Opinion ID: 185358
Heading Depth: 3
Heading Rank: 2

Heading: Future Pricing Flexibility

Text: 17 The FCC order also provides for additional pricing flexibility once an LEC shows that certain competitive thresholds (triggers) have been met in a given metropolitan statistical area (MSA). According to the FCC, this step is merely the latest effort to allow incumbent LECs progressively greater pricing flexibility as they face increasing competition. Order p 67. The triggers measure market competition based upon investments in infrastructure by potential competitors. The FCC's stated aim is to balance the benefit of further deregulation with the potential risk of exclusionary behavior or increased prices for consumers. See id. p 69 (noting that the relief if granted prematurely, might enable price cap LECs to (1) exclude new entrants from their markets, or (2) increase rates to unreasonable levels). Therefore, the more relief sought, the higher the trigger is set--that is, a greater level of investment by competitors is required. 18 The relief comes in two phases. In Phase I, LECs may offer contract tariffs and volume and term discounts, while remaining subject to some price cap rules and tariff requirements. In addition, for LECs subject to Phase I relief, new tariffs only require one day advance notice as opposed to seven or fourteen days notice under current rules. Phase I relief is available upon a showing that competitors have made irreversible investments in the facilities needed to provide the services at issue, thus discouraging incumbent LECs from successfully pursuing exclusionary strategies. Id. p 69. Phase I relief is potentially available for dedicated transport (entrance facilities, direct-trunked transport), channel terminations, and common line and traffic-sensitive services. 19 In order to obtain Phase I relief for dedicated transport services an incumbent LEC must show collocation in fifteen percent of wire centers within the MSA in which relief is sought, or in wire centers accounting for at least thirty percent of revenues for services in question. Id. p 93. In addition, at least one competitor must rely on transport facilities provided by a non-incumbent LEC in each wire center relied on in the applicant LEC's petition. Phase I relief is available for channel terminations upon a showing of collocation in fifty percent of wire centers within the MSA in which relief is sought or in wire centers accounting for at least sixty-five percent of revenues for services in question. Id. p p 105-06. The trigger for common line and traffic sensitive services is that a competitor must offer service to fifteen percent of incumbent LEC's customer locations using its own transport and switching facilities. Id. p 120. 20 In each case Phase I relief is subject to several conditions to prevent price discrimination or other potentially predatory behavior. Under Phase I, contract tariff rates must be available to all similarly situated customers, and volume discounts must be available to all similarly situated customers willing to make equivalent term commitments. Id. p p 124, 130. Incumbent LECs must continue to offer services pursuant to price caps as well. Id. p 24. Finally, LECs remain subject to FCC enforcement actions for anticompetitive behavior. See, e.g., id. p p 127, 131; 47 U.S.C. § 208. 21 In Phase II, LECs are given greater freedom to raise and lower rates outside of price cap regulation. Phase II relief is available for the same services and may be sought once competitors have established a significant market presence in the provision of the services at issue. Order p 69. Phase II relief allows LECs to offer services outside of price cap regulation, though LECs must still file generally available tariffs and remain subject to FCC enforcement actions for anticompetitive behavior. 22 In order to obtain Phase II relief for dedicated transport services an incumbent LEC must show collocation in fifty percent of wire centers within the MSA in which relief is sought or in wire centers accounting for at least sixty-five percent of revenues for services in question. Id. p p 148-49. In addition, as with Phase I relief, at least one competitor must rely on transport facilities provided by non-incumbent LECs in each wire center relied on in the applicant LEC's petition. Id. p 82. Phase II relief is available for channel terminations upon a showing of collocation in sixty-five percent of wire centers within the MSA in which relief is sought or in wire centers accounting for at least eighty-five percent of revenues for services in question. Id. p 150. The FCC has not yet set a collocation trigger for common line and trafficsensitive services Phase II relief. 23 As with Phase I relief, LECs must file tariffs and remain subject to FCC enforcement actions for anticompetitive behavior under the relevant statutory provisions. Id. p 151. The FCC acknowledged that its rule may allow Phase II relief before the manifestation of actual competitive alternatives for interstate access service customers but that the costs of delaying regulatory relief outweigh the potential costs of granting it before IXCs have a competitive alternative for each and every end user. Id. p 144. 24 Both Phase I and Phase II relief are available on an MSAwide basis. This is because, according to the FCC, MSAs best reflect the scope of competitive entry, and therefore are a logical basis for measuring the extent of competition. Id. p 72. Relief is not available on a rural service area basis. Rather relief is available for the non-MSA parts of a study area--typically one or more rural service areas--if the triggers are satisfied for the entire area. Id. p 76. The FCC acknowledges the theoretical possibility that granting relief on an MSA-wide basis could enable LECs to engage in predatory behavior. Id. p 83. However, the Commission concluded the costs, particularly the administrative costs, of granting pricing flexibility on a wire center-by-wire center basis outweigh the benefits of protecting againstsuch theoretical harms. Id. The Commission declined to provide 25 relief on a LATA basis, as in some states the relevant LATA encompasses the entire states. Id. p 73. 26 The triggers relied upon by the FCC are largely based upon collocation by competitors at LEC facilities. The FCC adopted this trigger for two reasons. First, the FCC concluded that collocation is a reasonable proxy for competitive conditions in a given MSA. Id. p 78. Specifically, the FCC found that collocation by competitors in incumbent LEC wire centers is a reliable indication of sunk investment by competitors. Id. p 81. Sufficient sunk investment of this sort, in the FCC's view, will discourage exclusionary pricing behavior. Id. p 78. In addition, the FCC determined that the collocation level is an easily verifiable, bright-line test that serves to avoid excessive administrative burdens. Id. In this sense, the trigger balances the FCC's desire for an accurate measure of actual competitive conditions in a given MSA, while also establishing a clear administrative standard. 27 The FCC acknowledged that adopting specific thresholds, like utility ratemaking, is not an exact science. Id. p 96; accord United States v. FCC, 707 F.2d 610, 618 (D.C. Cir. 1983). Rather, the thresholds are policy determinations based on our agency expertise, our interpretation of the record before us in this proceeding, and our desire to provide a bright-line rule to guide the industry. Id. p 96 (footnote omitted). Moreover, the FCC claimed its effort to select triggers that precisely measure competition for particular services also is hampered by the lack of verifiable data concerning competitors' revenues and facilities. Id. 28 To set the proper trigger thresholds the FCC examined a few local markets to assess the extent of market penetration that correlates with a given level of collocation investment, and scaled the various triggers to correlate with the level of relief sought. Thus, the Phase II triggers are higher than those for Phase I, and different services have different trigger levels depending upon the FCC's estimation of the threat of predatory or anticompetitive conduct. Thus, the amount of collocation required to obtain Phase I relief for channel terminations is higher than for dedicated transport services.