A Federal Communications Commission plan to eliminate price caps in much of the business broadband market uses a new test for determining whether customers benefit from competition. Even if a business that needs broadband has only one choice today, the FCC would consider the local market competitive if there's a second broadband provider within a half mile.

The proposal from FCC Chairman Ajit Pai will hurt small business customers of ISPs, according to a federal office that advocates on behalf of small businesses. But at least for now, the FCC plans to move ahead with a final vote at its meeting on April 20.

You may be thinking, "There are no price caps for broadband in the US!" That's true for the home Internet service market, but the FCC imposes price regulation on certain types of business broadband. So-called Business Data Services (BDS) provided by traditional phone companies like AT&T and Verizon use dedicated links to deliver "secure, reliable, and low-delay transmission service for moving voice, data, and video traffic" at speeds of up to 45Mbps upstream and downstream, the FCC's deregulation proposal says.

Last year, then-FCC Chairman Tom Wheeler proposed lowering price caps on these services by 11 percent over three years in order to "account for over a decade of efficiency gains."

"Price caps are designed to replicate the effects of a competitive market by setting a maximum price for services, which is continually adjusted downward to account for efficiency gains, offset by inflation," the Wheeler proposal said.

Pai threw out this proposal after being appointed chair by President Donald Trump. Instead, Pai put forth a proposal to "end... tariffing and other legacy pricing regulations" in "areas with sufficient competition." Pai argues that price regulation inhibits network investment, but his plan would maintain price caps in areas without sufficient competition.

No list of which counties are competitive

Pai's definition of "sufficient competition" has drawn fire. The plan would treat an entire county as competitive "if 50 percent of the locations with BDS demand in that county are within a half mile of a location served by a competitive provider." A county would also be considered competitive if 75 percent of Census blocks in the county have a cable provider.

Pai has not released a list of which counties have been deemed competitive, FCC Democratic Commissioner Mignon Clyburn said. The FCC has this information but will only make it public after the order is voted on, she said.

Clyburn said:

Chairman Pai has been a champion of transparency. It is puzzling, then, why he will release the text of the item, but omit a key appendix listing which counties are deemed competitive, until the order is released... The FCC should release this list immediately. This is the only way the public can truly evaluate the practical effects of the FCC's proposed actions.

In the home Internet market, ISPs often demand tens of thousands of dollars up front in exchange for extending their networks to customers' homes. The business Internet market is different, though Pai and his critics disagree on the practical impact of having a provider within a half mile.

"The record demonstrates that most business data services providers are willing and able to profitably invest and deploy facilities within a half mile of existing competitive facilities, and often have the ability to build out after winning a customer’s bid for business, depending upon the scale of investment required to reach the customer," Pai's proposal said. Therefore, "the presence of two current competitors or providers with their own fiber nodes within a half mile... are sufficient to provide competitive pressure to adequately discipline prices."

Businesses could pay “monopoly rents”

Pai's argument was disputed by the US Small Business Administration's Office of Advocacy in a filing with the FCC yesterday. The Office of Advocacy is an independent office within the US government, so its views do not necessarily reflect the opinions of the Small Business Administration or the White House.

Public comments on the FCC proposal include affidavits from smaller telecoms stating that building last-mile facilities to compete against the larger players "is not economically feasible," the advocacy office's filing said.

"Small businesses are the primary purchasers of these lower capacity services, and Advocacy is concerned that they may not have the same affordable choices for service that they currently have if competitors are unable to lease access from ILECs [incumbent local exchange carriers] when the business case for building new facilities doesn't exist," the filing said. Competitors in this context are known as CLECs (competitive local exchange carriers).

The advocacy office also said the presence of cable providers in 75 percent of Census blocks is not suitable proof of competition. Having a nearby cable provider doesn't necessarily guarantee access to dedicated links, the office said.

"As the FCC has noted, cable 'best efforts' service is not the same product as BDS, and cable companies do not represent a significant segment of the BDS market at this time," the small business advocacy office said. "It is conceivable that if prices for BDS increase significantly, a small business would choose to downgrade their service to best-efforts service to reduce costs. It is also conceivable that a business relying on BDS will pay monopoly rents in the absence of a real substitute or price regulation. Either result is problematic for small businesses. Small businesses want better broadband service at lower prices—they shouldn't have to accept a lower level of service to reduce costs, or pay more for the same services."

The Wheeler FCC initially proposed price controls for cable-based business data services but later concluded that this segment of the market is competitive enough that rate regulation wasn't needed.

Competition could suffer

Small ISPs that buy wholesale access from incumbents in order to provide competition without building their own facilities may also lose out in Pai's plan.

Today, ILECs often charge higher rates for wholesale service than they do for retail service. That's according to Phillip Berenbroick, senior policy counsel of consumer advocacy group Public Knowledge, who spoke to Ars. "That pricing is a pretty clear indication of market power, and the Wheeler FCC was poised to say that wholesale rates can't exceed retail rates," he said.

Under interim rules imposed in 2015, incumbent phone companies that discontinue legacy TDM (time-division multiplex) services in order to upgrade to Ethernet must continue providing wholesale access to competitors at similar rates. The new FCC plan "removes that requirement, meaning that once ILECs upgrade, CLECs (and their customers) may be out of luck if the CLEC hasn't built its own facilities," Berenbroick said.