A Federal Communications Commission decision to eliminate price caps imposed on some business broadband providers should be struck down, advocacy groups told federal judges last week. The FCC failed to justify its claim that a market can be competitive even when there is only one Internet provider, the groups said.

Led by Chairman Ajit Pai, the FCC's Republican majority voted in April of this year to eliminate price caps in a county if 50 percent of potential customers "are within a half mile of a location served by a competitive provider." That means business customers with just one choice are often considered to be located in a competitive market and thus no longer benefit from price controls. The decision affects Business Data Services (BDS), a dedicated, point-to-point broadband link that is delivered over copper-based TDM networks by incumbent phone companies like AT&T, Verizon, and CenturyLink.

But the FCC's claim that "potential competition" can rein in prices even in the absence of competition doesn't stand up to legal scrutiny, critics of the order say.

"In 2016, after more than 10 years of examining the highly concentrated Business Data Services market, the FCC was poised to rein in anti-competitive pricing in the BDS market to provide enterprise customers, government agencies, schools, libraries, and hospitals with much-needed relief from monopoly rates," Phillip Berenbroick, senior policy counsel at consumer advocacy group Public Knowledge said.

But after Republicans gained the FCC majority in 2017, "the commission illegally reversed course without proper notice and further deregulated the BDS market, leaving consumers at risk of paying up to $20 billion a year in excess charges from monopolistic pricing," Berenbroick said.

Potential competition

Public Knowledge was joined by the Consumer Federation of America (CFA) and New Networks in an amicus curiae brief that asked the US Court of Appeals for the Eighth Circuit to vacate the FCC's order.

"The Order concludes, contrary to the record and established antitrust analysis, that duopoly markets are sufficiently competitive to discipline market power and prices, and that potential competition can effectively check market power, even by monopoly service providers," the groups wrote.

Fewer than 10 percent of potential customers benefit from price controls under the FCC's new market test, according to Democratic FCC Commissioner Mignon Clyburn.

CFA says its research shows that "half of the $40 billion in annual BDS charges are overcharges that are the result of incumbent... market power."

"Because nearly every enterprise, non-profit, and government institution purchases BDS for essential connectivity, those charges are ultimately passed on and borne by consumers and taxpayers," the advocacy groups' brief said. Mobile phone users would also end up paying higher monthly rates because some wireless carriers purchase BDS to supply bandwidth to their networks, the brief said.

“Feeble” attempt to overcome evidence

The FCC's new competitive market test was "carefully tailored to yield the "desired result" of "unwinding the longstanding price cap regulatory regime," the amicus curiae brief said.

The brief continued:

Under the "Potential Duopoly" test, a market will be considered suitably likely to enjoy the benefits of competitive entry at some undetermined time in the future. The commission freely acknowledges that, as a result of removing regulatory constraints on prices, consumers may suffer for some undetermined period with unjust and unreasonable prices. But the commission rationalizes this abandonment of its core responsibility under the statute—to prevent unjust and unreasonable rates—on the grounds that competition will eventually blossom.

The FCC made a "feeble" attempt to overcome evidence that duopolies are not competitive, the brief said.

"The order cites studies analyzing three-firm and four-firm markets, but [the order] fails to explain how its analysis is relevant to the one-firm and two-firm markets the commission embraces as sufficiently competitive," the brief said. "Curiously," the FCC also "relies on a study involving ready-mix concrete for the proposition that the addition of competitors beyond a second has diminishing returns," the groups wrote.

Despite its decision, the FCC acknowledged limits to the positive effects from "potential" competitors.

"The FCC explicitly states that 'potential duopoly' competition cannot reasonably be expected to constrain price increases in the short term, but only in the 'intermediate term (i.e., several years),'" the brief said.

The FCC also claimed in its order that the "costs of regulation" likely outweigh the extra costs paid by consumers when dominant carriers can "exercise... market power... in the absence of regulation."

The FCC's new market test is thus "apparently meaningless" since the commission argues that deregulation is appropriate regardless of whether a market has competition, the advocacy groups argued.

The groups went on to say:

The order's true purpose is clear—deregulation at all costs, regardless of the facts and the record... If misrepresenting the record and constructing new economic theories is not enough to justify deregulating monopoly and duopoly markets, the commission has also put forth a theory that justifies deregulation regardless of what the record shows.

The FCC's order also argued that 5G wireless services could provide significant competition to BDS in the future but "ignore[d] the important fact that the two leading holders of 5G spectrum are Verizon and AT&T," the dominant BDS providers, the brief said.

Multiple companies sued the FCC

The FCC was sued by purchasers of BDS, such as Sprint and Windstream, who could end up paying higher prices because of the FCC decision.

The FCC was also sued by some providers of BDS, including CenturyLink and a subsidiary of Frontier Communications. CenturyLink and Frontier challenged another part of the order that requires what they call "excessive annual rate reductions" in areas where price caps will continue to be enforced. The price reductions are "intended to reflect productivity gains experienced by the regulated entities over time," but the FCC's required reductions "significantly overstated efficiencies in the provision of rate-regulated BDS offerings and ignored evidence of slower productivity growth among such services relative to others," they argued.

The lawsuits were consolidated into a single case. A motion for a stay of the order pending judicial review was denied, allowing the FCC's changes to take effect on schedule.

The FCC hasn't filed a response to the Public Knowledge brief yet, but the commission defended its decision in a filing in July. The FCC said that it "reasonably considered the presence of nearby competitors" and concluded that BDS providers "are commonly willing to extend their existing network out approximately a half mile... to meet demand." The FCC's order also "reasonably concluded that the presence of two providers imposes competitive discipline," the commission told judges.

But Public Knowledge, CFA, and New Networks argued that the FCC order should be overturned because it "is arbitrary and capricious," departs from the FCC's past precedents without justification, and reached a conclusion that is contradicted by evidence in the BDS docket.