

Page 28 GAO-07-80 Deregulation of Dedicated Access Services
Figure 2: Average Differences in Dedicated Access Prices Across All Terms and Zones in Nominal Dollars 

-10

-5

0

5

10

15

20

Price change (in nominal dollars)

Price comparisons Price-flex 2006 compared 

with price-cap 2006

Initial price compared 

with price-cap 2006

Initial price compared 

with price-flex 2006

-150

-100

-50

0

50

100

150

200

250

Price change (in nominal dollars)

Price comparisons

Source: GAO analysis of data from tariffs filed with FCC by AT&T, BellSouth, Qwest, and Verizon.

Channel terminations

Fixed transport

Variable transport

Price-flex 2006 compared 

with price-cap 2006

Initial price compared 

with price-cap 2006

Initial price compared 

with price-flex 2006

DS-1 prices DS-3 prices

Circuits may cross MSA boundaries, and customers may purchase circuits 

in several different MSAs with different levels of pricing flexibility. 

Therefore, looked at more broadly, a full circuit, or a customer’s entire 

purchase may cost less overall than it did prior to pricing flexibility. In 

other words, decreases resulting from the CALLS Order, coupled with 

contract discounts may offset any increases in price-flex list prices. 

However, examining prices in this way would not show the effects of 

differing levels of pricing flexibility, and, in particular, how phase II 

flexibility has changed prices, which was the objective of our analysis. 

Page 29 GAO-07-80 Deregulation of Dedicated Access Services
In general, because many contracts provide for discounts off the list price, 

effective prices for dedicated access under these contracts in phase II 

areas will generally be higher than phase I areas because price-flex list 

prices are, on average, higher than price-cap list prices. The exceptions to

this generality are those contracts with set prices for circuit components, 

rather than discounts. Representatives of price-cap incumbents, however, 

state that discounts from these contracts in phase I areas will compensate 

for the increases in the price-flex list price, when considering a customer’s 

entire purchase of dedicated access or when considering circuits that may 

cross MSA boundaries or are located in both phase I and phase II MSAs. 

Our analysis confirmed that many contracts with major incumbent carriers 

provide discounts that, along with CALLS Order decreases to the price-cap 

list price, can eliminate any increases in the price-flex list price that may 

have occurred as a result of phase II pricing flexibility. However, for other 

contracts we could not determine the effect on net prices, because key 

data (e.g., the length of dedicated interoffice mileage) were unavailable. 

Customers who sign contracts may need to meet various conditions, 

which competitors argue limits customers’ ability to choose another 

provider. These conditions include such things as revenue guarantees, 

requirements for shifting business away from competitors, and severe 

termination penalties. Table 4 shows examples of contracts with such 

conditions and terms. In revenue guarantee contracts, the customer 

guarantees that it will spend a certain amount with the incumbent (e.g.,

$301 million per year), and, in some contracts, that amount will increase 

over the course of the contract. These types of contracts may inhibit 

choosing competitive alternatives because the customer does not receive 

the applicable discount, credit, or incentive if the revenue targets are not

met and additional penalties may also apply. Unless a competitor can meet 

the customer’s entire demand, the customer has an incentive to stay with 

the incumbent and to purchase additional circuits from the incumbent, 

rather than switch to a competitor or purchase a portion of their demand 

from a competitor—even if the competitor is less expensive. FCC has 

indicated that if any party believes that these contract offerings are 

discriminatory or unlawful in any way, they may file a complaint under 

section 208 of the 1996 Act.34 According to FCC, no such complaints have 

been filed.

Effects of Contracts on 

Prices Varied, but Are 

Generally the Same Under 

Phase I Flexibility and 

Phase II Flexibility 

Conditions and Terms May 

Inhibit Switching Circuits 

to Competitors 

 3447 U.S.C. § 208. 

Page 30 GAO-07-80 Deregulation of Dedicated Access Services
Table 4: Examples of Contract Terms and Conditions

Type of terms and conditions Specific contracts 

Revenue guarantees Verizon contract number 1 (no longer available) was a 3-year-term contract that required 

an annual revenue commitment of $301 million in year 1, $346 million in year 2, and $386 

million in year 3, with discounts on the amount spent above these targets but below a 

maximum. If the customer did not achieve the revenue targets, no discount was applied. If 

the customer spent more than the maximum, the amount above the maximum was not 

eligible for a discount. 

BellSouth contract number 10 is a 2-year-term contract with minimum revenue 

commitments of $8,800,000 in year 1, and $10,100,000 in year 2, with discounts on the 

amount spent above these targets but below a maximum. If the customer does not achieve 

revenue minimums, no discount is applied, and the customer will not be allowed to 

subscribe to another contract with revenue minimums for a period extending 6 months 

beyond the term of the contract. If the customer spends over the maximum, the amount 

above the maximum is not eligible for a discount. 

Shifting business away from competitors Several AT&T contracts (Southwestern Bell contract number 15, Ameritech & Pacific Bell 

contract number 20, and Southern New England Telephone contract number 1) require 

that at least 4 percent of services ordered from AT&T must be switched over from a 

nonincumbent provider. 

Termination penalties A variety of AT&T contracts contain severe termination penalties. For example, if (SWBT) 

contract number 3 is terminated at the end of year 3 of a 5-year contract, termination 

penalties are 50 percent of the remaining 2 years of recurring charges, or approximately 

100 percent of annual billings. To provide comparable rates, a competitor (1) would have 

to provide a 50 percent discount over the next 2 years, just to match the incumbent’s offer, 

and (2) would need to provide a higher discount to provide a lower rate. 

Qwest contract number 06-009 is a 3-year-term contract that requires a monthly 

commitment of at least $16,935,000, but no more than $20,161,000. If the contract is 

terminated, the customer is liable for 50 percent of the minimum revenue commitment for 

each remaining month of the contract term. 

Verizon contract number 25 is a 2-year-term contract that requires an annual commitment

of at least $162,500,000. If the contract is terminated, the customer is liable for 50 percent

of the difference between the amount of revenue billed when terminated and the minimum 

annual commitment of $162,500,000. If the contract is terminated in year 1, there is no 

penalty for year 2 of the contract. 

Source: GAO analysis of contracts filed with FCC.

Page 31 GAO-07-80 Deregulation of Dedicated Access Services
Not all customers use price-flex contracts, and detailed data on the 

number of customers and circuits that are purchased at price-flex list 

prices were not available to us. Therefore, to examine the net effect of 

changes in list prices and the application of contract discounts, we 

compared average revenue data for dedicated access services under phase 

I and phase II pricing flexibility. Our analysis of average revenue data for 

channel terminations and transport for both DS-1 and DS-3 shows that, in 

general, average revenue has declined in nominal dollars.35 However, the 

decline in average revenue for channel terminations is larger in the 29

phase I areas for which we had data, compared with the 27 phase II areas. 

Average revenue decreased about 17 percent for DS-1 and DS-3 channel 

terminations in the phase I areas, and 6 percent for DS-1 and 5 percent for 

DS-3 in the phase II areas. As of 2005, the data show that average revenue 

in the phase II areas is about 4 percent higher for DS-1 channel 

terminations, and 24 percent higher for DS-3 channel terminations, 

compared with average revenue in the phase I areas. (See appendix II for 

more information on this analysis and for results using (1) data adjusted 

for inflation into 2005 dollars, using both the Bureau of Labor Statistics 

Producer Price Index for Wired Telecommunications Carriers and the 

general GDP price index, and (2) results weighted by the number of 

businesses in the MSA. Regardless of weighting or the price index used, 

phase II average revenue is consistently higher than phase I average 

revenue in 2005.) Figure 3 shows the change in average revenue generated

in 2005 for both DS-1 and DS-3 channel terminations compared with the 

average revenue generated from sales in the year just prior to when FCC 

granted pricing flexibility. (We do not specify that year because it varied 

among price-cap incumbents—i.e., 2000, 2001, or 2002.) 

Average Revenue Has 

Declined Over Time, but Is 

Generally Higher for 

Channel Terminations 

under Phase II Flexibility 

Than under Phase I 

Flexibility 

 35These averages mask the variation in average revenue generated by each price-cap 

incumbent carrier and the variation across specific MSAs. In a limited number of cases

there was almost no difference between phase I and phase II areas. Due to confidentiality 

concerns, we do not report data for specific incumbents or MSAs and, therefore, rely on

these aggregated figures. 

Page 32 GAO-07-80 Deregulation of Dedicated Access Services
Figure 3: Change in Average Revenue for DS-1 and DS-3 Channel Terminations in

Phase I and Phase II Areas 

0

20

40

60

80

100

120

140

160

Average revenue (in nominal dollars)

Time period Time period

Source: GAO analysis of data from a sample of phase I and phase II MSAs provided by AT&T, BellSouth, Qwest, and Verizon.

0

200

400

600

800

1,000

1,200

1,400

Average revenue (in nominal dollars)

Phase I

Phase II

DS-1 channel terminations DS-3 channel terminations

2005 average 

revenue

Pre-flex average 

revenue

2005 average 

revenue

Pre-flex average 

revenue

Note: Data are in nominal dollars. The differences between phase I and phase II revenue shown in 

2005 are statistically significant at the 1 percent level or lower. 

We also compared average revenue for channel terminations under phase 

II flexibility with average revenue for channel terminations in areas 

remaining under the price cap. We calculated the average price-cap

revenue from data submitted by price-cap incumbents in their annual tariff 

review plans, where price-cap incumbents provide the FCC with detailed

data on the number of channel terminations sold under the various zone 

and term prices available in their tariffs. Not all discounts available under 

price caps were included in our calculation because we were not able to 

determine how such discounts would be applied to only channel 

terminations. Therefore, the average price-cap revenue is biased upward. 

Comparing average revenue in the 27 phase II MSAs with average revenue 

in price-cap areas governed by the same tariff, we find no statistical 

Page 33 GAO-07-80 Deregulation of Dedicated Access Services
difference on average. Therefore, on average, phase II flexibility does not

appear to have resulted in prices lower than are available under price-cap

regulation. These averages mask variation across price-cap incumbents 

and across MSAs. For example, comparing average revenue in price-cap 

areas with average revenue in phase II areas for DS-3 channel 

terminations, two of the price-cap incumbents showed higher average 

revenue in phase II areas and two showed lower. 

Data on average revenue for dedicated transport that the incumbent firms 

provided shows that average revenue per unit for dedicated transport has 

declined over the same period. However, we were unable to compare 

revenue across differing levels of deregulation for transport, because 

nearly all MSAs with pricing flexibility are under phase II flexibility for 

dedicated transport. In fact, only 13 of the 215 MSAs with pricing 

flexibility have only phase I flexibility for transport, and all of the data 

provided to us were for MSAs where the price-cap incumbent had received

phase II pricing flexibility for dedicated transport. Price-cap incumbent 

firms have argued that the market for dedicated transport is a more 

competitive segment of the dedicated access market. FCC’s colocation 

triggers capture the extent to which competitors have their own dedicated

transport from incumbent wire centers. 

Page 34 GAO-07-80 Deregulation of Dedicated Access Services
The federal government spends millions of dollars annually on dedicated 

access services. Our analysis of spending by USDA and DOJ found that, of

the estimated $9 million they spent annually on dedicated access services 

in fiscal year 2006, most of these services were acquired through the 

FTS2001 program.36 Agencies purchasing under FTS2001 can obtain 

services from one or more contractors, who may offer different prices for 

similar services. Prices for services under the FTS2001 contracts 

decreased annually over the life of those contracts, and GSA and the 

telecom managers we interviewed recognized these prices to be generally 

below rates with similar conditions and terms in price-cap, phase I, and 

phase II markets.37 We found that the data on prices provided by the 

federal agencies regarding purchases through FTS2001 generally matched 

dedicated access price estimates found in FTS2001. However, government 

agencies are not required to use the FTS2001 program, and agencies may

procure dedicated access connections for high-capacity

telecommunications services directly from telecommunications carriers. 

Agencies may use their own telecommunications contracts to procure 

dedicated access connections. 

Data from Two 

Departments Show That 

Their Spending on 

Dedicated Access Services 

Is Generally Made Through 

FTS2001 

 36The FTS2001 program is the successor to the FTS2000 program. The former program 

represented an improvement over its predecessor in terms of available services and 

technology. FTS2001 provides voice, data, video, Internet Protocol, and managed network

services to federal agencies nationally and internationally. Under FTS2001, GSA awarded 

an FTS2001 long distance services contract to Sprint in December 1998 and another to MCI

WorldCom in January 1999. Under the terms of those contracts, each contractor is

guaranteed minimum revenue of $750 million over the life of the contracts, which run for 4 

base years and have four 1-year options. Another GSA-managed telecommunications 

contract program is the Metropolitan Area Acquisition, which provides local 

telecommunications services in selected metropolitan areas. Under this program, certain 

identified contractors as well as FTS2001 contractors are allowed to offer services in both 

local and long-distance markets, a process termed “crossover.” For additional information,

see GAO, FTS2001: Transition Challenges Jeopardize Program Goals, GAO-01-289 

(Washington, D.C.: Mar. 30, 2001). 

USDA purchased all of its dedicated access services through FTS2001 to connect the 

offices of its various agencies, such as the Forest Service and the Agricultural Research 

Service. Our review of spending on dedicated access in DOJ was limited to that contracted 

by DOJ’s Justice Management Division. It thus excluded any spending done by the Federal 

Bureau of Investigation. See appendix I for additional information on the federal agencies

included in this review. 

37A direct comparison between FTS prices and commercial tariff and contract prices 

cannot be made due to the difficulty in acquiring mileage data as well as identifying 

applicable contracts. The government requires carriers to provide it with the lowest 

applicable rates. 

Page 35 GAO-07-80 Deregulation of Dedicated Access Services
Our review of government expenditures on dedicated access services 

indicated instances in which the government was not paying the lowest 

price for these services in two ways. 

• First, even if the procurement is made through FTS2001, an agency may 

not necessarily use the lowest cost service provider for a particular pointto-point circuit. Given a particular dedicated circuit, FTS contractors each 

have prices that may differ substantially. Agencies may not use the lowest 

cost service provider because it may mean that they would have to switch 

providers, and there may be significant costs involved in switching. 

• Second, because rates available through FTS2001 were usually less than 

the rates government agencies received when purchasing directly through 

a contract other than FTS, spending on dedicated access services may be

higher. However, these other contracts may provide the agency with 

additional services, and thus we were unable to fairly compare the 

different rates. 

With the FTS2001 contracts expiring and a new contract vehicle, Networx, 

currently being defined and negotiated, it is unclear what prices the 

government will pay for dedicated access services. In many instances list 

prices, as previously discussed in this report, have increased since 

FTS2001 was initially negotiated. However, because of newer technologies 

(e.g., metro Ethernet and MPLS) and bundling of services, such increases 

in one service may be offset by overall gains in efficiency and lower prices 

for other services. 

FCC uses various data to assess competition for dedicated access services, 

but most of these data have significant limitations in their ability to 

describe the presence, extent, or change in competition. FCC’s strategic 

plan and various rulemakings have defined FCC’s obligation to ensure and 

assess competition for dedicated access services. The agency attempts to 

collect data from external parties through its rulemaking proceedings, but 

those parties have no obligation to provide data, and the agency has 

limited mechanisms to verify the reliability or accuracy of any data 

submitted. FCC has stated that (1) gathering and analyzing additional data

would be costly and burdensome and (2) that it is reluctant to impose 

additional reporting requirements on incumbent firms or to require 

competitive firms to report information on their networks. The agency

must balance the additional costs of gathering more data with the 

potential benefit that might result from these additional data. Yet without 

more complete and reliable data, FCC is unable to determine whether its 

FCC Plays an 

Important Role in 

Ensuring 

Competition, but 

Lacks Sufficient 

Information to 

Determine the 

Success of Its 

Deregulatory Policies 

Page 36 GAO-07-80 Deregulation of Dedicated Access Services
deregulatory policies are achieving their goals. FCC contends that its open 

proceeding on dedicated access will address what steps the agency should 

take to ensure that rates for dedicated access services remain just and 

reasonable.

The promotion of competition is one of the two policy objectives of the 

1996 Act. The stated outcomes of this policy objective are to lower prices 

and increase the quality of telecommunications services available to 

American telecommunications consumers as well as promote the rapid 

deployment of new telecommunications technologies. FCC is the federal

agency charged with executing and enforcing the provisions of the 1996 

Act. 

In support of the goals of the 1996 Act, FCC implemented its 2006-2011 

Strategic Plan, which defines the promotion of competition as one of the 

agency’s goals.38 To support this goal, FCC’s current strategic plan says 

that it will collect and evaluate information on competition in the domestic 

and international communications markets. Additionally, FCC stated that 

it will continually review FCC rules to determine what rules need to be 

implemented, revised, or eliminated to achieve its competition objectives 

effectively and efficiently. As part of its review of the progress the agency

has made toward meeting its strategic plan, FCC determined that it was 

making adequate progress toward ensuring that American consumers can 

choose among multiple reliable and affordable means of communications. 

In January 2005, based on a petition filed in 2002, FCC opened a 

rulemaking proceeding in which it stated its commitment to periodically

examine its deregulatory judgments regarding competition for dedicated

access services.39 FCC further affirmed that its review of deregulation for 

dedicated access services is consistent with its ongoing commitment to 

ensure that its predictive judgments about competition for dedicated 

access are consistent with actual marketplace developments. 

Ensuring Competition Is a 

Central FCC Responsibility 

 38Federal Communications Commission, Strategic Plan 2006-2011 (2005), 8. 

39Special Access Rates for Price Cap Local Exchange Carriers, WC Docket No. 05-25, 

Order and Notice of Proposed Rulemaking, 20 FCC Rcd 1994 (2005). 

Page 37 GAO-07-80 Deregulation of Dedicated Access Services
FCC uses data provided in incumbents’ pricing flexibility applications to 

determine the extent of competition in dedicated access. As part of these 

applications, incumbents provide FCC with data on competitors colocated

in their wire centers. FCC has determined that the collection of these data 

does not pose a high administrative burden on applicants and allows FCC 

to assess the state of competition in dedicated access. To minimize 

disputes about these data, FCC requires the incumbent to notify colocated 

competitors that the incumbent has listed their presence in their 

application for pricing flexibility. Incumbents provide these data to FCC in

a confidential format that protects the exact names and locations of these 

competitors. 

A second major source of data that FCC uses to gauge competition in the 

markets for dedicated access services comes from its Automated 

Reporting Management Information System (ARMIS). FCC initiated 

ARMIS in 1987 to collect and report on incumbent financial and 

operational data. Incumbents annually report this information to FCC. 

ARMIS data include general rates of return as well as specific revenue 

figures and line counts for last mile connections per incumbent. ARMIS 

data are publicly available through FCC’s Web site. 

In other markets, FCC has identified some data needed to assess 

competition. For example, in its 2005 Performance and Accountability 

Report, FCC identified the following measures to assess competition for 

various telecommunications services: 

FCC Uses Various Data to 

Assess Competition for 

Dedicated Access Services 

• Number of consumers having a choice among wireless and wireline 

service providers. 

• Percentage of households with competing providers for multichannel 

video programming and information services. 

• Relative prices for wireless and wireline services.

• Price for international calls. 

However, these measures relate to competition for residential customers, 

not business customers. 

Finally, in various rulemaking proceedings, FCC has requested that 

outside parties provide data regarding the state of competition in 

dedicated access services. The information filed by these parties is 

generally available for inspection and comment by the public. FCC takes

Page 38 GAO-07-80 Deregulation of Dedicated Access Services
into account the data provided by outside parties as part of its rulemaking 

proceedings. In its rulemaking proceeding on competition in dedicated

access services, FCC received a variety of comments and data from 

incumbents, competitors, cellular telephone companies, and large 

business users. 

The data that FCC uses to assess competition for dedicated access 

services have several limitations that prevent the agency from describing 

the current state of competition—that is, these data are not current, 

specific, or reliable. FCC has stated that gathering and analyzing additional 

data would be costly and burdensome. Furthermore, FCC has not 

traditionally required competitive firms to report data, and the agency is 

reluctant to impose further reporting requirements on incumbent firms, 

which would be subject to OMB approval and the Paperwork Reduction 

Act.40

First, the data are not current. The data that FCC receives from

incumbents when they apply for pricing flexibility represent a one-time 

assessment of the state of competition for dedicated access services. Once 

it grants pricing flexibility, FCC does not review the state of competition in 

dedicated access for those incumbent markets. Because many pricing 

flexibility applications were granted in 2001 and 2002, FCC has not 

reviewed the state of competition in 4 to 5 years in markets, such as 

Atlanta, Los Angeles, Phoenix, and Pittsburgh, where pricing flexibility has 

been granted. Additionally, FCC has no mechanisms in place in its rules to 

review competition. As previously shown, the amount of competition has 

changed between 2001 and 2006 in some markets, according to our 

analysis that used FCC’s means of measuring competition—colocation of 

incumbents and competitors in wire centers. FCC also collects 

marketplace data from rulemaking proceedings on an irregular basis, and

the agency generally does not establish a fixed timeline to resolve 

rulemaking proceedings.

41

Second, data provided to FCC in rulemaking proceedings are often not 

specific enough to be useful. Outside parties are under no obligation to 

Data Available to FCC Are 

Not Current, Specific or 

Reliable 

 40See footnote 20. 

41Generally, comments are due 60 days after a Notice of Proposed Rulemaking is published 

in the Federal Register and reply comments are due 90 days after publication in the Federal 

Register. FCC extended the reply comment period to on or before July 29, 2005. 

Page 39 GAO-07-80 Deregulation of Dedicated Access Services
provide data FCC requests in rulemaking proceedings, and these parties 

often do not provide requested data. For example, in its rulemaking on 

competition for dedicated access services, FCC requested data to create 

an average price index for MSAs with pricing flexibility and MSAs under 

price-cap regulation to determine how prices have changed. However, no 

companies filed such indices. Instead, the companies provided aggregate 

figures of average revenue. These average revenue figures were not 

disaggregated to enable comparisons of price trends under different levels

of deregulation. 

As with the major incumbent providers, FCC also has limited data on 

competitors’ provision of dedicated access services. For example, ARMIS 

only requires certain price-cap incumbents to file information. 

Competitors are not required to file any financial or operational data 

through this system. In addition, competitors may file tariffs for their 

dedicated access service offerings, but they are not obligated to do so. As 

a result, FCC has no specific or current data on competitors’ prices for 

dedicated access services or on the extent to which competitors have 

extended their networks. FCC has noted that requiring competitors to 

disclose that information could disturb the market by providing 

information that would not otherwise be publicly available. However, 

some competitors we interviewed stated that they have information on 

where other competitors are because they use other competitors wherever 

possible as an alternative to using price-cap incumbents. 

Third, FCC’s data also have limited reliability for assessing competition in 

dedicated access. Outside parties are often economically interested parties

that have an incentive to provide incomplete or biased data. For example, 

most of the outside parties in the rulemaking proceeding on competition in 

dedicated access are parties that would directly profit from further 

regulation or deregulation. FCC is limited in its ability to assess the 

reliability of these parties’ information. Instead, it relies on other parties to 

challenge or affirm these data’s reliability. Additionally, parties involved in 

the rulemaking on dedicated access have raised concerns over the 

reliability of ARMIS data to make assessments of competition in dedicated 

access services. While competitors have used ARMIS data to show that 

price-cap incumbents are earning large rates of return on dedicated 

access, price-cap incumbents state that ARMIS cannot be used to make 

competitive assessments due to outdated accounting rules, including such

things as arbitrary cost allocations and the inclusion of certain revenues 

but not the corresponding costs. The question of ARMIS data utility is part 

of the open proceeding on dedicated access. 

Page 40 GAO-07-80 Deregulation of Dedicated Access Services
As previously noted, FCC’s Performance and Accountability Report 

recognizes the need for data to assess competition, but the available data

lack metrics for competition in dedicated access for businesses. The 

Government Performance and Results Act of 1993 outlines criteria for 

agencies to define and measure their progress in relation to the agencies’ 

performance goals.42 These criteria state that an agency should identify 

performance measures that adequately indicate progress toward its 

performance goals. In our review of FCC’s Performance and 

Accountability Report, we found no data or measures of competition and 

choice that were relevant to the business market or to dedicated access 

services, although increasing consumers’ and businesses’ choice in 

telecommunications is a stated goal of the agency. FCC’s data focus 

instead on consumers’ access to residential wireless providers or video 

programming (such as cable or satellite TV), or on the cost of an 

international telephone call. However, FCC stated that there is no easily 

identifiable and understandable measure for competition in the business 

market or in dedicated access. Furthermore, more competition has 

traditionally existed in the business sector than in the residential sector, 

and, therefore, FCC has focused on metrics in the residential sector. 

The market for dedicated access services is complex and 

multidimensional, including a wholesale market for dedicated access 

facilities as well as a retail market that relies on dedicated access facilities 

to provide high-capacity telecommunications services for large business 

customers with multiple locations. The wholesale market has historically 

been controlled by the incumbent firms, who have virtually ubiquitous 

networks within their regions. Competitors have entered segments of this 

market with their own networks, encouraged by FCC’s actions dating back 

many years, and are active participants in the retail market, reselling 

incumbent dedicated access services to provide business services, or 

relying on their own or other competitors’ local connections, where they 

exist. 

FCC has initiated several deregulatory actions and access charge reforms 

in an effort to fulfill the intent of the 1996 Act and allow market forces and 

competition to govern prices for dedicated access. At the heart of FCC’s 

actions was a vision of facilities-based competition, where competitors 

would compete with the incumbents mainly using their own networks and 

Conclusions 

 42Pub. L. No. 103-62. 

Page 41 GAO-07-80 Deregulation of Dedicated Access Services
facilities. Under facilities-based competition, incumbents would be 

constrained from pursuing predatory and exclusionary pricing practices, 

and prices would be driven toward marginal costs. FCC’s deregulatory 

actions were predicated on proxy measures that FCC predicted would 

indicate whether sufficient facilities-based competition existed for 

dedicated access services in order for market forces to function in this 

way. However, our analysis of facilities-based competition suggests that 

FCC’s predictive judgment — that MSAs with pricing flexibility have 

sufficient competition — may not have been borne out, particularly for 

channel terminations to the end users of dedicated access. Even more 

troublesome is the fact that some of our analysis, which is based on FCC’s 

competition metrics, suggests that competitive alternatives for dedicated 

access have declined in some MSAs in the past few years. The effect that 

such changes may be having on consumers of all sizes, including the 

federal government, could be significant. 

Taking a broader view of the competitive landscape, our analysis suggests 

that wireline facilities-based competition itself may not be a realistic goal 

for some segments of the market for dedicated access. Long-standing 

entry barriers continue to exist and are not likely to be alleviated. Where 

demand for dedicated access is less than 3 or 4 DS-1’s, it would appear 

unlikely that any competitor would extend its network for that business. 

While competitors may be able to serve such lower demand customers 

using UNEs in the hopes that demand might increase to such a level that 

makes build out a real possibility, FCC has recognized that the availability 

of lower-priced UNEs has discouraged investment by competitors (as well 

as incumbents). Furthermore, the FCC has recently limited the availability 

of UNEs. New technologies, such as WiMax, also have the potential to 

bring more competition. However, it is unclear the extent to which this 

technology can provide a widespread alternative to wireline dedicated 

access, how long that transition will take to become an effective 

alternative, or who will be in the best position to provide that alternative. 

Concurrently, price-cap incumbents have received a significant amount of 

price deregulation allowing them to negotiate price-flex contracts and to 

raise their list prices. However, competitors argue that price-flex 

contracts, in addition to other entry barriers, discourage the use of 

competitive networks, and thus discourage investment by competitive 

firms. 

In its ongoing rulemaking proceeding on dedicated access, FCC 

recognized its responsibility to revisit its proxy measures to determine 

whether its predictive judgments comport with actual market 

developments and to fulfill its mission to encourage competition and to 

Page 42 GAO-07-80 Deregulation of Dedicated Access Services
ensure lower prices, higher quality services, and adequate choices for 

consumers. Much of the specific data and information that FCC collects 

and has requested from incumbents, competitors, and dedicated access 

customers that would enable the agency to effectively analyze trends in 

competition and the effects of deregulation were not provided by these 

parties, and the information that has been provided is of limited reliability, 

and has come from parties that would directly profit from further 

deregulation or regulation. Even with the data that has been provided, 

FCC’s rulemaking proceeding, which began with a petition filed in 2002, is

still unresolved. 

Regardless of where competition may come from in the future, it is clear 

that FCC does not regularly monitor and measure the development of 

competition, which will affect how FCC responds to emerging trends, and 

the actions it takes to encourage and foster such competition. We have

consistently noted the need for better data at FCC to track competition 

and deployment of telecommunications services to a variety of 

consumers.43 Without data that are reliable, relevant, and current, FCC is 

limited in its ability to adequately monitor the state of competition for 

dedicated access, and thus is limited in its ability to determine whether its 

predictive judgments were correct, and whether its deregulatory actions 

are achieving their goals. 

To more effectively monitor and determine whether its deregulatory 

actions are achieving their goals of encouraging competition, and ensuring

lower prices and adequate consumer choice, FCC should take the 

following two actions: 

Recommendations for 

Executive Action 

• Develop a meaningful and workable definition of effective competition, or 

true customer choice, using an approach that evaluates the competitive 

nature of a market by accounting for the number of effective competitive 

choices available to customers. 

• Consider collecting additional data and developing additional measures to 

monitor competition on an ongoing basis that more accurately represents 

 43GAO, Telecommunications: Broadband Deployment Is Extensive Throughout the United

States, but It Is Difficult to Assess the Extent of Deployment Gaps in Rural Areas, 

GAO-06-426 (Washington, D.C.: Mar. 2006); and Challenges to Assessing and Improving 

Telecommunications For Native Americans on Tribal Lands, GAO-06-189 (Washington,

D.C.: Jan. 2006). 

Page 43 GAO-07-80 Deregulation of Dedicated Access Services
market developments and individual customer choice (e.g., price indices 

and the extent of competitors’ networks). 

If, through this monitoring, FCC finds that competition is not developing 

as it expected, it should determine what actions are necessary to 

accelerate competition for dedicated access. 

We obtained comments on a draft of this report from FCC officials, which

are presented in appendix III. In summary, FCC stated that our report 

“appears to imply the need for a return to price control policies” and thus 

generally disagreed with the report’s recommendations. Consistent with 

that interpretation of the report’s overall message, FCC notes that “the 

cost of price regulation to carriers and the public is still greater than the 

benefits.” FCC’s comments assert that it “takes seriously its obligation to

foster competition ... and will use all available data” to do so, but also 

indicates that gathering reliable data and analyzing actual competition in 

communications markets would be difficult. FCC adds that in 2001, a 

federal court agreed with its theoretical approach to gauging competition 

based on proxy measures.44 Regarding our recommendation to develop a 

meaningful and workable definition of effective competition, FCC states 

that there is no universally accepted, bright-line definition of “effective 

competition,” and that any definition that suggests a geographic market 

more granular than its existing measures would be administratively 

infeasible to implement and may not be consistent with the deregulatory 

goals of the 1996 Act. Regarding our recommendation to consider 

collecting additional data and developing additional measures to monitor 

competition, FCC states that they continue to monitor competition in 

dedicated access, and suggested that the detailed data FCC requested in its 

ongoing rulemaking proceeding on dedicated access will allow it to 

evaluate competitive entry in these markets. 

Contrary to FCC’s interpretation, the report does not call for the 

reregulation of dedicated access prices, nor do we intend to imply that 

broad reregulation of prices is either necessary or the appropriate 

response to the evidence of less competition and higher prices in 

deregulated markets. The market for dedicated access services is 

estimated to be worth $16 billion annually. The data developed in this 

report indicates that there are fewer competitive alternatives and that 

Agency Comments 

 44Worldcom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001). 

Page 44 GAO-07-80 Deregulation of Dedicated Access Services
prices for dedicated access in the theoretically more competitive phase II

markets are higher on average than prices in phase I markets, and not 

statistically different than prices in price-cap markets. The report also 

demonstrates that FCC does not have the type of meaningful data that 

would allow it to effectively oversee the extent of competition in the 

market. Thus, the report calls for FCC, serving in its capacity as the federal 

regulator of interstate communications services, to better define effective 

competition and then collect meaningful data on the state of competition 

in the marketplace. Only by doing so can FCC measure its progress toward 

its stated goals to encourage competition and secure lower prices and 

higher quality services for telecommunications consumers, or adjust its 

approach toward that goal, as needed. 

We recognize that the United States Court of Appeals for the D.C. Circuit 

held that FCC made a reasonable policy determination regarding its proxy

measures of competition, and that regulation could impose costs that 

outweigh benefits.45 However, given the changes in the market and the 

questions raised by our analysis, we believe FCC should not be static and

should seek more discrete measures that are necessary in an evolving 

environment. Indeed, although FCC’s existing rules on pricing flexibility 

were adopted based on predictive judgment and its ongoing rulemaking on

dedicated access is intended to examine whether available data support 

maintaining, modifying, or repealing those rules, FCC’s comments now 

suggest a preference for economic theory rather than empirical data. The 

data used in our analysis was obtained in a manner that prohibited our 

sharing it; FCC could obtain those data and analyses contractually in the 

same way that we did. The data developed in this report, at a minimum, 

raise questions about FCC’s assertion that higher prices will induce 

competitive entry. For example, although FCC’s comments note that high

prices will induce competitive entry, the data developed in this report 

suggest otherwise. There appear to be fewer competitors in areas where 

prices are higher. Moreover, economic theory generally holds that 

competitive entry would occur if markets are “contestable.” FCC itself 

recognizes that the substantial sunk costs required to compete in these 

markets may serve as a barrier to entry. 

We agree with FCC that there is no universally accepted, bright-line 

definition of “effective competition.” However, we believe that FCC is in 

the best position to develop meaningful and workable definitions despite 

 45Worldcom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001). 

Page 45 GAO-07-80 Deregulation of Dedicated Access Services
any difficulties associated with such a task. Further, we maintain that this 

is a relevant and important task for the requisite federal regulatory body. 

Furthermore, we maintain that FCC would be significantly hindered in its

ability to fulfill its regulatory responsibilities and statutory goals of 

promoting competition if it cannot define competition, does not have 

measurable goals, and does not collect and analyze reliable data on the

state of competition for dedicated access. 

Regarding our second recommendation that FCC consider additional data 

and measures, we disagree with FCC’s assertion that it continues to 

monitor competition and that requesting detailed data in the rulemaking 

proceeding on dedicated access is sufficient to allow FCC to evaluate

pricing behavior. FCC’s strategic plan and performance budget contain no

measures by which the Congress or the American public can ascertain the 

extent to which its deregulatory polices are encouraging competition in 

the business market or in the provision of dedicated access services. 

Furthermore, while FCC requested information in its rulemaking 

proceeding—such as price indices pertaining to services sold in phase I 

and phase II areas and cost studies—it is our understanding, based on

review of the submissions of major carriers, that such detailed data were

not supplied by the parties to the proceeding. Instead, FCC received data 

that were either incomplete or in a more aggregated form that can obscure

the effect of phase II pricing flexibility. Thus, we disagree with FCC’s 

position that the data gathered from the rulemaking is adequate to monitor 

competition and that additional data collection is not needed. We support 

the FCC’s rulemaking and believe that data collection is a critical factor in 

the proceeding. 

We also provided the major incumbent carriers an opportunity to review a 

draft of the report, as well as representatives of the trade association 

representing competing carriers and a group representing a coalition of 

major users of telecom services. Three of the four major incumbent firms 

provided comments on a draft of the report. Generally, these firms (AT&T, 

BellSouth, and Verizon) took issue with the report’s underlying data and 

the conclusions we drew from those data, as follows: 

• Concerning the extent of facilities-based competition in the market for 

dedicated access services, the incumbent firms asserted that data we used 

were incomplete. They asserted that competing firms often did not supply 

information on the buildings served as a competitive alternative. Further, 

the incumbents asserted that even if individual buildings were not served 

by a competitive alternative, the proximity of those firms’ fiber networks 

(or the presence of wireless alternatives and cable providers) could 

Page 46 GAO-07-80 Deregulation of Dedicated Access Services
provide a competitive check. Additionally, the incumbents disagreed with 

the draft report’s characterization of the dedicated access product market 

as being defined by demand for a DS-1 or greater level of service, 

commenting that we should have examined competition at DS-3 and 

greater levels of demand. Incumbent firms also asserted that DOJ and FCC 

have found the markets for dedicated access to be competitive. 

• Concerning our analysis of changes in prices, the incumbents argued that 

the analysis was unreliable because the data we used were incomplete. 

More specifically, they insisted that prices paid by customers could not be 

analyzed by focusing on channel terminations in particular areas because

prices need to be examined on the basis of the total circuit (i.e., including 

the mileage portion), which may cross multiple geographic boundaries, 

and that the data show that prices have decreased over time. 

We recognize the limits of available data on the extent and effect of 

competition in the market for dedicated access services. It is highly 

unlikely that any data set on telecommunications networks would be 

perfect. DOJ has noted that even with the ability to obtain data through 

subpoena power, its analysis also likely experienced some errors due to 

underreporting and overreporting. Nevertheless, we believe the data used

provide a reasonably and sufficiently reliable picture of the extent of 

facilities-based competition at the building level. The report acknowledges 

the potential for underreporting and overreporting of competitors’ 

equipment and notes the extent of data errors using data supplied by two 

large competitors. As noted, the database we relied upon has been used by

at least two incumbents in petitions before state public utility 

commissions. We disagree that we are not accounting for the competitive

presence of cable and wireless providers. The database we used shows the 

presence of these competitive alternatives, and our analysis does not 

exclude such competitive alternatives. And although a competing firm may 

have fiber relatively nearby, that does not mean that competitive entry into

a location is necessarily likely. DOJ has recognized in its Competitive 

Impact Statements that “such entry is a difficult, time-consuming, and 

expensive process.” We took note of the incumbents’ objections to our 

definition of the product market and incorporated additional analyses of 

the extent of competition in the market for higher levels of demand (e.g., 

DS-3 and higher). We disagree that DOJ believes these markets to be 

competitive. Although DOJ cleared the proposed mergers, it required 

Verizon and SBC to divest portions of certain local fiber-optic network 

facilities to proceed with their respective acquisitions. Moreover, DOJ 

clearly noted in its Competitive Impact Statements on the mergers that 

“[f]or the vast majority of commercial buildings in [their] territory” the 

Page 47 GAO-07-80 Deregulation of Dedicated Access Services
incumbents are the only provider of dedicated access. We note also that 

FCC approved the mergers with conditions. 

On the concerns raised by the incumbents on the draft’s analysis of 

changes in pricing, it is true that we did not have complete information on 

pricing; neither incumbents nor competitors were able to provide that 

information, which is usually restricted contractually by non-disclosure 

agreements. It is also true that we focused our analysis on channel 

terminations and not on the price of a total circuit, including transport, or 

on a customer’s entire purchase. Our objective was to examine the effect

of phase II pricing flexibility, which is the only circumstance under which 

price increases can occur. By disaggregating the data on the basis of how 

pricing flexibility was granted, we were able to examine price trends 

under different levels of pricing flexibility. We were unable to examine 

trends in transport prices under different levels of pricing flexibility 

because the vast majority of MSAs have received phase II pricing 

flexibility for dedicated transport (and therefore very few data points with 

which to compare) and because other key data elements associated with

transport (e.g., varying mileage) was unavailable. Analysis based on more 

aggregated data, such as suggested by the incumbents, obscures the effect 

of phase II pricing flexibility by including prices that are based on base 

rates resulting from the CALLS Order, which were automatically 

decreasing until 2003. We took note of the incumbents’ issue that we did 

not compare average revenue under pricing flexibility with average 

revenue under price caps, and incorporated additional analyses comparing 

price-cap average revenue to price-flex average revenue. The draft makes 

clear that average revenue for both channel terminations and dedicated 

transport have declined over time. At the same time, however, it is also 

clear from the data provided by the incumbents themselves that they 

generate higher levels of average revenue from sales of channel 

terminations in the theoretically more competitive phase II areas—a 

finding that is incongruous with greater levels of competition. 

Finally, we also provided GSA, USDA, and DOJ the opportunity to 

comment on segments of the report that pertain to the data and 

information they provided. GSA, USDA, and DOJ verified the key facts we 

obtained from them, and provided technical clarifications which we 

incorporated where appropriate. 

We are sending copies of this report to the appropriate congressional 

committees and to appropriate officials of the FCC, GSA, USDA, and DOJ. 

We will also make copies available to others upon request. In addition, the 

Page 48 GAO-07-80 Deregulation of Dedicated Access Services
report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-2834 or at heckerj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix IV. 

Sincerely yours, 

JayEtta Z. Hecker 

Director, Physical Infrastructure 

Page 49 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: 

Methodology 

Objectives, Scope and 

Page 50 GAO-07-80 

Appendix I: Objectives, Scope and 

Methodology 

This report examines the state of competition within the markets for 

dedicated access services by addressing three issues: (1) the extent to 

which competitive alternatives to the major incumbent telecommunication 

carriers are available; (2) pricing for dedicated access services in fully 

deregulated markets versus regulated markets, as well as prices the 

government is paying for dedicated access; and (3) the data the Federal

Communications Commission (FCC) uses to measure competition in 

dedicated access and the limitations, if any, that may exist in such efforts. 

To determine the extent that competitive alternatives exist for dedicated

access, we analyzed the extent to which competitive telecommunications 

providers provide dedicated access service to end user buildings in 16 

metropolitan statistical areas (MSA). We selected those 16 MSAs, divided

evenly between phase I and phase II deregulated markets (for channel 

terminations) and evenly among the major incumbent firms (AT&T 

Corporation, BellSouth Corporation, Qwest Communications, and Verizon 

Communications). Table 5 summarizes the selected MSAs. Our sample of 

MSAs is intended to illustrate the extent that competition has entered the 

market for dedicated access services only; the results are not generalizable

to all MSAs in the United States. We are not making a judgment on the 

legal sufficiency of competition in dedicated access services including, 

whether recent mergers violate antitrust laws or whether proposed 

remedies that the Department of Justice (DOJ) identified would be 

sufficient to eliminate the competitive harm of the mergers. 

Table 5: MSAs in Analysis, by Price-Cap Incumbent and Applicable Pricing

Flexibility 

Extent of Competitive 

Alternatives to Major 

Incumbent Firms 

Price cap

incumbent 

Phase I for channel 

terminations, phase II for 

dedicated transport 

Phase II for channel 

terminations and dedicated

transport 

AT&T Detroit, Chicago Los Angeles, San Jose 

BellSouth Greenville, New Orleans Atlanta, Miami

Qwest Seattle, Minneapolis Phoenix, Portland 

Verizon New York, Washington, D.C. Norfolk, Pittsburgh 

Source: GAO analysis of FCC pricing flexibility report and orders. 

Data on the presence of relevant telecommunications equipment in 

businesses throughout the United States is not independently available 

from public sources. To conduct our analysis, we contracted with two 

firms: Telcordia Technologies, Inc., and GeoResults. 

 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

We contracted with Telcordia, a leading global provider of 

telecommunications network software and services, to obtain an extract 

from the Location Registry (formerly, CLONES), which is a hosted 

database of network locations and related network functions for the 

telecommunications industry. A given location and network function for 

an incumbent or competitive firm can be identified uniquely using a 

CLLITM Code. The CLLI Code is an alphanumeric code and key into the 

Location Registry, providing additional information such as physical 

address and coordinates. The CLLI Code can be used to make inferences 

about network equipment. It is not an equipment identifier. Both 

incumbent and competitive firms can subscribe to the COMMON 

LANGUAGE® Location Information Service from Telcordia to gain access 

to the Location Registry, enabling the voluntary entry of their information 

into the registry. Incumbent and competitive firms are responsible for 

maintaining the integrity of their records and providing any data 

reconciliation regarding records that may be incorrect or incomplete. The 

Location Registry provides subscribing firms with a standardized method 

for identifying network locations and related network functions. The 

Location Information Service, in conjunction with the Connection 

Information Service, provides a method for standardizing orders for 

network interconnection and network transport between the different 

firms. 

We assessed the reliability of the Telcordia Location Registry and 

determined that the information was sufficiently reliable for our purposes. 

According to Telcordia, the information in the registry may be less 

comprehensive for competitive firms than for incumbent firms because 

some smaller competitive firms do not subscribe to the service, and there 

may be some underreporting of competitors’ locations due to competitive 

concerns. However, Telcordia is unable to estimate the extent to which

competitors’ data are underreported. To gauge the extent that the data are

understated, we compared entries in the database with lists of “lit” 

buildings provided to us by two of the largest competitive firms. One firm 

showed 465 lit buildings in the data they provided to us in the 16 MSAs we 

examined, of which 436 showed the presence of a “lit” competitor, 

suggesting an underreporting error of a little over 6 percent. However, the 

database also showed this same competitor as being the sole competitive 

presence in 81 additional buildings that were not on the firm’s list of lit 

buildings, suggesting, that, for this competitor, the database is

overreporting the level of competition. However, the other firm from 

which we obtained data provided us a list with 693 lit buildings in the 

MSAs we examined, of which 289 showed the presence of a “lit” 

competitor, indicating underreporting of about 400 buildings across the 

Page 51 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

MSAs for this competitor. These two examples show that individual 

competitor’s presence may be underreported and overreported. 

The data in the location registry may also overstate the presence of 

competitors for other reasons. Bankrupt and merged companies, such as 

the former AT&T and MCI, still have entries in the registry, although that 

equipment may not be in use or may now be equipment owned by the 

incumbent firm. Furthermore, the registry may also incorporate some 

equipment from active competitors that is not currently providing service

or is no longer in service, as shown above. For instance, there may be 

equipment in a vacant building where a competitor used to provide 

service, but the competitor had not removed the equipment from the 

registry. 

For the purposes of analyzing the presence of competitors at incumbent 

wire centers, the registry is likely more accurate. Because the registry is 

primarily used for interconnection purposes, and because wire centers are 

locations where aggregation of traffic and interconnections take place, 

underreporting of competitors’ presence in wire centers is unlikely. There 

is no single public or private data source universally recognized as 

comprehensive. This is because there is no compulsory process through 

which telecommunications companies report such data to FCC or private 

data sources. This database is the most comprehensive available to us, and 

price-cap incumbent firms, such as BellSouth and AT&T, have used the 

database for similar purposes. While we recognize that there is both 

underreporting and overreporting in the database, it would appear that 

these two errors offset one another to some degree. Therefore, while our 

analysis does not provide pinpoint accuracy regarding the state of 

facilities-based competition, we determined that the database was 

sufficiently reliable to illustrate the general level of competitive build out

to end-user locations. 

To analyze the extract of the Location Registry, we contracted with 

GeoResults, which is a firm that the telecommunications industry has used 

extensively to analyze Telcordia data. GeoResults analyzes the CLLI Codes 

within the Location Registry to make inferences about the presence of 

fiber-optic equipment within a given building. GeoResults’ analysis (known 

in the telecommunications industry as its “GeoLit” report), provides us 

with the necessary filtered data to indicate which end user buildings have

a “lit” presence from a competitor. Telcordia has not validated methods or 

assumptions of any analysis performed by GeoResults for accuracy or 

completeness. GeoResults’ GeoLit analysis is based on July 2006 extract 

from the Location Registry. The firm provided GAO with analysis on the 

Page 52 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

extent to which competitors provide dedicated access using fiber and 

wireless facilities at commercial buildings in those 16 MSAs. While copper, 

fiber, and wireless facilities may be used for access, industry participants 

told us that for practical purposes, competitive local access providers 

extend their facilities primarily via fiber and to a lesser extent via wireless, 

due to the higher revenue capacity and the lower maintenance costs of 

fiber or wireless. 

We also analyzed the presence of any type of telecommunications 

equipment owned by competitors located in those buildings. This analysis

thus included data on telecommunications equipment that GeoResults 

identified as non-fiber optic or could not be positively identified as fiber 

optic. It also included data on other equipment not used to provide 

service, such as testing equipment. In general, this analysis found presence 

of any type of equipment in buildings with greater than a DS-1 of demand

ranging from about 17 percent to 30 percent, excluding Norfolk. We 

believe this analysis is not a valid measure of facilities-based competition 

because the equipment included in the analysis includes non-fiber optic 

equipment attached to non-fiber optic dedicated access from price-cap 

incumbents—which may represent leased lines—and testing equipment, 

both of which falsely indicate a facilities-based competitive presence. 

To analyze the extent to which business users are likely to purchase 

dedicated access from incumbent firms or competitors, we also contracted 

with GeoResults. GeoResults provided GAO with their standard demand 

model that estimated the number of buildings that might require dedicated 

access at three levels of demand, as shown in table 6. 

Page 53 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

Table 6: GeoResults’ Dedicated Access Demand Model

Level of demand Definition

At least DS-1 A commercial building with one or more business tenants that have a 

dedicated access demand for one or more DS-1 circuits. An

individual business that has a data bandwidth demand of 512 Kb to 8 

Mb will be defined as a business that has a dedicated access 

demand for one or more DS-1 circuits. 

At least DS-3 A commercial building with a business tenant that has a dedicated

access demand for one DS-3 circuit. An individual business that has 

a data bandwidth demand of 8 Mb to 16 Mb will be defined as a 

business that has a dedicated access demand for one DS-3 circuit. 

At least 2 DS-3’s A commercial building with one or more business tenants that have a 

dedicated access demand for two or more DS-3 circuits. An

individual business that has a data bandwidth demand of 16 Mb or 

more will be defined as a business that has a dedicated access 

demand for two or more DS-3 circuits. 

GeoResults’ model focuses on the number of employees per business; the 

type of business (e.g., ones that are telecommunications intensive versus 

ones that are not, such as bakeries); and the “family size” of the business 

(i.e., the extent to which a business was a branch office of a larger 

corporate parent). For our analysis of facilities-based competition for 

buildings with at least one DS-1 of demand, we included cellular phone 

sites, mobile switching offices, “carrier hotels”—locations where several 

competitors locate for interconnection purposes—and any other locations

where competitors had placed fiber-based equipment, regardless of 

whether the model indicated any demand for dedicated access. For our 

analysis of competition in locations with a greater level of demand, we 

only examined those locations GeoResults identified as having a DS-3 level 

of demand or a level of demand of 2 DS-3s or higher. 

GeoResults obtained data on businesses from Experian’s National 

Business Database. Experian is a national company that provides, among 

other products, information regarding businesses in the United States. We 

assessed the reliability of Experian’s National Business Database and 

reviewed Experian’s quality procedures that it uses to verify the 

information contained within its National Business Database and found it 

sufficiently reliable for our purposes. No available database is 100 percent 

inclusive of all commercial buildings. GeoResults uses records for some 15 

million commercial buildings in its demand model. GeoResults estimates 

that this data covers about 70-75 percent of the total number of 

commercial buildings. GeoResults officials told us that this demand model 

is widely used by a variety of incumbent and competitive firms as well. 

Page 54 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

According to GeoResults, these firms use their demand model to identify

target dedicated access customers within various buildings throughout 

MSAs in the United States. 

To describe how deregulation has affected available prices for dedicated

access services, we analyzed changes in list prices, prices available under 

customized contracts, and average prices in MSAs under phase I flexibility 

and phase II flexibility from the period prior to the granting of pricing 

flexibility (generally, 2001 or 2002) to the present, or to the latest period 

for which data were available. We limited our analysis to prices for highcapacity dedicated access services at two speeds—1.544 megabytes per 

second (Mbps), which is known as a DS-1 circuit, and 45 Mbps, which is 

known as a DS-3 circuit—because they represent the majority of dedicated 

access revenues. Where possible, we compared prices for the two major 

components of dedicated access services—channel terminations and 

dedicated transport. Although dedicated access services can be ordered 

with multiple options and configurations, such as value-added services 

geared toward providing added network reliability, we focused our 

analysis on DS-1 and DS-3 monthly recurring charges only, without any 

such features or options. 

Separately, we analyzed spending on dedicated access services by selected

federal departments and agencies. We analyzed available data on prices 

that selected federal government departments under General Services 

Administration (GSA) contracts paid, as well as prices paid under separate

agency contracts for services purchased directly in the marketplace. 

We analyzed listed prices for channel terminations and dedicated 

transport for month-to-month, 3-year, and 5-year terms across three 

density zones.1

 FCC requires incumbent firms to file list prices in all areas 

that they serve. “Price-flex” list prices are made generally available in 

areas with phase II flexibility. “Price-cap” list prices are made generally 

Analysis of Available 

Information on Dedicated 

Access Pricing 

Change in List Prices 

 1

Typically, price-cap incumbents offer prices across different zones that reflect the 

concentration of business demand for dedicated access within a geographic area. Zones 

generally correspond with areas of relatively high, medium, and low business demand 

density. Zone 1 is generally considered as inclusive of the central business area, where a

large portion of businesses that would require DS-1 and DS-3 would reside. Prices are 

generally lower in zone 1 than in zones 2 or 3—with zone 3 generally having the highest 

prices, because costs to provide services are likely higher in less dense areas. Occasionally 

an incumbent will offer prices across five zones. In cases where an incumbent provided 

pricing across five zones, we analyzed prices associated with zones 1, 3, and 5. 

Page 55 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

available to all customers in areas with phase I pricing flexibility as well as

all other areas in which FCC has granted neither phase I nor phase II 

flexibility. We analyzed 1,152 elements of dedicated access service across 

the four major price-cap incumbents’ filings. We compared both current 

price-flex prices with current price-cap prices as well as current price-flex

prices to prices in effect in 2001. We left these prices in nominal dollars 

and did not adjust for inflation. These comparisons were made using like 

components and parameters. For example, we compared the price for a 3-

year term, zone 1, channel termination in a phase II MSA in 2006 against 

the price for a 3-year term, zone 1, channel termination in that same MSA 

in 2001, as well as against the price for a 3-year term, zone 1, channel 

termination in a phase I MSA in 2006. Some price-cap incumbents also 

offered 1-year, 2-year, 4-year, or 7-year terms. We did not include these 

prices in our analysis, because not all price-cap incumbents offered such 

terms. Including these additional term prices would not change the overall 

results of the analysis because term prices are generally determined by a 

percentage discount off of the month-to-month list prices. 

Because larger customers may purchase dedicated access through various 

contracts with incumbents made allowable under phase I and phase II 

deregulation, we analyzed a substantial number of these contracts, which 

FCC requires incumbents to file. In reviewing contracts, we generally 

compared net prices (i.e., after discount and credits) under the contracts 

to the initial price prior to the granting of pricing flexibility and examined 

the effect of contract discounts on the price-flex list price and the pricecap list price. However, because we do not know the details of how the 

circuits purchased under these contracts are configured (i.e., some circuit 

components can be in phase I areas, others in phase II, some circuits may 

traverse both phase I and phase II areas or even price-cap areas), we could 

not determine the overall effect of the contracts on customers’ entire 

purchases. 

In some cases, prices on some contracts did not vary on a per-mile basis. 

Because list prices have a mileage component, we were not able to 

compare many of the flat contract prices with prices available prior to 

pricing flexibility. Additionally, some contracts cover multiple regions. For 

example, several AT&T contracts require subscription of concurrent 

dedicated access services in specific MSAs in four regions, each of which 

has its own list prices. Since base prices are not identical across AT&T’s 

regions, it is possible that under a multiregion contract, the contract 

discounts result in lower prices in one region, but not another. The data

required to analyze the various factors that contribute to an overall 

contractual price were not available. For example, mileage data for 

Customized Contracts 

Page 56 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

individual contracts or specific detailed data on the number of DS-1 and 

DS-3 circuits purchased under each contract were not available. 

Because we could not obtain specific data on the number of customers 

purchasing dedicated access services at various pricing levels (i.e., monthto-month, term, various zones, and various contract options) and the exact 

amount purchased, we could not test the effect of phase II pricing 

flexibility over time through an analysis of list prices and contract 

discounts. Therefore, we requested that incumbents provide us with data 

on their average revenue per unit for channel terminations and dedicated 

transport from the period just prior to the granting of pricing flexibility 

and the most current period for which data were available across MSAs 

with phase I flexibility for channel terminations and phase II flexibility for

channel terminations. We requested that the incumbents provide us with 

data representing total average monthly recurring charges, which would 

include any discounts or termination penalties from price-flex contracts,2

and exclude any non-recurring charges associated with the initial purchase 

of the services. The average revenue per unit effectively suggests the 

average (arithmetic mean) price that customers paid for the specific 

dedicated access components. As an average, the data reflect the net 

effect of circuits purchased in different density zones, and across different 

term lengths or volume arrangements. The mean price is susceptible to 

effect from a few large customers with heavily discounted prices. One 

major incumbent carrier told us that 5 percent of its customers had 

contracts with customized discounts, and those customers represented 

about 50 percent of the firm’s dedicated access business. To compensate 

for such an effect, data on the median prices paid would also have been 

useful, but were not available to us. 

We analyzed the average amount of revenue in nominal dollars that the 

major incumbent carriers reported from the sales of DS-1 and DS-3 

dedicated access channel terminations in 56 MSAs—27 MSAs with phase II 

flexibility for channel terminations, and 29 MSAs with phase I. We 

received data for 20 MSAs from AT&T and Verizon, and data for 10 MSAs 

from BellSouth and Qwest, for a total of 60 MSAs. We excluded two MSAs 

from the data that Verizon provided and two from AT&T’s data because 

Change in Average Revenue 

 2

Not all of the major incumbent firms were able to include every discount that was based 

on price-flex contracts. One firm was unable to include discounts that were based on

revenue commitments; however, because these discounts are available in both phase I and

phase II areas, there is little reason to believe that these discounts would affect the prices 

available in phase II areas greater or less than it would affect prices in phase I areas. 

Page 57 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

those MSAs were not under phase I or phase II flexibility for channel 

terminations. We were unable to independently verify the reliability of the 

data provided by the price-cap incumbents. However, we performed some

logic tests based on listed prices and available discounts to determine if 

there were any major inaccuracies. Due to confidentiality concerns, we 

aggregated these averages across MSAs and across all four major price-cap 

incumbents, which masks some variation across the firms, as well as 

variation across MSAs, but still allows us to examine overall trends in 

markets under different phases of deregulation. 

We also calculated the average revenue in areas that remain under full 

price-cap regulation from data submitted by price-cap incumbents in their 

annual tariff review plans, where price-cap incumbents provide the FCC 

with detailed data on the number of specific circuit components sold 

under the various zone and term prices available in their tariffs. We 

calculated an average price-cap price for DS-1 and DS-3 channel 

terminations for tariffs corresponding to the phase II MSAs for which we 

had average revenue data. For example, the phase II MSAs in Verizon’s 

territory for which we received data corresponded to the area covered by 

Verizon’s FCC No. 1 tariff filing. The average price-cap revenue is likely to

be biased upward. Because areas still under price-cap regulation have not 

qualified for phase I or phase II flexibility, these areas are likely to have 

lower business density. Therefore, a higher percentage of circuits are 

likely to be sold under zone 3 pricing, which is generally priced higher 

than circuits under zone 1 pricing. For example, in Qwest’s annual tariff 

review plan, 51 percent of DS-1 channel terminations were sold under 

zone 3 pricing. Because we do not have detailed data on the number of 

channel terminations sold under different zones in phase II areas, we were 

unable to correct for this bias. Furthermore, not all discounts available 

under price-cap regulation (such as AT&T’s Managed Value Plan) were 

included in our calculation because we were not able to determine how 

such discounts would be applied to only channel terminations. However, 

despite these biases, we find that phase II average revenue for the 27 

MSAs, on average, is not statistically different than price-cap average 

revenue. 

We compared how the average revenue for channel terminations in phase I 

and phase II areas had changed over time, from prior to deregulation 

through 2005 (the latest full year for which data were available), and we 

compared average revenue figures for 2005 across phase I areas, phase II

areas, and areas remaining under the price cap. We also performed our 

analysis using two different price indexes and after weighting the data

based on the relative size of the MSAs to determine how sensitive our 

Page 58 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

results were to such effects. We used both the general GDP price index, as

well as the Bureau of Labor Statistics’ Producer Price Index for Wired 

Telecommunications Carriers to adjust the data to 2005 constant dollars. 

To account for the relative difference in the size of the MSAs, we weighted 

the data on the basis of the number of businesses with 20 or more 

employees in each MSA. While an imperfect weight, this was used as a 

rough estimate of the level of demand in these MSAs. Regardless of the 

deflator used or weighting the data, phase II average revenue was higher

than phase I average revenue. See appendix II for the detailed results of 

this sensitivity analysis. 

We also analyzed the changes in average revenue for dedicated transport. 

Because all but one of the MSAs in the data provided to us were areas 

where the price-cap incumbents had received phase II flexibility for 

transport, we were unable to compare changes in average revenue for 

transport under different levels of pricing flexibility. In fact, of the 215 

MSAs where pricing flexibility has been granted, the four major price-cap 

incumbents have received phase II flexibility for dedicated transport in 

202 MSAs, and phase I flexibility in only 13 MSAs. 

We were unable to collect data on prices that competitive firms charged; 

therefore, those prices are excluded from this analysis. We asked 

competitive firms to supply prices, however, they did not. We interviewed 

representatives from these firms who provided anecdotal information 

about their prices. Furthermore, we did not include the costs of providing 

dedicated access services in our analysis to measure the extent to which 

prices approach costs, because these data also were unavailable. FCC, 

which previously collected data on costs, discontinued cost studies 

several years ago. In addition, FCC gave price-cap incumbents the option 

to accept price decreases resulting from the CALLS Order, or have prices 

reinitialized on the basis of detailed cost studies that the incumbent could 

provide. However, no price-cap incumbent provided a cost study. 

To examine prices that the government has paid for dedicated access, we 

interviewed and obtained dedicated access monthly prices from the 

Department of Agriculture (USDA) and DOJ. We selected those 

departments because they have many offices that require high-speed 

dedicated access. USDA officials indicated they provided data for all 

dedicated access purchased by the entire department. At DOJ, we 

obtained data from the Justice Management Division, which both uses and 

orders a substantial portion of telecommunication services for agencies 

within the department. The Justice Management Division provided data on 

dedicated access services. However, these data did not include 

Federal Spending on Dedicated 

Access Services 

Page 59 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

information from the Federal Bureau of Investigation. The results from

these departments and agencies may not be representative of the federal

government as a whole. 

We interviewed officials with GSA, which awarded and administers the 

governmentwide FTS2001 telecommunications contracts with Sprint and

MCI. We also obtained access to GSA’s automated pricing tool, the “SDP 

Pricer,” which provides pricing estimates for dedicated access and other 

services and is available to federal departments and agencies. We 

compared the prices provided by USDA and DOJ with prices obtained 

from the pricing tool. GSA officials indicated that the SDP Pricer provides

estimates only, and that actual prices paid may be different. For example, 

GSA officials indicated that they are aware of instances where service 

initiation charges are negotiated and waived between the FTS2001

contractor and the federal government entity purchasing the services. GSA 

also indicated that federal entities are not required to purchase services 

using FTS2001, nor are they required to use the lowest cost contractor. 

USDA and DOJ provided aggregate and individual circuit pricing data for 1

month of data and indicated that the month provided was representative 

of average spending. These entites also indicated whether the circuit was 

purchased under the FTS2001 contracts and also the identity of the service 

provider. Each entity provided individual circuit data that included circuit

endpoints, monthly recurring charges, and speed of the service, among 

other information. 

We compared the channel termination and local interoffice costs of 

dedicated access services, and not the total or long-distance costs. We 

were not able to directly compare total entity or GSA prices to list or 

contract prices offered by incumbents, as data on interoffice mileage and 

the closest wire center were not available. For circuits purchased under

FTS2001, we compared prices paid with the estimates that the SDP Pricer 

produced. 

To determine what data FCC utilizes to monitor competition and any 

limitations that may exist to its monitoring efforts, we analyzed FCC 

triggers for predicting competition as well as FCC data collection 

processes for determining and monitoring competition. We analyzed FCC’s 

strategic plan, performance budget, and measures that the agency uses to 

track its progress toward meeting its stated goals of increasing 

competition and choice for business. We then compared these plans, 

budgets, and measures against criteria developed from the Government 

FCC Oversight of 

Dedicated Access 

Page 60 GAO-07-80 Deregulation of Dedicated Access Services
Appendix I: Objectives, Scope and 

Methodology 

Performance and Results Act of 1993.3 We discussed all of those elements 

with FCC senior staff. 

In addition, for our three objectives we analyzed and summarized 

comments in the rulemaking proceeding on dedicated access, and 

interviewed the major incumbent telecommunications carriers, 

competitive local exchange providers, Wall Street analysts covering the 

dedicated access markets, and representatives of large telecommunication 

users. 

We conducted our work from November 2005 through October 2006 in 

accordance with generally accepted government auditing standards. 

 3

Pub. L. No. 103-62. 

Page 61 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue Appendix II: Analysis of A Data and List Prices verage Revenue 

Data and List Prices 

We analyzed the average amount of revenue that the major incumbent 

carriers reported from the sales of DS-1 and DS-3 dedicated access 

channel termination in 56 MSAs--27 MSAs with phase II flexibility for 

channel terminations and 29 with phase I. We excluded two MSAs from 

the data that Verizon provided and two MSAs from AT&T’s data because

those MSAs were not under phase I or phase II flexibility for channel 

terminations. We performed our analysis in nominal dollars. We also 

performed our analysis using the Bureau of Labor Statistics’ Producer 

Price Index for Wired Telecommunications Carriers (“telecommunications 

price index”), as well as using the general GDP price index to adjust these

data to 2005 constant dollars. Regardless of the price index used, phase II 

average revenue in 2005 was higher than phase I average revenue in 2005.

However, using nominal dollars or dollars adjusted using the general GDP 

price index did not result in any increases in average revenue in phase II 

MSAs over time, whereas adjusting these data using the 

telecommunications price index did result in increases in phase II MSAs. 

Because MSAs in these data varied greatly in their size (e.g., Los Angeles

and Greenville), we also performed the analysis and weighted these data

on the basis of the number of businesses with 20 or more employees in 

each MSA. While an imperfect weight, this was used as a rough estimate of 

the level of demand in these MSAs. We obtained data on the number of 

businesses from the U.S. Census Bureau’s 2002 Statistics of U.S. 

Businesses. These were the most recent data available. Weighting these 

data did not change our finding that phase II average revenue was higher 

than phase I average revenue. 

Tables 7 through 10 show the results of our analysis using unweighted 

nominal dollars, unweighted adjusted dollars using the 

telecommunications price index, unweighted adjusted dollars using the 

general GDP price index, and weighted adjusted dollars using the 

telecommunications price index. 

Page 62 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Table 7: Summary Statistics of Average Revenue for Channel Terminations, Unweighted Nominal Dollars 

Speed Time frame and level of current pricing flexibility Mean

Lower

limita

Upper

limita

Number of 

MSAs

DS1 Pre-flex—all MSAs $146.53 $139.10 $153.96 56

Pre-flex—MSAs that became phase I 152.35 140.40 164.29 29

Pre-flex—MSAs that became phase II 140.28 131.56 149.01 27

2005—all MSAs 128.88 123.49 134.27 56

2005—Phase I MSAs 126.20 120.28 132.12 29

2005—Phase II MSAs 131.77 122.24 141.29 27

2005 less pre-flex—all MSAs (17.65)b (22.63) (12.66) 56

2005 less pre-flex—Phase I MSAs (26.15)b(33.95) (18.35) 29

2005 less pre-flex—Phase II MSAs (8.52)b(12.72) (4.32) 27

2005 less pre-flex—Phase II less phase I 17.63b8.92 26.35 56

DS3 Pre-flex—all MSAs 1,341.46 1,264.28 1,418.65 56

Pre-flex—MSAs that became phase I 1,287.32 1,183.23 1,391.41 29

Pre-flex—MSAs that became phase II 1,399.62 1,282.08 1,517.15 27

2005—all MSAs 1,194.97 1,125.05 1,264.90 56

2005—Phase I MSAs 1,069.58 997.75 1,141.41 29

2005—Phase II MSAs 1,329.65 1,225.40 1,433.91 27

2005 less pre-flex—all MSAs (146.49)

b

(202.75) (90.23) 56

2005 less pre-flex—Phase I MSAs (217.74)

b

(296.17) (139.31) 29

2005 less pre-flex—Phase II MSAs (69.96) (144.84) 4.91 27

2005 less pre-flex—Phase II less phase I 147.78b41.49 254.06 56

Source: GAO analysis of data from AT&T, BellSouth, Qwest and Verizon. 

Note: The average revenue data for pre-flex are from 2000, 2001, or 2002. Verizon provided data 

from 2000, AT&T and BellSouth provided data from 2001, and Qwest provided data from 2002. 

a

The values are based on 95 percent confidence intervals. 

b

The difference is statistically significant at the 1 percent level or lower (two-tailed), using meandifference tests.

Page 63 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Table 8: Summary Statistics of Average Revenue for Channel Terminations, Unweighted Adjusted Dollars Using

Telecommunications Price Index 

Speed Timeframe and level of current pricing flexibility Mean

Lower

limita

Upper

limita

Number of

 MSAs

DS1 Pre-flex—all MSAs $133.50 $127.49 $139.51 56

Pre-flex—MSAs that became phase I 138.31 128.57 148.05 29

Pre-flex—MSAs that became phase II 128.33 121.42 135.25 27

2005—all MSAs 128.88 123.49 134.27 56

2005—Phase I MSAs 126.20 120.28 132.12 29

2005—Phase II MSAs 131.77 122.24 141.29 27

2005 less pre-flex—all MSAs (4.62)c(8.82) (0.42) 56

2005 less pre-flex—Phase I MSAs (12.11)b(18.08) (6.14) 29

2005 less pre-flex—Phase II MSAs 3.43 (0.99) 7.86 27

2005 less pre-flex—Phase II less phase I 15.54b8.26 22.82 56

DS3 Pre-flex—all MSAs 1,226.36 1,156.10 1,296.61 56

Pre-flex—MSAs that became phase I 1,173.73 1,078.19 1,269.27 29

Pre-flex—MSAs that became phase II 1,282.88 1,177.30 1,388.47 27

2005—all MSAs 1,194.97 1,125.05 1,264.90 56

2005—Phase I MSAs 1,069.58 997.75 1,141.41 29

2005—Phase II MSAs 1,329.65 1,225.40 1,433.91 27

2005 less pre-flex—all MSAs (31.38) (81.71) 18.95 56

2005 less pre-flex—Phase I MSAs (104.15)

b

(173.45) (34.84) 29

2005 less pre-flex—Phase II MSAs 46.77 (17.89) 111.43 27

2005 less pre-flex—Phase II less phase I 150.91b 58.29 243.54 56

Source: GAO analysis of data from AT&T, BellSouth, Qwest and Verizon. 

Note: Average revenue figures are in 2005 dollars using the Bureau of Labor Statistics Producer 

Price Index for Wired Telecommunications Carriers. 

a

The values are based on 95 percent confidence intervals. 

b

The difference is statistically significant at the 1 percent level or lower (two-tailed), using meandifference tests. 

c

The difference is statistically significant at the 5 percent level or lower (two-tailed), using meandifference tests. 

Page 64 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Table 9: Summary Statistics of Average Revenue for Channel Terminations, Unweighted Adjusted Dollars Using General GDP 

Price Index 

Speed Timeframe and level of current pricing flexibility Mean

Lower

limita

Upper

limita

Number of 

MSAs

DS1 Pre-flex—all MSAs $161.62 $152.82 $170.42 56

Pre-flex—MSAs that became phase I 168.47 154.38 182.56 29

Pre-flex—MSAs that became phase II 154.26 143.81 164.71 27

2005—all MSAs 128.88 123.49 134.27 56

2005—Phase I MSAs 126.20 120.28 132.12 29

2005—Phase II MSAs 131.77 122.24 141.29 27

2005 less pre-flex—all MSAs (32.73)b(38.72) (26.75) 56

2005 less pre-flex—Phase I MSAs (42.26)b(52.05) (32.49) 29

2005 less pre-flex—Phase II MSAs (22.49)b(27.09) (17.89) 27

2005 less pre-flex—Phase II less phase I 19.77b9.12 30.43 56

DS3 Pre-flex—all MSAs 1,475.83 1,391.02 1,560.64 56

Pre-flex—MSAs that became phase I 1,419.26 1,305.38 1,533.15 29

Pre-flex—MSAs that became phase II 1,536.59 1,406.46 1,666.72 27

2005—all MSAs 1,194.97 1,125.05 1,264.90 56

2005—Phase I MSAs 1,069.58 997.75 1,141.41 29

2005—Phase II MSAs 1,329.65 1,225.40 1,433.91 27

2005 less pre-flex—all MSAs (280.86)

b

(343.40) (218.32) 56

2005 less pre-flex—Phase I MSAs (349.68)

b

(437.96) (261.40) 29

2005 less pre-flex—Phase II MSAs (206.94)

b

(292.16) (121.72) 27

2005 less pre-flex—Phase II less phase I 142.74c 22.85 262.63 56

Source: GAO analysis of data from AT&T, BellSouth, Qwest and Verizon. 

Note: The average revenue figures are in 2005 dollars using the general GDP Price Index. 

a

The values are based on 95 percent confidence intervals. 

b

The difference is statistically significant at the 1 percent level or lower (two-tailed), using meandifference tests. 

c

The difference is statistically significant at the 5 percent level or lower (two-tailed), using meandifference tests. 

Page 65 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Table 10: Summary Statistics of Average Revenue for Channel Terminations, Weighted Adjusted Dollars Using the 

Telecommunications Price Index 

Speed Timeframe and level of current pricing flexibility Mean Lower limita

Upper limita

Number of

 MSAsc

DS1 Pre-flex—all MSAs $132.95 $132.88 $133.02 56

Pre-flex—MSAs that became phase I 134.57 134.48 134.67 29

Pre-flex—MSAs that became phase II 130.25 130.17 130.34 27

2005—all MSAs 126.80 126.73 126.86 56

2005—Phase I MSAs 123.93 123.86 124.00 29 

2005—Phase II MSAs 131.56 131.44 131.67 27 

2005 less pre-flex—all MSAs (6.15)b(6.20) (6.11) 56

2005 less pre-flex—Phase I MSAs (10.64)b(10.70) (10.59) 29

2005 less pre-flex—Phase II MSAs 1.30b1.23 1.38 27

2005 less pre-flex—Phase II less phase I 11.95b11.86 12.04 56

DS3 Pre-flex—all MSAs 1,175.38 1,174.62 1,176.14 56

Pre-flex—MSAs that became phase I 1,128.80 1,128.08 1,129.48 29 

Pre-flex—MSAs that became phase II 1,252.78 1,251.23 1,254.34 27 

2005—all MSAs 1,163.53 1,162.74 1,164.32 56

2005—Phase I MSAs 1,081.89 1,081.28 1,082.50 29

2005—Phase II MSAs 1,299.13 1,297.54 1,300.71 27

2005 less pre-flex—all MSAs (11.85)c(12.34) (11.37) 56

2005 less pre-flex—Phase I MSAs (46.89)c(47.46) (46.32) 29

2005 less pre-flex—Phase II MSAs 46.34c45.54 47.14 27

2005 less pre-flex—Phase II less phase I 93.23c 92.25 94.21 56

Source: GAO analysis of data from AT&T, BellSouth, Qwest and Verizon. 

Note: The average revenue figures are in 2005 dollars using the Bureau of Labor Statistics’ Producer

Price Index for Wired Telecommunications Carriers. Data are weighted on the basis of the number of

businesses with 20 or more employees. 

a

The values are based on a 95 percent confidence intervals. 

b

The difference is statistically significant at the 1 percent level of lower (two-tailed), using meandifference tests. 

c

The number of observations for the frequency weights is 349,512 for the 56 MSAs; 218,164 for the 

29 MSAs; and 131,348 for the 27 MSAs. 

We also analyzed list prices in the published tariffs from the four major 

incumbent firms to compare how phase II pricing flexibility and the 

CALLS Order have changed these prices. We compiled data on prices for 

channel terminations and dedicated transport (both fixed and variable 

charges) for month-to-month, 3-year, and 5-year terms across three density 

zones from the published tariffs as of June 1, 2006. We eliminated any 

Page 66 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

comparisons where the tariff contained price-flex prices for channel 

terminations, but no MSAs covered by the tariff had phase II flexibility for 

channel terminations (e.g., AT&T’s tariff that covers Nevada has price-flex 

list prices for channel terminations, yet AT&T has not received phase II 

flexibility for channel terminations in any MSAs in Nevada). 

We made the following three comparisons for all combinations of circuit 

components, terms, and zones: (1) 2006 price-flex list prices compared 

with initial prices (prior to pricing flexibility); (2) 2006 price-cap prices 

compared with initial prices; and (3) 2006 price-flex prices compared with 

2006 price-cap prices. We also performed this analysis after adjusting the 

data to constant dollars. Adjusting the dollars did not change the basic 

findings of our analysis. Tables 11 and 12 show the results in nominal 

dollars. 

Table 11: Summary Statistics of List Price Comparisons for all DS-1 Combinations in Nominal Dollars 

Mean price comparisons

Component Term Zone

Price-flex 2006 less 

initial price

Price-cap 2006 

less initial price

Price-flex 2006 less 

price-cap 2006

Number of 

comparisons

Channel 

terminations 

All All $7.73a$(9.46)a$17.20a144

Monthly All 20.56a(3.45) 24.01a48

Zone 1 17.76a(1.20) 18.96a16

Zone 2 21.03a(4.25) 25.28a16

Zone 3 22.89a(4.90) 27.79a16

3-yr All 2.74 (12.54)a15.28a48

Zone 1 0.87 (9.80)a10.67a16

Zone 2 3.17 (13.27)a16.45a16

Zone 3 4.17 (14.55)a18.73a16

5-yr All (0.10) (12.39)a12.30a48

Zone 1 (1.12) (9.34)a8.22a16

Zone 2 (0.21) (13.21)a13.00a16

Zone 3 1.05 (14.62)a15.67a16

Fixed transport All All 1.58b(6.06)a7.64a216

Monthly All 4.16a(4.16)a8.32a72

Zone 1 3.60a(4.11)a7.71a24

Zone 2 4.11a(4.27)b8.37a24

Zone 3 4.78a(4.09)b8.87a24

3-yr All 0.39 (6.79)a7.18a72

Zone 1 0.07 (6.11)a6.19a24

Page 67 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Mean price comparisons

Component Term Zone

Price-flex 2006 less 

initial price

Price-cap 2006 

less initial price

Price-flex 2006 less 

price-cap 2006

Number of 

comparisons

Zone 2 0.39 (6.73)a7.12a24

Zone 3 0.70 (7.52)a8.22a 24

5-yr All 0.19 (7.24)a7.44a72

Zone 1 (0.10) (6.28)a6.18a24

Zone 2 0.20 (6.77)a6.96a24

Zone 3 0.49 (8.68)a9.17a24

Variable transport All All 0.81a(2.29)a3.10a216

Monthly All 1.37a(2.00)a3.36a72

Zone 1 1.28a(1.91)a3.18a24

Zone 2 1.38a(1.95)a3.33a24

Zone 3 1.44a(2.13)a3.56a24

3-yr All 0.65a(2.50)a3.14a72

Zone 1 0.51c(2.39)a2.90a24

Zone 2 0.63b(2.51)a3.14a24

Zone 3 0.80a(2.59)a3.39a24

5-yr All 0.43a(2.37)a2.80a72

Zone 1 0.40 (2.22)a2.63a24

Zone 2 0.45c(2.39)a2.84a24

Zone 3 0.44 (2.50)a2.94a24

Source: GAO analysis of data from tariffs filed with the FCC in 2001 and 2006, including AT&T (Ameritech FCC No. 2, Nevada Bell

FCC No. 1, Pacific Bell FCC No. 1, Southern New England Bell FCC No. 39, and Southwestern Bell FCC No. 73), BellSouth FCC

No. 1, Qwest FCC No. 1, and Verizon FCC Nos. 1, 11, and 14. 

Note: Initial prices are from 2001 and 2006 prices are as of June 2006. 

a

The price difference is statistically significant at the 1 percent level or lower, two-tailed. 

b

The price difference is statistically significant at the 5 percent level or lower, two-tailed. 

c

The price difference is statistically significant at the 10 percent level or lower, two-tailed. 

Page 68 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Table 12: Summary Statistics of List Price Comparisons for all DS-3 Combinations in Nominal Dollars 

Mean price comparisons

Component Term Zone

Price-flex 2006 less 

initial price

Price-cap 2006 

less initial price

Price-flex 2006

less price-cap

2006 

Number of 

comparisons

Channel terminations All All $98.12a$(113.95)a$212.08a144

Monthly All 137.37a(118.78)

a

256.14a48

Zone 1 127.88b(112.81)

a

240.69a16

Zone 2 137.37b(121.90)

a

259.27a16

Zone 3 146.87b(121.61)

a

268.48a16

3-yr All 90.59a(115.75)

a

206.34a48

Zone 1 82.17b(114.37)

a

196.54a16

Zone 2 90.07b(113.81)

a

203.88a16

Zone 3 99.54b(119.07)

a

218.61a16

5-yr All 66.41a(107.34)

a

173.75a48

Zone 1 57.08c(105.19)

a

162.28a16

Zone 2 66.92b(106.71)

a

173.63a16

Zone 3 75.23b(110.11)

a

185.33a16

Fixed transport All All 10.50b(60.34)a70.84a216

Monthly All 21.95b(52.55)a74.50a72

Zone 1 21.72 (52.32)a74.03a24

Zone 2 21.96 (49.53)a71.49a24

Zone 3 22.17 (55.81)a77.98a24

3-yr All 3.46 (66.64)a 70.09a 72

Zone 1 3.12 (66.19)a69.31a24

Zone 2 2.98 (65.49)a68.47a24

Zone 3 4.28 (68.23)a72.50a24

5-yr All 6.09 (61.83)a67.92a72

Zone 1 5.78 (60.68)a66.47a24

Zone 2 5.65 (60.61)a66.25a24

Zone 3 6.86 (64.20)a71.06a24

Variable transport All All 2.64a(12.57)a15.21a216

Monthly All 3.84a(13.46)a17.29a72

Zone 1 3.51c(11.83)a15.34a24

Zone 2 4.04c(13.11)a17.15a24

Zone 3 3.97c(15.43)a19.39a24

3-yr All 2.18c(14.01)a16.19a72

Zone 1 2.05 (12.30)a14.35a24

Page 69 GAO-07-80 Deregulation of Dedicated Access Services
Appendix II: Analysis of Average Revenue 

Data and List Prices 

Mean price comparisons

Component Term Zone

Price-flex 2006 less 

initial price

Price-cap 2006 

less initial price

Price-flex 2006

less price-cap

2006 

Number of 

comparisons

Zone 2 2.01 (13.78)a15.79a24

Zone 3 2.48 (15.96)a18.44a24

5-yr All 1.90 (10.24)a12.15a72

Zone 1 1.81 (8.81)b10.62b24

Zone 2 1.76 (10.12)b11.88b24

Zone 3 2.14 (11.80)b13.94b24

Source: GAO analysis of data from tariffs filed with the FCC in 2001 and 2006, including AT&T (Ameritech FCC No. 2, Nevada Bell

FCC No. 1, Pacific Bell FCC No. 1, Southern New England Bell FCC No. 39, and Southwestern Bell FCC No. 73), BellSouth FCC No.

1, Qwest FCC No. 1, and Verizon FCC Nos. 1, 11, and 14. 

Note: Initial prices are from 2001 and 2006 prices are as of June 2006. 

a

The price difference is statistically significant at the 1 percent level or lower, two-tailed. 

b

The price difference is statistically significant at the 5 percent level or lower, two-tailed. 

c

The price difference is statistically significant at the 10 percent level or lower, two-tailed. 

Page 70 GAO-07-80 Deregulation of Dedicated Access Services
Appendix III: Comments from the Federal Communications Commission

Appendix III: Comments from the Federal 

Communications Commission 

Page 71 GAO-07-80 Deregulation of Dedicated Access Services
Appendix III: Comments from the Federal Communications Commission

Page 72 GAO-07-80 Deregulation of Dedicated Access Services
Appendix III: Comments from the Federal Communications Commission

Page 73 GAO-07-80 Deregulation of Dedicated Access Services
Appendix III: Comments from the Federal Communications Commission

Page 74 GAO-07-80 Deregulation of Dedicated Access Services
Appendix III: Comments from the Federal Communications Commission

Page 75 GAO-07-80 Deregulation of Dedicated Access Services
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 76 GAO-07-80 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

JayEtta Hecker (202) 512-2834 or heckerj@gao.gov

In addition, Steve Martin, Assistant Director; Eli Albagli; Edda

Emmanuelli-Perez; Colin Fallon; Brandon Haller; John Karikari; Logan 

Kleier; Teague Lyons; Grant Mallie; Josh Ormond; Andrew Von Ah; and 

Mindi Weisenbloom made key contributions to this report. 

 Deregulation of Dedicated Access Services

GAO Contact 

Staff 

Acknowledgments 

(544114) 
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