Telecommunications:

FCC Needs to Improve Its Ability to Monitor and Determine the Extent of Competition in Dedicated Access Services

GAO-07-80: Published: Nov 29, 2006. Publicly Released: Nov 29, 2006.

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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.

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 Metropolitan Statistical Areas (MSA) 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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: 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 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.

    Agency Affected: Federal Communications Commission

    Status: Closed - Implemented

    Comments: In November 2006, we found that FCC's deregulation of special access services - which was granted to incumbent firms based on a proxy measure of competition, namely collocation in an incumbent's wire center - had not resulted in an extensive amount of facilities-based competition at the building level, as was predicted, and that numerous barriers to entry existed, suggesting that facilities-based competition may not be a realistic goal for some segments of the market for special access. Consequently, we recommended that the FCC develop a meaningful and workable definition of effective competition that accounts for the number of effective competitive choices available to customers and to determine what actions are necessary to accelerate competition for special access. On November 5, 2009, FCC issued a request for public comment on an analytical framework necessary to resolve issues in the special access notice of proposed rulemaking. According to the request for comment: "Once the Commission adopts an analytical approach enabling a systematic determination of whether or not the current regulation of special access services is ensuring rates, terms, and conditions that are just and reasonable as required by the Act, we can determine what, if any, specific problems there are with the current regime and formulate specific solutions as necessary." Staff developed alternative analytical frameworks to define competition and requested additional data from incumbents and competitive firms in the special access market in October 2010. Data were received from over 20 companies and FCC has been analyzing such data according to the frameworks they developed. The results of FCC's analysis will give the commission a workable definition of competition that will allow them to better understand the impacts of their deregulatory policies, and what actions are necessary, if any, to ensure that the commission?s regulation of special access services results in just and reasonable rates, terms, and conditions.

    Recommendation: 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 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 Affected: Federal Communications Commission

    Status: Closed - Implemented

    Comments: In November 2006, we found that the data FCC uses to assess competition for special access services had several limitations that prevent the agency from describing the current state of competition. We found that data had not been collected in several years, data was often not specific enough to be useful, data was lacking to describe the provision of services from competitive firms, and that FCC relied on data from economically interested parties that have an incentive to provide incomplete or biased data. We therefore recommended that FCC consider collecting additional data to monitor competition that more accurately represents market developments and individual customer choice. On October 28, 2010, the FCC issued a Public Notice inviting the public to submit data voluntarily to assist the Commission in evaluating special access issues. FCC seeks extensive data from competitive local exchange carriers, cell phone service providers, and incumbent local exchange carriers regarding the location and other aspects of all special access connections owned or leased in 24 major metropolitan areas, including the 16 areas examined in depth in our report. FCC also plans to issue a second public notice seeking additional data on special access connections (e.g. data on prices). According to officials from the Wireline Competition Bureau, FCC has received data from over 20 firms involved in special access markets and is analyzing the data it has received in the context of the analytical frameworks being considered to evaluate special access issues. The results of FCC's analysis will allow it to better understand the impacts of its deregulatory policies, and what actions are necessary, if any, to ensure that the Commission's regulation of special access services results in just and reasonable rates, terms, and conditions.

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