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entitled 'Telecommunications: FCC Needs to Improve Its Ability to
Monitor and Determine the Extent of Competition in Dedicated Access
Services' which was released on November 30, 2006.
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Report to the Chairman, Committee on Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
November 2006:
Telecommunications:
FCC Needs to Improve Its Ability to Monitor and Determine the Extent of
Competition in Dedicated Access Services:
Deregulation of Dedicated Access Services:
GAO-07-80:
GAO Highlights:
Highlights of GAO-07-80, a report to the Chairman, Committee on
Government Reform, House of Representatives
Why GAO Did This Study:
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 cost-based 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 Found:
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.
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.
[Hyperlink, http://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.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Facilities-Based Competition to End Users Does Not Appear to Be
Extensive:
Prices for Dedicated Access Services in MSAs with Phase II Pricing
Flexibility Are on Average Higher Than Prices Elsewhere:
FCC Plays an Important Role in Ensuring Competition, but Lacks
Sufficient Information to Determine the Success of Its Deregulatory
Policies:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Objectives, Scope and Methodology:
Appendix II: Analysis of Average Revenue Data and List Prices:
Appendix III: Comments from the Federal Communications Commission:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Conditions for Granting Different Phases of Pricing
Flexibility in an MSA:
Table 2: Percentage of Buildings with a Fiber-Based Competitive
Alternative by Demand (July 2006):
Table 3: Change in Competitive Colocation in "Price-flex" Wire Centers:
Table 4: Examples of Contract Terms and Conditions:
Table 5: MSAs in Analysis, by Price-Cap Incumbent and Applicable
Pricing Flexibility:
Table 6: GeoResults' Dedicated Access Demand Model:
Table 7: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Nominal Dollars:
Table 8: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Adjusted Dollars Using Telecommunications
Price Index:
Table 9: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Adjusted Dollars Using General GDP Price
Index:
Table 10: Summary Statistics of Average Revenue for Channel
Terminations, Weighted Adjusted Dollars Using the Telecommunications
Price Index:
Table 11: Summary Statistics of List Price Comparisons for all DS-1
Combinations in Nominal Dollars:
Table 12: Summary Statistics of List Price Comparisons for all DS-3
Combinations in Nominal Dollars:
Figures:
Figure 1: Simplified Components of Dedicated Access Circuits:
Figure 2: Average Differences in Dedicated Access Prices Across All
Terms and Zones in Nominal Dollars:
Figure 3: Change in Average Revenue for DS-1 and DS-3 Channel
Terminations in Phase I and Phase II Areas:
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:
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).[Footnote 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 incumbent firms to compete in the long-distance
market;[Footnote 2] therefore, incumbent firms are now competing to
provide businesses with long-distance 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.")[Footnote 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,[Footnote 4] which,
among other things, permitted the deregulation of prices for dedicated
access services in metropolitan statistical areas (MSA)[Footnote 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).[Footnote 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.[Footnote 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.[Footnote 8]
* 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 price-capped 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 of the figure, the price-cap incumbent has
received phase I flexibility for channel terminations. As figure 1
shows, with phase I flexibility, the price-cap 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:
[See PDF for image]
Source: GAO.
[End of figure]
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).[Footnote 9] The
CALLS plan was envisioned as a 5-year transitional regime to resolve,
among other things, price-cap issues.[Footnote 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.[Footnote 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.[Footnote 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 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.[Footnote 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 would be to lessen competition substantially for
dedicated access in 19 metropolitan areas.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 17]
Recently, a federal appellate court upheld FCC's fourth attempt to
impose UNE rules.[Footnote 18] Under the new rules, FCC modified its
unbundling framework[Footnote 19] 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 proxies to determine impairment for high-capacity loops and
dedicated transport.[Footnote 20] Where such triggers are not met, the
incumbent must make UNEs available at rates based on forward-looking
economic costs.[Footnote 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 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.[Footnote 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.[Footnote 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.[Footnote 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.
* 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.[Footnote 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
high-capacity 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, 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.[Footnote 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.
Results in Brief:
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 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, 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 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 Act[Footnote 27] 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 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.
Background:
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 revenue-based triggers, and not the percentage of total wire
centers in an MSA.
Table 1: Conditions for Granting Different Phases of Pricing
Flexibility in an MSA:
Level of pricing flexibility: Partial ("phase I") price deregulation;
Dedicated access components: Channel terminations to end users;
Requires installed colocation equipment from at least one competitor
in: Wire centers with 65 percent of revenues;
Requires installed colocation equipment from at least one competitor
in: 50 percent of total wire centers.
Level of pricing flexibility: Partial ("phase I") price deregulation;
Dedicated access components: Dedicated transportation[A];
Requires installed colocation equipment from at least one competitor
in: Wire centers with 30 percent of revenues;
Requires installed colocation equipment from at least one competitor
in: 15 percent of total wire centers.
Level of pricing flexibility: Full ("phase II") price deregulation;
Dedicated access components: Channel terminations to end users;
Requires installed colocation equipment from at least one competitor
in: Wire centers with 85 percent of revenues;
Requires installed colocation equipment from at least one competitor
in: or;
Requires installed colocation equipment from at least one competitor
in: 65 percent of total wire centers.
Level of pricing flexibility: Full ("phase II") price deregulation;
Dedicated access components: Dedicated transportation[A];
Requires installed colocation equipment from at least one competitor
in: Wire centers with 65 percent of revenues; or;
Requires installed colocation equipment from at least one competitor
in: 50 percent of total wire centers.
Source: FCC Pricing Flexibility Order.
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.
[End of table]
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,[Footnote 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 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.[Footnote 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.
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.[Footnote 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
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):
MSA[A]: Phase II MSAs: Atlanta;
Buildings with demand of DS-1 or greater: 12,718;
Number of buildings with a "lit" competitor: 446;
Percent with a competitor: 3.5%;
Buildings with demand of DS-3: 278;
Number of buildings with a "lit" competitor: 25;
Percent with a competitor: 9.0%;
Buildings with demand of 2 DS-3s and greater: 67;
Number of buildings with a "lit" competitor: 10;
Percent with a competitor: 14.9%.
MSA[A]: Phase II MSAs: Los Angeles;
Buildings with demand of DS-1 or greater: 22,639;
Number of buildings with a "lit" competitor: 508;
Percent with a competitor: 2.2%;
Buildings with demand of DS-3: 650;
Number of buildings with a "lit" competitor: 26;
Percent with a competitor: 4.0%;
Buildings with demand of 2 DS-3s and greater: 265;
Number of buildings with a "lit" competitor: 34;
Percent with a competitor: 12.8%.
MSA[A]: Phase II MSAs: Miami;
Buildings with demand of DS-1 or greater: 14,300;
Number of buildings with a "lit" competitor: 363;
Percent with a competitor: 2.5%;
Buildings with demand of DS-3: 421;
Number of buildings with a "lit" competitor: 14;
Percent with a competitor: 3.3%;
Buildings with demand of 2 DS-3s and greater: 136;
Number of buildings with a "lit" competitor: 21;
Percent with a competitor: 15.4%.
MSA[A]: Phase II MSAs: Norfolk;
Buildings with demand of DS-1 or greater: 5,008;
Number of buildings with a "lit" competitor: 2,080[B];
Percent with a competitor: 41.5%;
Buildings with demand of DS-3: 56;
Number of buildings with a "lit" competitor: 35;
Percent with a competitor: 62.5%;
Buildings with demand of 2 DS-3s and greater: 13;
Number of buildings with a "lit" competitor: 9;
Percent with a competitor: 69.2%.
MSA[A]: Phase II MSAs: Phoenix;
Buildings with demand of DS-1 or greater: 7,981;
Number of buildings with a "lit" competitor: 297;
Percent with a competitor: 3.7%;
Buildings with demand of DS-3: 155;
Number of buildings with a "lit" competitor: 17;
Percent with a competitor: 11.0%;
Buildings with demand of 2 DS-3s and greater: 51;
Number of buildings with a "lit" competitor: 5;
Percent with a competitor: 9.8%.
MSA[A]: Phase II MSAs: Pittsburgh;
Buildings with demand of DS-1 or greater: 4,733;
Number of buildings with a "lit" competitor: 383;
Percent with a competitor: 8.1%;
Buildings with demand of DS-3: 78;
Number of buildings with a "lit" competitor: 15;
Percent with a competitor: 19.2%;
Buildings with demand of 2 DS-3s and greater: 25;
Number of buildings with a "lit" competitor: 9;
Percent with a competitor: 36.0%.
MSA[A]: Phase II MSAs: Portland;
Buildings with demand of DS-1 or greater: 3,683;
Number of buildings with a "lit" competitor: 126;
Percent with a competitor: 3.4%;
Buildings with demand of DS-3: 67;
Number of buildings with a "lit" competitor: 9;
Percent with a competitor: 13.4%;
Buildings with demand of 2 DS-3s and greater: 26;
Number of buildings with a "lit" competitor: 3;
Percent with a competitor: 11.5%.
MSA[A]: Phase II MSAs: San Jose;
Buildings with demand of DS-1 or greater: 4,653;
Number of buildings with a "lit" competitor: 287;
Percent with a competitor: 6.2%;
Buildings with demand of DS-3: 98;
Number of buildings with a "lit" competitor: 13;
Percent with a competitor: 13.3%;
Buildings with demand of 2 DS-3s and greater: 20;
Number of buildings with a "lit" competitor: 2;
Percent with a competitor: 10.0%.
MSA[A]: Phase II MSAs: Total;
Buildings with demand of DS-1 or greater: 75,715;
Number of buildings with a "lit" competitor: 4,490;
Percent with a competitor: 5.9%;
Buildings with demand of DS-3: 1,803;
Number of buildings with a "lit" competitor: 154;
Percent with a competitor: 8.5%;
Buildings with demand of 2 DS-3s and greater: 603;
Number of buildings with a "lit" competitor: 93;
Percent with a competitor: 15.4%.
MSA[A]: Phase I MSAs: Chicago;
Buildings with demand of DS-1 or greater: 16,732;
Number of buildings with a "lit" competitor: 361;
Percent with a competitor: 2.2%;
Buildings with demand of DS-3: 325;
Number of buildings with a "lit" competitor: 37;
Percent with a competitor: 11.4%;
Buildings with demand of 2 DS-3s and greater: 185;
Number of buildings with a "lit" competitor: 47;
Percent with a competitor: 25.4%.
MSA[A]: Phase I MSAs: Detroit;
Buildings with demand of DS-1 or greater: 12,174;
Number of buildings with a "lit" competitor: 298;
Percent with a competitor: 2.4%;
Buildings with demand of DS-3: 168;
Number of buildings with a "lit" competitor: 13;
Percent with a competitor: 7.7%;
Buildings with demand of 2 DS-3s and greater: 48;
Number of buildings with a "lit" competitor: 2;
Percent with a competitor: 4.2%.
MSA[A]: Phase I MSAs: Greenville;
Buildings with demand of DS-1 or greater: 2,551;
Number of buildings with a "lit" competitor: 68;
Percent with a competitor: 2.7%;
Buildings with demand of DS-3: 28;
Number of buildings with a "lit" competitor: 5;
Percent with a competitor: 17.9%;
Buildings with demand of 2 DS-3s and greater: 4;
Number of buildings with a "lit" competitor: 0;
Percent with a competitor: 0.0%.
MSA[A]: Phase I MSAs: Minneapolis;
Buildings with demand of DS-1 or greater: 6,786;
Number of buildings with a "lit" competitor: 389;
Percent with a competitor: 5.7%;
Buildings with demand of DS-3: 147;
Number of buildings with a "lit" competitor: 31;
Percent with a competitor: 21.1%;
Buildings with demand of 2 DS-3s and greater: 56;
Number of buildings with a "lit" competitor: 12;
Percent with a competitor: 21.4%.
MSA[A]: Phase I MSAs: New Orleans;
Buildings with demand of DS-1 or greater: 3,540;
Number of buildings with a "lit" competitor: 207;
Percent with a competitor: 5.8%;
Buildings with demand of DS-3: 65;
Number of buildings with a "lit" competitor: 15;
Percent with a competitor: 23.1%;
Buildings with demand of 2 DS-3s and greater: 37;
Number of buildings with a "lit" competitor: 9;
Percent with a competitor: 24.3%.
MSA[A]: Phase I MSAs: New York;
Buildings with demand of DS-1 or greater: 34,650;
Number of buildings with a "lit" competitor: 2,354;
Percent with a competitor: 6.8%;
Buildings with demand of DS-3: 762;
Number of buildings with a "lit" competitor: 198;
Percent with a competitor: 26.0%;
Buildings with demand of 2 DS-3s and greater: 380;
Number of buildings with a "lit" competitor: 158;
Percent with a competitor: 41.6%.
MSA[A]: Phase I MSAs: Seattle;
Buildings with demand of DS-1 or greater: 4,951;
Number of buildings with a "lit" competitor: 188;
Percent with a competitor: 3.8%;
Buildings with demand of DS-3: 100;
Number of buildings with a "lit" competitor: 15;
Percent with a competitor: 15.0%;
Buildings with demand of 2 DS-3s and greater: 51;
Number of buildings with a "lit" competitor: 14;
Percent with a competitor: 27.5%.
MSA[A]: Phase I MSAs: Washington, D.C;
Buildings with demand of DS-1 or greater: 20,472;
Number of buildings with a "lit" competitor: 1,967;
Percent with a competitor: 9.6%;
Buildings with demand of DS-3: 518;
Number of buildings with a "lit" competitor: 131;
Percent with a competitor: 25.3%;
Buildings with demand of 2 DS-3s and greater: 146;
Number of buildings with a "lit" competitor: 40;
Percent with a competitor: 27.4%.
MSA[A]: Phase I MSAs: Total;
Buildings with demand of DS-1 or greater: 101,856;
Number of buildings with a "lit" competitor: 5,832;
Percent with a competitor: 5.7%;
Buildings with demand of DS-3: 2,113;
Number of buildings with a "lit" competitor: 445;
Percent with a competitor: 21.1%;
Buildings with demand of 2 DS-3s and greater: 907;
Number of buildings with a "lit" competitor: 282;
Percent with a competitor: 31.1%.
MSA[A]: Phase I MSAs: Grand total;
Buildings with demand of DS-1 or greater: 177,571;
Number of buildings with a "lit" competitor: 10,322;
Percent with a competitor: 5.8%;
Buildings with demand of DS-3: 3,916;
Number of buildings with a "lit" competitor: 599;
Percent with a competitor: 15.3%;
Buildings with demand of 2 DS-3s and greater: 1,510;
Number of buildings with a "lit" competitor: 375;
Percent with a competitor: 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.
[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.
[End of table]
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 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.
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.[Footnote 31]
Table 3: Change in Competitive Colocation in "Price-flex" Wire Centers:
MSA: Phase I channel termination markets: Chicago;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 58;
Number of "price-flex" wire centers with competitive colocation: July
2006: 42;
Percentage change: (28).
MSA: Phase I channel termination markets: Detroit;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 27;
Number of "price-flex" wire centers with competitive colocation: July
2006: 22;
Percentage change: (19).
MSA: Phase I channel termination markets: Greenville;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 5;
Number of "price-flex" wire centers with competitive colocation: July
2006: 5;
Percentage change: 0.
MSA: Phase I channel termination markets: Minneapolis;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 20;
Number of "price-flex" wire centers with competitive colocation: July
2006: 18;
Percentage change: (10).
MSA: Phase I channel termination markets: New Orleans;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 6;
Number of "price-flex" wire centers with competitive colocation: July
2006: 6;
Percentage change: 0.
MSA: Phase I channel termination markets: New York;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 80;
Number of "price-flex" wire centers with competitive colocation: July
2006: 75;
Percentage change: (6).
MSA: Phase I channel termination markets: Seattle;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 11;
Number of "price-flex" wire centers with competitive colocation: July
2006: 11;
Percentage change: 0.
MSA: Phase I channel termination markets: Washington, D.C;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 46;
Number of "price-flex" wire centers with competitive colocation: July
2006: 39;
Percentage change: (15).
MSA: Phase I channel termination markets: Total;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 214;
Number of "price-flex" wire centers with competitive colocation: July
2006: 193;
Percentage change: (10).
MSA: Phase II channel termination markets: Atlanta;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 16;
Number of "price-flex" wire centers with competitive colocation: July
2006: 16;
Percentage change: 0.
MSA: Phase II channel termination markets: Los Angeles;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 64;
Number of "price-flex" wire centers with competitive colocation: July
2006: 64;
Percentage change: 0.
MSA: Phase II channel termination markets: Miami;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 38;
Number of "price-flex" wire centers with competitive colocation: July
2006: 38;
Percentage change: 0.
MSA: Phase II channel termination markets: Norfolk;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 15;
Number of "price-flex" wire centers with competitive colocation: July
2006: 15;
Percentage change: 0.
MSA: Phase II channel termination markets: Phoenix;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 19;
Number of "price-flex" wire centers with competitive colocation: July
2006: 18;
Percentage change: (5).
MSA: Phase II channel termination markets: Pittsburgh;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 34;
Number of "price-flex" wire centers with competitive colocation: July
2006: 22;
Percentage change: (33).
MSA: Phase II channel termination markets: Portland;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 10;
Number of "price-flex" wire centers with competitive colocation: July
2006: 10;
Percentage change: 0.
MSA: Phase II channel termination markets: San Jose;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 11;
Number of "price-flex" wire centers with competitive colocation: July
2006: 11;
Percentage change: 0.
MSA: Phase II channel termination markets: Total;
Number of "price-flex" wire centers with competitive colocation: In
pricing flexibility application: 256;
Number of "price-flex" wire centers with competitive colocation: July
2006: 227;
Percentage change: (11).
Source: GAO analysis of Pricing Flexibility applications, and Telcordia
and GeoResults data.
Note: Percentages have been rounded.
[End of table]
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.
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)[Footnote 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 fiber-optic connection to the
building.[Footnote 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.
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 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.
Prices for Dedicated Access Services in MSAs with Phase II Pricing
Flexibility Are on Average Higher Than Prices Elsewhere:
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) price-flex 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 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 price-cap prices increasing
in constant terms over the period.) Average differences in dedicated
access prices across all terms and zones are shown in figure 2.
Figure 2: Average Differences in Dedicated Access Prices Across All
Terms and Zones in Nominal Dollars:
[See PDF for image]
Source: GAO analysis of data from tariffs filed with FCC by AT&T,
BellSouth, QWest, and Verizon.
[End of figure]
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.
Effects of Contracts on Prices Varied, but Are Generally the Same Under
Phase I Flexibility and Phase II Flexibility:
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.
Conditions and Terms May Inhibit Switching Circuits to Competitors:
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.[Footnote 34] According to FCC, no such complaints have been filed.
Table 4: Examples of Contract Terms and Conditions:
Type of terms and conditions: Revenue guarantees;
Specific contracts: 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.
Type of terms and conditions: Shifting business away from competitors;
Specific contracts: 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.
Type of terms and conditions: Termination penalties;
Specific contracts: 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.
[End of table]
Average Revenue Has Declined Over Time, but Is Generally Higher for
Channel Terminations under Phase II Flexibility Than under Phase I
Flexibility:
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.[Footnote 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.)
Figure 3: Change in Average Revenue for DS-1 and DS-3 Channel
Terminations in Phase I and Phase II Areas:
[See PDF for image]
Source: GAO analysis of data from a sample of phase I and Phase II MSAs
provided by AT&T, BellSouth, Qwest, and Verizon.
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.
[End of figure]
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 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.
Data from Two Departments Show That Their Spending on Dedicated Access
Services Is Generally Made Through FTS2001:
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.[Footnote 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.[Footnote 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.
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
point-to-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 Plays an Important Role in Ensuring Competition, but Lacks
Sufficient Information to Determine the Success of Its Deregulatory
Policies:
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 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.
Ensuring Competition Is a Central FCC Responsibility:
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.[Footnote 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.[Footnote 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.
FCC Uses Various Data to Assess Competition for 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:
* 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
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.
Data Available to FCC Are Not Current, Specific or Reliable:
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.[Footnote 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.[Footnote 41]
Second, data provided to FCC in rulemaking proceedings are often not
specific enough to be useful. Outside parties are under no obligation
to 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.
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.[Footnote 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.
Conclusions:
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 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
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.[Footnote 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.
Recommendations for Executive Action:
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:
* 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 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.
Agency Comments:
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.[Footnote 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
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.[Footnote 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 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 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 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 report will be available at no charge on the GAO Web site at
[Hyperlink, 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,
Signed by:
JayEtta Z. Hecker Director, Physical Infrastructure:
[End of section]
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.
Extent of Competitive Alternatives to Major Incumbent Firms:
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:
Price cap incumbent: AT&T;
Phase I for channel terminations, phase II for dedicated transport:
Detroit, Chicago;
Phase II for channel terminations and dedicated transport: Los Angeles,
San Jose.
Price cap incumbent: BellSouth;
Phase I for channel terminations, phase II for dedicated transport:
Greenville, New Orleans;
Phase II for channel terminations and dedicated transport: Atlanta,
Miami.
Price cap incumbent: Qwest;
Phase I for channel terminations, phase II for dedicated transport:
Seattle, Minneapolis;
Phase II for channel terminations and dedicated transport: Phoenix,
Portland.
Price cap incumbent: Verizon;
Phase I for channel terminations, phase II for dedicated transport: New
York, Washington, D.C;
Phase II for channel terminations and dedicated transport: Norfolk,
Pittsburgh.
Source: GAO analysis of FCC pricing flexibility report and orders.
[End of table]
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.
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
CLLI™ 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 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 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.
Table 6: GeoResults' Dedicated Access Demand Model:
Level of demand: At least DS-1;
Definition: 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.
Level of demand: At least DS-3;
Definition: 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.
Level of demand: At least 2 DS-3's;
Definition: 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.
[End of table]
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. According to GeoResults, these firms use
their demand model to identify target dedicated access customers within
various buildings throughout MSAs in the United States.
Analysis of Available Information on Dedicated Access Pricing:
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 high-capacity 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.
Change in List Prices:
We analyzed listed prices for channel terminations and dedicated
transport for month-to-month, 3-year, and 5-year terms across three
density zones.[Footnote 46] 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 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.
Customized Contracts:
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 price-cap 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 individual contracts or
specific detailed data on the number of DS-1 and DS-3 circuits
purchased under each contract were not available.
Change in Average Revenue:
Because we could not obtain specific data on the number of customers
purchasing dedicated access services at various pricing levels (i.e.,
month-to-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,[Footnote 47] 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
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 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.
Federal Spending on Dedicated Access Services:
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
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.
FCC Oversight of Dedicated Access:
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
Performance and Results Act of 1993.[Footnote 48] 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.
[End of section]
Appendix II: Analysis of Average 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.
Table 7: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Nominal Dollars:
Speed: DS1;
Time frame and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: $146.53;
Lower limit[A]: $139.10;
Upper limit[A]: $153.96;
Number of MSAs: 56.
Speed: DS1;
Time frame and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 152.35;
Lower limit[A]: 140.40;
Upper limit[A]: 164.29;
Number of MSAs: 29.
Speed: DS1;
Time frame and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 140.28;
Lower limit[A]: 131.56;
Upper limit[A]: 149.01;
Number of MSAs: 27.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005--all MSAs;
Mean: 128.88;
Lower limit[A]: 123.49;
Upper limit[A]: 134.27;
Number of MSAs: 56.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005--Phase I
MSAs;
Mean: 126.20;
Lower limit[A]: 120.28;
Upper limit[A]: 132.12;
Number of MSAs: 29.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 131.77;
Lower limit[A]: 122.24;
Upper limit[A]: 141.29;
Number of MSAs: 27.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--all MSAs;
Mean: (17.65)[B];
Lower limit[A]: (22.63);
Upper limit[A]: (12.66);
Number of MSAs: 56.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--Phase I MSAs;
Mean: (26.15)[B];
Lower limit[A]: (33.95);
Upper limit[A]: (18.35);
Number of MSAs: 29.
Speed: DS1;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--Phase II MSAs;
Mean: (8.52)[B];
Lower limit[A]: (12.72);
Upper limit[A]: (4.32);
Number of MSAs: 27.
Speed: DS1;
Time frame and level of current pricing flexibility: SpeedDS3: 2005
less pre-flex--Phase II less phase I;
Mean: SpeedDS3: 17.63[B];
Lower limit[A]: 8.92;
Upper limit[A]: 26.35;
Number of MSAs: 56.
Speed: DS3;
Time frame and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: 1,341.46;
Lower limit[A]: 1,264.28;
Upper limit[A]: 1,418.65;
Number of MSAs: 56.
Speed: DS3;
Time frame and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 1,287.32;
Lower limit[A]: 1,183.23;
Upper limit[A]: 1,391.41;
Number of MSAs: 29.
Speed: DS3;
Time frame and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 1,399.62;
Lower limit[A]: 1,282.08;
Upper limit[A]: 1,517.15;
Number of MSAs: 27.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005--all MSAs;
Mean: 1,194.97;
Lower limit[A]: 1,125.05;
Upper limit[A]: 1,264.90;
Number of MSAs: 56.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005--Phase I
MSAs;
Mean: 1,069.58;
Lower limit[A]: 997.75;
Upper limit[A]: 1,141.41;
Number of MSAs: 29.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 1,329.65;
Lower limit[A]: 1,225.40;
Upper limit[A]: 1,433.91;
Number of MSAs: 27.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--all MSAs;
Mean: (146.49)[B];
Lower limit[A]: (202.75);
Upper limit[A]: (90.23);
Number of MSAs: 56.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--Phase I MSAs;
Mean: (217.74)[B];
Lower limit[A]: (296.17);
Upper limit[A]: (139.31);
Number of MSAs: 29.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--Phase II MSAs;
Mean: (69.96);
Lower limit[A]: (144.84);
Upper limit[A]: 4.91;
Number of MSAs: 27.
Speed: DS3;
Time frame and level of current pricing flexibility: 2005 less pre-
flex--Phase II less phase I;
Mean: 147.78[B];
Lower limit[A]: 41.49;
Upper limit[A]: 254.06;
Number of MSAs: 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 mean-difference tests.
[End of table]
Table 8: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Adjusted Dollars Using Telecommunications
Price Index:
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: $133.50;
Lower limit[A]: $127.49;
Upper limit[A]: $139.51;
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 138.31;
Lower limit[A]: 128.57;
Upper limit[A]: 148.05;
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 128.33;
Lower limit[A]: 121.42;
Upper limit[A]: 135.25;
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 128.88;
Lower limit[A]: 123.49;
Upper limit[A]: 134.27;
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 126.20;
Lower limit[A]: 120.28;
Upper limit[A]: 132.12;
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 131.77;
Lower limit[A]: 122.24;
Upper limit[A]: 141.29;
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (4.62)[C];
Lower limit[A]: (8.82);
Upper limit[A]: (0.42);
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (12.11)[B];
Lower limit[A]: (18.08);
Upper limit[A]: (6.14);
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: 3.43;
Lower limit[A]: (0.99);
Upper limit[A]: 7.86;
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 15.54[B];
Lower limit[A]: 8.26;
Upper limit[A]: 22.82;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: 1,226.36;
Lower limit[A]: 1,156.10;
Upper limit[A]: 1,296.61;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 1,173.73;
Lower limit[A]: 1,078.19;
Upper limit[A]: 1,269.27;
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 1,282.88;
Lower limit[A]: 1,177.30;
Upper limit[A]: 1,388.47;
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 1,194.97;
Lower limit[A]: 1,125.05;
Upper limit[A]: 1,264.90;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 1,069.58;
Lower limit[A]: 997.75;
Upper limit[A]: 1,141.41;
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 1,329.65;
Lower limit[A]: 1,225.40;
Upper limit[A]: 1,433.91;
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (31.38);
Lower limit[A]: (81.71);
Upper limit[A]: 18.95;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (104.15)[B];
Lower limit[A]: (173.45);
Upper limit[A]: (34.84);
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: 46.77;
Lower limit[A]: (17.89);
Upper limit[A]: 111.43;
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 150.91[B];
Lower limit[A]: 58.29;
Upper limit[A]: 243.54;
Number of MSAs: 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 mean-difference tests.
[C] The difference is statistically significant at the 5 percent level
or lower (two-tailed), using mean-difference tests.
[End of table]
Table 9: Summary Statistics of Average Revenue for Channel
Terminations, Unweighted Adjusted Dollars Using General GDP Price
Index:
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: $161.62;
Lower limit[A]: $152.82;
Upper limit[A]: $170.42;
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 168.47;
Lower limit[A]: 154.38;
Upper limit[A]: 182.56;
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 154.26;
Lower limit[A]: 143.81;
Upper limit[A]: 164.71;
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 128.88;
Lower limit[A]: 123.49;
Upper limit[A]: 134.27;
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 126.20;
Lower limit[A]: 120.28;
Upper limit[A]: 132.12;
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 131.77;
Lower limit[A]: 122.24;
Upper limit[A]: 141.29;
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (32.73)[B];
Lower limit[A]: (38.72);
Upper limit[A]: (26.75);
Number of MSAs: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (42.26)[B];
Lower limit[A]: (52.05);
Upper limit[A]: (32.49);
Number of MSAs: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: (22.49)[B];
Lower limit[A]: (27.09);
Upper limit[A]: (17.89);
Number of MSAs: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 19.77[B];
Lower limit[A]: 9.12;
Upper limit[A]: 30.43;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: 1,475.83;
Lower limit[A]: 1,391.02;
Upper limit[A]: 1,560.64;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 1,419.26;
Lower limit[A]: 1,305.38;
Upper limit[A]: 1,533.15;
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 1,536.59;
Lower limit[A]: 1,406.46;
Upper limit[A]: 1,666.72;
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 1,194.97;
Lower limit[A]: 1,125.05;
Upper limit[A]: 1,264.90;
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 1,069.58;
Lower limit[A]: 997.75;
Upper limit[A]: 1,141.41;
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 1,329.65;
Lower limit[A]: 1,225.40;
Upper limit[A]: 1,433.91;
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (280.86)[B];
Lower limit[A]: (343.40);
Upper limit[A]: (218.32);
Number of MSAs: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (349.68)[B];
Lower limit[A]: (437.96);
Upper limit[A]: (261.40);
Number of MSAs: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: (206.94)[B];
Lower limit[A]: (292.16);
Upper limit[A]: (121.72);
Number of MSAs: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 142.74[C];
Lower limit[A]: 22.85;
Upper limit[A]: 262.63;
Number of MSAs: 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 mean-difference tests.
[C] The difference is statistically significant at the 5 percent level
or lower (two-tailed), using mean-difference tests.
[End of table]
Table 10: Summary Statistics of Average Revenue for Channel
Terminations, Weighted Adjusted Dollars Using the Telecommunications
Price Index:
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: $132.95;
Lower limit[A]: $132.88;
Upper limit[A]: $133.02;
Number of MSAs[C]: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 134.57;
Lower limit[A]: 134.48;
Upper limit[A]: 134.67;
Number of MSAs[C]: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 130.25;
Lower limit[A]: 130.17;
Upper limit[A]: 130.34;
Number of MSAs[C]: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 126.80;
Lower limit[A]: 126.73;
Upper limit[A]: 126.86;
Number of MSAs[C]: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 123.93;
Lower limit[A]: 123.86;
Upper limit[A]: 124.00;
Number of MSAs[C]: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 131.56;
Lower limit[A]: 131.44;
Upper limit[A]: 131.67;
Number of MSAs[C]: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (6.15)[B];
Lower limit[A]: (6.20);
Upper limit[A]: (6.11);
Number of MSAs[C]: 56.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (10.64)[B];
Lower limit[A]: (10.70);
Upper limit[A]: (10.59);
Number of MSAs[C]: 29.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: 1.30[B];
Lower limit[A]: 1.23;
Upper limit[A]: 1.38;
Number of MSAs[C]: 27.
Speed: DS1;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 11.95[B];
Lower limit[A]: 11.86;
Upper limit[A]: 12.04;
Number of MSAs[C]: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre- flex--all
MSAs;
Mean: 1,175.38;
Lower limit[A]: 1,174.62;
Upper limit[A]: 1,176.14;
Number of MSAs[C]: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase I;
Mean: 1,128.80;
Lower limit[A]: 1,128.08;
Upper limit[A]: 1,129.48;
Number of MSAs[C]: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: Pre-flex-- MSAs
that became phase II;
Mean: 1,252.78;
Lower limit[A]: 1,251.23;
Upper limit[A]: 1,254.34;
Number of MSAs[C]: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--all MSAs;
Mean: 1,163.53;
Lower limit[A]: 1,162.74;
Upper limit[A]: 1,164.32;
Number of MSAs[C]: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase I MSAs;
Mean: 1,081.89;
Lower limit[A]: 1,081.28;
Upper limit[A]: 1,082.50;
Number of MSAs[C]: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005--Phase II
MSAs;
Mean: 1,299.13;
Lower limit[A]: 1,297.54;
Upper limit[A]: 1,300.71;
Number of MSAs[C]: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
all MSAs;
Mean: (11.85)[C];
Lower limit[A]: (12.34);
Upper limit[A]: (11.37);
Number of MSAs[C]: 56.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase I MSAs;
Mean: (46.89)[C];
Lower limit[A]: (47.46);
Upper limit[A]: (46.32);
Number of MSAs[C]: 29.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II MSAs;
Mean: 46.34[C];
Lower limit[A]: 45.54;
Upper limit[A]: 47.14;
Number of MSAs[C]: 27.
Speed: DS3;
Timeframe and level of current pricing flexibility: 2005 less pre-flex--
Phase II less phase I;
Mean: 93.23[C];
Lower limit[A]: 92.25;
Upper limit[A]: 94.21;
Number of MSAs[C]: 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 mean-difference 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.
[End of table]
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 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:
Component: Channel terminations;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: $7.73[A];
Mean price comparisons: Price-cap 2006 less initial price: $(9.46)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: $17.20[A];
Number of comparisons: 144.
Component: Channel terminations;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 20.56[A];
Mean price comparisons: Price- cap 2006 less initial price: (3.45);
Mean price comparisons: Price- flex 2006 less price-cap 2006: 24.01[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 17.76[A];
Mean price comparisons: Price-cap 2006 less initial price: (1.20);
Mean price comparisons: Price-flex 2006 less price-cap 2006: 18.96[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 21.03[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.25);
Mean price comparisons: Price-flex 2006 less price-cap 2006: 25.28[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 22.89[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.90);
Mean price comparisons: Price-flex 2006 less price-cap 2006: 27.79[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 2.74;
Mean price comparisons: Price-cap 2006 less initial price: (12.54)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 15.28[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 0.87;
Mean price comparisons: Price-cap 2006 less initial price: (9.80)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 10.67[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 3.17;
Mean price comparisons: Price-cap 2006 less initial price: (13.27)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 16.45[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 4.17;
Mean price comparisons: Price-cap 2006 less initial price: (14.55)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 18.73[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: (0.10);
Mean price comparisons: Price-cap 2006 less initial price: (12.39)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 12.30[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: (1.12);
Mean price comparisons: Price-cap 2006 less initial price: (9.34)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 8.22[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: (0.21);
Mean price comparisons: Price-cap 2006 less initial price: (13.21)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 13.00[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 5-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 1.05;
Mean price comparisons: Price-cap 2006 less initial price: (14.62)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 15.67[A];
Number of comparisons: 16.
Component: Fixed transport;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 1.58[B];
Mean price comparisons: Price-cap 2006 less initial price: (6.06)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 7.64[A];
Number of comparisons: 216.
Component: Fixed transport;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 4.16[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.16)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 8.32[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 3.60[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.11)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 7.71[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 4.11[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.27)[B];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 8.37[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 4.78[A];
Mean price comparisons: Price-cap 2006 less initial price: (4.09)[B];
Mean price comparisons: Price-flex 2006 less price- cap 2006: 8.87[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 0.39;
Mean price comparisons: Price-cap 2006 less initial price: (6.79)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 7.18[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 0.07;
Mean price comparisons: Price-cap 2006 less initial price: (6.11)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 6.19[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 0.39;
Mean price comparisons: Price-cap 2006 less initial price: (6.73)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 7.12[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 0.70;
Mean price comparisons: Price-cap 2006 less initial price: (7.52)[A];
Mean price comparisons: Price-flex 2006 less price- cap 2006: 8.22[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 0.19;
Mean price comparisons: Price-cap 2006 less initial price: (7.24)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 7.44[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: (0.10);
Mean price comparisons: Price-cap 2006 less initial price: (6.28)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 6.18[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 0.20;
Mean price comparisons: Price-cap 2006 less initial price: (6.77)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 6.96[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 0.49;
Mean price comparisons: Price-cap 2006 less initial price: (8.68)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 9.17[A];
Number of comparisons: 24.
Component: Variable transport;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 0.81[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.29)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 3.10[A];
Number of comparisons: 216.
Component: Variable transport;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 1.37[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.00)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 3.36[A];
Number of comparisons: 72.
Component: Variable transport;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 1.28[A];
Mean price comparisons: Price-cap 2006 less initial price: (1.91)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 3.18[A];
Number of comparisons: 24.
Component: Variable transport;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 1.38[A];
Mean price comparisons: Price-cap 2006 less initial price: (1.95)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 3.33[A];
Number of comparisons: 24.
Component: Variable transport;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 1.44[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.13)[A];
Mean price comparisons: Price-flex 2006 less price- cap 2006: 3.56[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 0.65[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.50)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 3.14[A];
Number of comparisons: 72.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 0.51[C];
Mean price comparisons: Price-cap 2006 less initial price: (2.39)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 2.90[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: :0.63[B];
Mean price comparisons: Price-cap 2006 less initial price: (2.51)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 3.14[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 0.80[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.59)[A];
Mean price comparisons: Price-flex 2006 less price- cap 2006: 3.39[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 0.43[A];
Mean price comparisons: Price-cap 2006 less initial price: (2.37)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 2.80[A];
Number of comparisons: 72.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 0.40;
Mean price comparisons: Price-cap 2006 less initial price: (2.22)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 2.63[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 0.45[C];
Mean price comparisons: Price-cap 2006 less initial price: (2.39)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 2.84[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 0.44;
Mean price comparisons: Price-cap 2006 less initial price: (2.50)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 2.94[A];
Number of comparisons: 24.
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.
[End of table]
Table 12: Summary Statistics of List Price Comparisons for all DS-3
Combinations in Nominal Dollars:
Component: Channel terminations;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: $98.12[A];
Mean price comparisons: Price-cap 2006 less initial price:
$(113.95)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006:
$212.08[A];
Number of comparisons: 144.
Component: Channel terminations;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 137.37[A];
Mean price comparisons: Price- cap 2006 less initial price:
(118.78)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 256.14[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 127.88[B];
Mean price comparisons: Price-cap 2006 less initial price: (112.81)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 240.69[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 137.37[B];
Mean price comparisons: Price-cap 2006 less initial price: (121.90)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 259.27[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 146.87[B];
Mean price comparisons: Price-cap 2006 less initial price: (121.61)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 268.48[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 90.59[A];
Mean price comparisons: Price-cap 2006 less initial price: (115.75)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 206.34[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 82.17[B];
Mean price comparisons: Price-cap 2006 less initial price: (114.37)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 196.54[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 90.07[B];
Mean price comparisons: Price-cap 2006 less initial price: (113.81)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006:
203.88[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 99.54[B];
Mean price comparisons: Price-cap 2006 less initial price: (119.07)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 218.61[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 66.41[A];
Mean price comparisons: Price-cap 2006 less initial price: (107.34)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 173.75[A];
Number of comparisons: 48.
Component: Channel terminations;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 57.08[C];
Mean price comparisons: Price-cap 2006 less initial price: (105.19)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 162.28[A];
Number of comparisons: 16.
Component: Channel terminations;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 66.92[B];
Mean price comparisons: Price-cap 2006 less initial price: (106.71)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006:
173.63[A];
Number of comparisons: 16.
All:
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 75.23[B];
Mean price comparisons: Price-cap 2006 less initial price: (110.11)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 185.33[A];
Number of comparisons: 16.
Component: Fixed transport;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 10.50[B];
Mean price comparisons: Price-cap 2006 less initial price: (60.34)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 70.84[A];
Number of comparisons: 216.
Component: Fixed transport;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 21.95[B];
Mean price comparisons: Price- cap 2006 less initial price: (52.55)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 74.50[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 21.72;
Mean price comparisons: Price-cap 2006 less initial price: (52.32)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 74.03[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 21.96;
Mean price comparisons: Price-cap 2006 less initial price: (49.53)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 71.49[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 22.17;
Mean price comparisons: Price-cap 2006 less initial price: (55.81)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 77.98[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 3.46;
Mean price comparisons: Price-cap 2006 less initial price: (66.64)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 70.09[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 3.12;
Mean price comparisons: Price-cap 2006 less initial price: (66.19)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 69.31[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 2.98;
Mean price comparisons: Price-cap 2006 less initial price: (65.49)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 68.47[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 4.28;
Mean price comparisons: Price-cap 2006 less initial price: (68.23)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 72.50[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 6.09;
Mean price comparisons: Price-cap 2006 less initial price: (61.83)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 67.92[A];
Number of comparisons: 72.
Component: Fixed transport;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 5.78;
Mean price comparisons: Price-cap 2006 less initial price: (60.68)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 66.47[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 5.65;
Mean price comparisons: Price-cap 2006 less initial price: (60.61)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 66.25[A];
Number of comparisons: 24.
Component: Fixed transport;
Term: 5-yr;
Zone: Variable transport: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: Variable
transport: 6.86;
Mean price comparisons: Price-cap 2006 less initial price: Variable
transport: (64.20)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: Variable
transport: 71.06[A];
Number of comparisons: Variable transport: 24.
Component: Variable transport;
Term: All;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 2.64[A];
Mean price comparisons: Price-cap 2006 less initial price: (12.57)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 15.21[A];
Number of comparisons: 216.
Component: Variable transport;
Term: Monthly;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 3.84[A];
Mean price comparisons: Price-cap 2006 less initial price: (13.46)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 17.29[A];
Number of comparisons: 72.
Component: Variable transport;
Term: Monthly;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 3.51[C];
Mean price comparisons: Price-cap 2006 less initial price: (11.83)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 15.34[A];
Number of comparisons: 24.
Component: Variable transport;
Term: Monthly;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 4.04[C];
Mean price comparisons: Price-cap 2006 less initial price: (13.11)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 17.15[A];
Number of comparisons: 24.
Component: Variable transport;
Term: Monthly;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 3.97[C];
Mean price comparisons: Price-cap 2006 less initial price: (15.43)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 19.39[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 2.18[C];
Mean price comparisons: Price-cap 2006 less initial price: (14.01)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 16.19[A];
Number of comparisons: 72.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 2.05;
Mean price comparisons: Price-cap 2006 less initial price: (12.30)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 14.35[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 2.01;
Mean price comparisons: Price-cap 2006 less initial price: (13.78)[A];
Mean price comparisons: Price- flex 2006 less price-cap 2006: 15.79[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 3-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 2.48;
Mean price comparisons: Price-cap 2006 less initial price: (15.96)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 18.44[A];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: All;
Mean price comparisons: Price-flex 2006 less initial price: 1.90;
Mean price comparisons: Price-cap 2006 less initial price: (10.24)[A];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 12.15[A];
Number of comparisons: 72.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 1;
Mean price comparisons: Price-flex 2006 less initial price: 1.81;
Mean price comparisons: Price-cap 2006 less initial price: (8.81)[B];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 10.62[B];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 2;
Mean price comparisons: Price-flex 2006 less initial price: 1.76;
Mean price comparisons: Price-cap 2006 less initial price: (10.12)[B];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 11.88[B];
Number of comparisons: 24.
Component: Variable transport;
Term: 5-yr;
Zone: Zone 3;
Mean price comparisons: Price-flex 2006 less initial price: 2.14;
Mean price comparisons: Price-cap 2006 less initial price: (11.80)[B];
Mean price comparisons: Price-flex 2006 less price-cap 2006: 13.94[B];
Number of comparisons: 24.
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.
[End of table]
[End of section]
Appendix III: Comments from the Federal Communications Commission:
Federal Communications Commission:
Washington, D.C. 20554:
November 13, 2006:
Via Facsimile:
Mr. Mark L. Goldstein, Director:
Physical Infrastructure Issues:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Goldstein,
Thank you for the opportunity to review and comment on the Government
Accountability Office's (GAO) Draft Report Telecommunications, FCC
Needs to Improve Its Ability to Monitor and Determine the Extent of
Competition in Dedicated Access Services (GAO Draft Report). This
letter provides the Federal Communications Commission's (FCC) written
response to the GAO conclusions and recommendations contained in the
GAO Draft Report.
The GAO Draft Report, taken as a whole, appears to imply the need for a
return to price control policies that the Commission abandoned in 1999
during the previous Administration.[Footnote 49] Since 1996, the
Commission has followed the direction found in the Telecommunications
Act of 1996 to foster policies and rules that "promote competition and
reduce regulation in order to secure lower prices and higher quality
services for American telecommunications consumers and encourage the
rapid deployment of new telecommunications technologies." In 1999, the
Commission specifically recognized the significant costs associated
with direct price regulation (including regulation of wholesale prices)
of special access services. The Commission recognized that special
access price regulation "imposes costs on carriers and the
public."[Footnote 50] Moreover, in granting pricing flexibility for
special access services to price-cap incumbent LECs, the Commission
explicitly found that the cost of further delaying regulatory relief
was greater than the cost of granting relief prematurely. The
Commission determined that "the public interest is better served by
permitting market forces to govern the rates for the access services at
this point."[Footnote 51]
In that order, the Commission explained:
"[W]e will not require incumbent LECs to demonstrate that they no
longer possess market power in the provision of any access services to
receive pricing flexibility. [R]egulation imposes costs on carriers and
the public, and the cost of delaying regulatory relief outweigh any
costs associated with granting that relief before competitive
alternatives have developed to the point that the incumbent lacks
market power."[Footnote 52]
Thus, the Commission determined that, even if competition had not fully
developed, the cost of regulating special access pricing was still
greater than the benefits. So, even if GAO is correct that competitive
alternative facilities have not developed as fast as the Commission had
projected, the cost of price regulation to "carriers and the public" is
still greater than the benefits.
Instead of requiring a disaggregated market power analysis, the
Commission, in the Pricing Flexibility Order, determined to rely on
more easily verifiable investment in collocation as a proxy for
competition in access services. The Commission found that "collocation
by competitors in incumbent LEC wire centers is a reliable indication
of sunk investment by competitors."[Footnote 53] The Commission
rejected any approach to price deregulation that relied on granular
findings of "non-dominance" because "non-dominance showings are neither
administratively simple nor easily verifiable."[Footnote 54] Indeed,
the Commission reasoned that it was simply infeasible to rely on
evidence of market share erosion or supply elasticity because such
"analyses require considerable time and expense, and they generate
considerable controversy that is difficult to resolve."[Footnote 55]
Moreover, the Commission explicitly recognized that Phase II pricing
relief could lead to price increases for customers in some areas, but
rationalized that such a result was still superior to continued price
regulation for two reasons. First, the Commission recognized that our
special access pricing rules "may have required incumbent LECs to price
access services below cost in certain areas."[Footnote 56] Second, the
Commission found that "[i]f an incumbent LEC charges an unreasonably
high rate for access to an area that lacks a competitive alternative,
that rate will induce competitive entry, and that entry will in turn
drive rates down."[Footnote 57]
In its review of the Commission's decision, the United States Court of
Appeals for the D.C. Circuit (D.C. Circuit) rejected arguments that the
Commission should be required to measure actual competition before
allowing incumbent carriers pricing flexibility. The D.C. Circuit found
the Commission's determination to use collocation as a proxy for
competition to be reasonable."[Footnote 58]
Both the Commission and the courts have determined that price
regulation of incumbents' network facilities imposes costs and creates
significant disincentives --for both incumbent and competitive carriers
--to invest in economically beneficial facilities and innovation. Thus,
such price regulation should be used minimally in areas where sunk
investment indicates that competition is developing.[Footnote 59] The
Commission is committed to continued implementation of policies that
bring the benefits of competition - -more and better services and lower
prices - -to all Americans.
The GAO Draft Report contains factual findings which appear to be based
primarily on two studies.[Footnote 60] Significantly, the FCC was not
provided the data used to perform these studies. Without access to the
data used to perform these studies, the FCC cannot evaluate the
reliability of the GAO studies or assess the validity of the
conclusions drawn therefrom. For example, we do not know what rate
elements the incumbent LECs included in generating their average
revenue data and how that might have affected the estimates.[Footnote
61] It is also not clear how differences in demand from one MSA to
another may have affected the average revenue estimates. Although the
GAO Draft Report states that it attempted to address this problem by
weighting the data, it is not clear how this was accomplished.
Moreover, the GAO Draft Report acknowledges that theirs was an
"imperfect weight."[Footnote 62] Thus, we are unable to assess the
reliability or relevance of these studies.
The GAO Draft Report makes two specific recommendations. The GAO Draft
Report first recommends that the FCC "develop a 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."[Footnote 63]
This recommendation seems administratively impracticable. First, there
is no universally accepted, bright-line definition of "effective
competition." Second, before applying such a definition, it would be
necessary to define the relevant product and geographic markets, which,
as GAO suggests, are likely to be extremely narrow. For example, the
GAO study seems to suggest that at least each individual building and
perhaps each floor of a building needs to be considered a separate
market.[Footnote 64] As the Commission recognized, and as the D.C.
Circuit has agreed, implementing national telecommunications price
deregulation by counting the number of competitive alternatives
available to individual consumers would be administratively
infeasible.[Footnote 65] Recognizing these difficulties as well as the
need to adopt an administratively feasible methodology, the Commission,
in the Pricing Flexibility Order, chose to develop triggers that would
apply to MSAs. The Commission reasoned that "defining geographic areas
smaller than MSAs would force incumbents to file additional pricing
flexibility petitions, and, although these petitions might produce a
more fine-tuned picture of competitive conditions, the record does not
suggest that this level of detail justifies the increased expenses and
administrative burdens associated with these proposals."[Footnote 66]
Finally, the Commission recognized that it would "not delay .
regulatory relief until access customers have a competitive alternative
for access to every end user."[Footnote 67]
In affirming this order, the D.C. Circuit found that the choice of MSAs
for pricing flexibility was reasonable because "the Commission
considered alternatives to MSA-wide relief and determined that, on
balance, these alternatives would be less beneficial to consumers and
regulated entities."[Footnote 68] Similarly, in considering and
rejecting a building-by-building approach to its impairment analysis,
the Commission concluded:
[A] building specific impairment analysis would be impracticable and
unadministrable. As noted above, it would be exceedingly difficult for
us to conduct . nationwide, fact-intensive, building specific inquiries
. The record suggests that there are at least 700,000 commercial
buildings, and perhaps as many as 3 million buildings, for which
impairment would have to be evaluated. Such case-by-case evaluation
would be impracticable even if the relevant evidence were entirely
objective and readily forthcoming. Here, however, the difficulty would
be magnified by carriers' disincentives to provide relevant data that
is in their possession and by the subjectivity inherent in the
interpretation of that data.[Footnote 69]
Thus, we question whether the recommendation to measure effective
competition on a granular basis is consistent with the deregulatory
goals of the 1996 Act and court orders sustaining the Commission's
implementation of the Act.
The GAO Draft Report's second recommendation is that we consider
collecting additional data and developing additional measures to
monitor special access competition. We note that the Commission
continues to monitor the extent to which markets are open to
competitive entry and has requested extremely detailed information
about the special access market in the Special Access NPRM.[Footnote
70] For example, the Commission has requested detailed special access
cost information, expense matrix data, cost studies, and other
information on special access rates that would allow the Commission to
further evaluate pricing behavior.[Footnote 71] The Commission takes
seriously its obligation to foster competition in telecommunications
markets and will use all available data to fulfill its obligations.
We appreciate the opportunity to review and comment on the GAO Draft
Report. If we can assist in any further way in the completion of this
report, please let me know.
Sincerely,
Signed by:
Anthony Dale:
Managing Director:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
JayEtta Hecker (202) 512-2834 or heckerj@gao.gov:
Staff Acknowledgments:
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.
FOOTNOTES
[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.
[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.
[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.
[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.
[10] Access 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).
[11] Price-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 Sarasota-Bradenton, Florida.
[12] Special Access Rates for Price Cap Local Exchange Carriers, WC
Docket No. 05-25, Order and Notice of Proposed Rulemaking, 20 FCC Rcd
1994 (2005).
[13] Because 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.
[14] At 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.
[15] Memorandum 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).
[16] A network element is defined as "a facility or equipment used in
the provision of a telecommunication service." 47 U.S.C. § 153(29).
[17] Congress 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).
[18] Covad Communications Company v. FCC, 450 F.3d 528 (D.C. Cir.
2006).
[19] Unbundled 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).
[20] Competing 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.
[21] The 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.
[22] Telcordia and COMMON LANGUAGE are registered trademarks and CLCI,
CLEI, CLFI, CLLI, and NC/NCI are trademarks of Telcordia Technologies,
Inc.
[23] The 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.
[24] 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.
[25] 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.
[26] FCC 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.
[27] The 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."
[28] Pricing Flexibility Order, 80.
[29] WiMAX 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."
[30] These 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.
[31] Because 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.
[32] The 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).
[33] Dedicated 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.
[34] 47 U.S.C. § 208.
[35] These 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.
[36] The 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.
[37] A 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.
[38] Federal Communications Commission, Strategic Plan 2006-2011
(2005), 8.
[39] Special Access Rates for Price Cap Local Exchange Carriers, WC
Docket No. 05-25, Order and Notice of Proposed Rulemaking, 20 FCC Rcd
1994 (2005).
[40] See footnote 20.
[41] Generally, 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.
[42] Pub. L. No. 103-62.
[43] GAO, 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).
[44] Worldcom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001).
[45] Worldcom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001).
[46] 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.
[47] 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.
[48] Pub. L. No. 103-62.
[49] In the GAO Draft Report, the GAO concludes that "facilities- based
competition for [high capacity] dedicated access services to individual
buildings does not appear to be widespread" and that "prices and
average revenues are higher in phase II [metropolitan statistical areas
(MSAs)], where competition is theoretically more vigorous, than they
are in phase I MSAs, where prices are still constrained by the price
cap." GAO Draft Report at 9-10. The GAO Draft Report finds further that
the GAO's analysis of these "pricing trends also suggests that the
FCC's predictive judgment [in the Pricing Flexibility Order] may not
have been borne out." Id. at 36.
[50] Access Charge Refonn, CC Docket Nos. 96-262, 94-1, 98-157, CCB/CPD
File No. 98-63, Fifth Report and Order and Further Notice of Proposed
Rulemaking, 14 FCC Rcd 14221, 14271-72, para. 90 (1999) (Pricing
Flexibility Order), ay d, WorldCom, Inc. v. FCC, 238 F.3d 449 (D.C.
Cir. 2001).
[51] Id. at 14301, para. 155.
[52] Id.
[53] 1d. at 14263-65, paras. 79-81.
[54] Id. at 14271-72, para. 90.
[55] Id.
[56] Id. at 14301-02, para. 155.
[57] Id. at 14297-98, para. 144.
[58] WorldCom, Inc. v. FCC, 238 F.3d at 459.
[59] See, e.g., Review of the Section 251 Unbundling Obligations of
Incumbent Local Exchange Carriers, Implementation of the Local
Competition Provisions of the Telecommunications Act of 1996,
Deployment of Wireline Services Offering Advanced Telecommunications
Capability, CC Docket Nos. 96-98, 98-147, 01-338, Report and Order on
Remand and Further Notice of Proposed Rulemaking, 18 FCC Rcd 16978,
17150, para. 290 (2003) (Triennial Review Order) ("Section 706 requires
the Commission to encourage deployment of advanced telecommunications
services by using, among other things, `methods that remove barriers to
infrastructure investment."' (citation omitted)), aff' d in part,
remanded in part, vacated in part, United States Telecom Ass'n v. FCC,
359 F.3d 554 (D.C. Cir. 2004) (USTA II), cert. denied sub nom. Nat'l
Ass'n Regulatory Util. Comm'rs v. United States Telecom Ass'n, 125
S.Ct. 313, 316, 345 (2004); see also Petition for Forbearance of the
Verizon Telephone Companies Pursuant to 47 U.S.C. § 160(c); SBC
Communications Inc.'s Petition for Forbearance Under 47 U.S.C. §
160(c); Qwest Communications International Inc. Petition for
Forbearance Under 47 U.S.C. § 160(c); BellSouth Telecommunications,
Inc. Petition for Forbearance Under 47 U.S.C. § 160(c), WC Docket Nos.
01-338, 03-235, 03-260, 04-48, Memorandum Opinion and Order, 19 FCC Rcd
21496, 21505, para. 21 (2004) (Section 271 Broadband Forbearance
Order), aff' d, Earthlink v. FCC, 462 F.3d 1 (D.C. Cir. 2006).
[60] First, using data from GeoResults providing building level
estimates of demand for dedicated access services and from Telcordia
and GeoResults concerning the extent to which competitive alternatives
exist in particular buildings, GAO estimated the extent of facilities-
based competition for end-user channel terminations in sixteen MSAs.
Second, the GAO conducted an average revenue study to compare the rates
paid for dedicated access services in MSAs where incumbent LECs have
received pricing flexibility.
[61] It is not clear from the report whether non-recurring charges,
early termination penalties, or other charges were included in the
data.
[62] GAO Draft Report at 44.
[63] Id. at 37.
[64] Id. at 17.
[65] See Pricing Flexibility Order, 14 FCC Rcd at 14260, paras. 72- 74.
[66] Id.
[67]Id. at 14298, para. 144.
[68] See WorldCom, Inc. v. FCC, 238 F.3d at 460-61.
[69] Unbundled Access to Network Elements, Review of the Section 251
Unbundling Obligations of Incumbent Local Exchange Carriers, WC Docket
No. 04-313 & CC Docket No. 01-338, Order on Remand, 20 FCC Rcd 2533,
2620, para. 157 (2004) (Triennial Review Remand Order) aff' d, Covad
Communications v. FCC, 450 F.3d 528.
[70] See Special Access Rates for Price Cap Local Exchange Carriers, WC
Docket No. 05-25, RM-10593, Order and Notice of Proposed Rulemaking, 20
FCC Rcd 1994 (2005) (Special Access NPRM).
[71] Id. at 2006, 2008, 2015, 2016-17, 2019, paras. 29, 36, 62, 65, 72.
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