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Special Access“Dispelling the Myths”

Wendy M. Moser

Vice President Public Policy, Qwest

July 14, 2007

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Background of Special Access Reform

• 1991, FCC instituted price cap regulation for the BOCs and GTE, and permitted other LECs to adopt price cap regulation voluntarily with goal of having price cap companies (1) improve efficiency; (2) invest efficiently; and (3) develop and deploy innovative service offerings.

• 1996, Telecom Act set a pro-competitive, de-regulatory national policy.• 1997, FCC adopted a primarily market-based approach to accelerate the development of

competition in all telecommunications markets and to ensure that regulation does not unduly interfere with the operation of the markets as competition develops.

• 1999, FCC provided the rules for implementing the market-based approach and sets the framework for how price cap LECs would receive pricing flexibility.

– Phase I (price caps, volume and term discounts with contracting ability with price cap constrained tariffed rates for services); or

– Phase II (volume and term discounts with contracting ability and no requirement to maintain price cap constrained tariffed rates); or

– None (price cap constrained tariff rate only, with no ability to offer discounts or enter into contracts)

• 2002, Qwest granted Phase I or Phase II pricing flexibility in some of its MSAs. For example, for DS1 and DS3 Loops a.k.a. Chan Terms:

– Phase I (e.g. Denver, Minneapolis, Seattle)

– Phase II (e.g. Phoenix, Portland)

– None (e.g. Wyoming)

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Current Market Conditions

• Competition for the end user business customer is flourishing.– Wireline competition from competitive access providers, including AT&T and

VZ in Qwest’s region

– Cable providers

– Wireless providers

– CLECs

• Competitors either self provision, purchase special access from us, purchase special access from alternative providers, purchase UNEs, or some combination of the above.

• Qwest has responded to growing competition by offering customers substantial promotional, term or volume discounts, i.e., most customers do not purchase special access at Qwest’s month-to-month rates.

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Special Access Rates are Decreasing

• In Qwest's Major Markets (Denver, Minneapolis, Seattle) and others (such as in Tucson AZ, Tacoma WA, Fort Collins CO, Salem OR, and Provo UT), Special Access rates for Qwest’s highest rate offering (its month-to-month rates) have decreased between 2000 and 2007– 15% for DS-1 services– 7% for DS-3 services– The Services that most customers buy have even deeper discounts--Term,

Volume or Both as most customers purchase out of contracts, not the month-to-month tariffs

• Overall, rates for the majority of Special Access have decreased!• It is true that some Special Access month-to-month rates have increased

(such as in Phoenix AZ, Des Moines IA, Colorado Springs CO, Omaha NE, and Salt Lake City UT), but for the majority of these month-to-month rate increases, they have been about the same as the rate of inflation between 2000 and 2007—about 3%.– And in these areas, the services that most customers buy have the deep

discounts available--term, volume or both, such that customers have not seen even this minimal rate increase

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Comparisons to ROR Benchmarks and UNEs Are Useless

• Price cap LECs and special access are not rate of return regulated and have not been since the 1980’s.

• Separations has not been updated or changed making an accurate rate of return calculation impossible.

• Special Access month-to-month rates are usually higher than equivalent UNEs as UNEs are only available for express purposes in express circumstances, offered at the lowest rate that regulators may lawfully mandate.

– The purpose of the Act is not to provide the widest possible unbundling, or to guarantee competitors access to network elements at the lowest price that government may lawfully mandate. Rather, its purpose is to stimulate competition—preferably genuine, facilities-based competition. Where competitors have access to necessary inputs at rates that allow competition, not only to survive, but to flourish, it is hard to see any need for the Commission to impose the costs of mandatory unbundling.” USTA II, 359 F3d at 580.

• Wireless carriers are not eligible to purchase UNEs.– Consistent with USTA II, we deny access to UNEs in cases where the requesting carrier seeks to

provide service exclusively in a market that is sufficiently competitive without the use of unbundling. In particular, we deny access to UNEs for the exclusive provision of mobile wireless services and long distance services. TRRO, FCC 04-290, para. 34.

• The Special Access market is flourishing and the customer demand and supply for high capacity circuits is at an all-time high.

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Next Steps in Special Access

• FCC has released NPRM, asking parties to refresh record in the “Special Access Notice of Proposed Rulemaking”.– FCC 07-123, released July 9, 2007, in WC Docket No. 05-25, RM-

10593

• FCC is requesting parties to comment on all aspects of the issues raised related to special access.

• The FCC is in the best position to evaluate competition in the special access market and the appropriateness of the rates in the special access market.