The Special Access Market Failure

1. The Special Access Market Failure October 1, 2007

2. What is Special Access? Special access circuits are essential inputs (dedicated telecommunications facilities) that all telecommunications carriers, both wireline and wireless providers, use to reach their customers and connect their networks. Cell phones, Internet, Data networks, local service, intra-company networks, ATMs, point of purchase—to name a few, all rely on Special Access. For example, the carrier that serves Georgetown University might use a special access circuit to connect the main campus in Georgetown to the law school on Capitol Hill. Similarly, wireless carriers use special access circuits to connect its cell towers to the its switching office.

3. Special Access Arrangement

4. Special Access: A Brief Regulatory History • 1984-90 – Traditional “rate-of-return” regulation. • 1991 – Incentive Regulation (“price caps”). • 1999 – Pricing “flexibility”, based on FCC predictionthat competition is imminent. • By 2004 – Vast majority of BOCs’ special access is outside of incentive or “price caps” regulation. • 2005/2006 Mega- mergers eliminated the two largest alternative networks to the incumbents – AT&T and MCI

5. How do we know there is a market failure? • Overwhelming Market Share is Increasing • Inflated Prices are Increasing • Anti-Competitive Terms and Conditions are Increasing • As a result, Significant Consumer Harm is Increasing

6. Overwhelming Market Share Is Increasing

7. Overwhelming Market Share: ILECs, already dominant before price flex, increased their market share Wholesale Special Access Market Share 2001 2005 ILEC ILEC Sources: FCC Monitoring Report Table 1.5 and Telecommunications Industry Revenue Table 5. Note: 2005 adjusted to re-classify pre-merger AT&T and MCI estimated in-territory revenue as ILEC

8. Overwhelming Market Share:Nearly 98% of Sprint Nextel’s DS1 connections to cell sites in the Top 50 MSAs are provided by ILECs (primarily AT&T and VZ) 2006 DS1

9. Overwhelming Market Share: ILEC Share of Sprint Nextel DS1 Connections to Office Buildings has Increased

10. Overwhelming Market Share: Alternative Facilities at Cell Sites are Nearly Non-Existent • A February 2007 Sprint Nextel poll of its vendors shows that there are NO alternative facilities at the overwhelming majority of Sprint Nextel cell-sites • 77 alternative vendors polled on fiber availableat over 52,000 Sprint Nextel cell-sites • 16 vendors reported facilities available at about 1% of the cell-sites Cell-Sites

11. Inflated Prices Are Increasing

12. Inflated Prices: Prices AT&T and Verizon Charge for Special Access Greatly Exceed the Economically Efficient Price The 5 Year Term Rate for a DS1 Special Access Circuit is 90%Higher than the Functionally Equivalent Unbundled Network Element Rate DS1 Circuit Price= 2 Channel Terminations and 10 miles of Transport Cost Based Price = 2 DS1 UNE Loops and 10 miles of Transport Comparison using the most urban set of UNE and special access rates Average is simple average of rates in these 9 states.

13. Significant Consumer Harm is Increasing

14. Artificially Inflated Special Access Prices Increase Costs, Reduce Infrastructure Investments and Harm Consumers • Special access represents approximately 33%of the monthly network cost of operating a cell site. • Consumers would benefit from reduced special access costs. • Infrastructure improvements = greater service options and coverage. • Faster deployment of wireless Internet broadband services (i.e., WiMax). • True competition benefits consumers. • Forcing one competitor to finance another competitor (BOC) distorts competition in the marketplace.

15. The Customer POV • Who is “we”? • Enterprise customers • Ad Hoc Telecommunications Users Committee • No carrier members, no carrier money • FCC and the courts – no legislative advocacy, no endorsement of legislative proposals • We support de-regulation of competitive markets • We oppose de-regulation of non-competitive markets

16. The Special Access Problem • Why do enterprise customers care about special access? • It’s how we say “broadband” • It’s what we buy most often • It’s what our networks run on

17. The Special Access Problem So what’s our problem? 1. Competition: There isn’t any. • Cable service? Only in residential neighborhoods. • Satellite/Wireless/BPL? Oh please. • CLECs? They build arteries, they must buy capillaries 2. Regulation: There isn’t any, where it’s needed. • “Pricing flexibility,” not incentive rules (“price caps”) • Predictions, not reality, before the bubble burst

18. What happens when the FCC’s predictions are just wrong?

19. Competition Works: Prices for similar capacity in markets with competition are priced significantly lower DS1 Price = Average Price of 5 Year Term Plan for 2 Channel Terminations and 10 Miles of Transport

20. How big is the problem? RBOC Special Access Rates of Return:2006

21. What the BOCs say • Big customers are sophisticated buyers • So we can talk about opera while we’re paying too much? • We need competition just like the next guy • Prices are going down • Only if you look at revenues instead of prices • Because buses are cheaper than cars, per seat • So let’s talk about prices, not revenues or “VGEs” • There are plenty of competitors • Who are all dependent on special access for the “final mile” • Armis, shmarmis • But the rules have always been different for special access, because it’s… well… special.

22. It’s bigger than you think • Special access + information economy = massive ripple effects • Macro-economic impact of supra-competitive prices • Deadweight loss, decreased consumer and producer surplus • According to an AT&T model • Jobs: 234,000 new jobs lost (1Q07-4Q09) • GDP growth: depressed by $66 billion

23. What we’ve been doing about it • Nag, nag, nag • Performance Standards Rulemaking – Jan ‘02 • Broadband Regulation Rulemaking – Mar ‘02 • Broadband Wireline Internet Access Rulemaking – Jul ‘02 • AT&T Special Access Rulemaking Petition – Dec ‘02 • ILEC Separate Affiliate Rulemaking – Jun ‘03 • AT&T Mandamus Petition before D.C. Circuit – Jun ‘04 • SBC-AT&T/VZ-MCI Merger Proceedings – May ‘05 • Special Access Rulemaking – Jun ‘05 • Verizon Forbearance Petition – Mar ’06

24. THE TIME IS NOW! • The record evidence overwhelminglyfavors action • A broad array of parties (consumers, businesses, AT&T and Verizon competitors) favor action • Now – in 2007 – is the time carriers are building their competitive broadband networks • Now – in 2007 – is the time consumers are ready for competitive alternatives to the ever-consolidating, ever-more-powerful AT&T and Verizon • Now – in 2007 – is the time to ACT

25. AT&T & MCI Used to Agree: • “There is now indisputable proof that ... the Bells ... are abusing their market power with patently unjust and unreasonable rates that impose a multi-billion dollar annual overcharge or tax on American businesses and consumers...." AT&T • "The Bells have used rate deregulation to gouge both their captive special access customers and the general public." AT&T • “The Bells' special access . . . annual returns are simply obscene."AT&T • "The Bells' special access rates are grossly excessive and unlawful and are becoming more so."  AT&T • “The BOCs have garnered exorbitant returns on special access services at the expense of their captive special access customers.” MCI

26. What is the Solution? • The FCC Special Access rulemaking remains pending with a decision expected by October 2007. • The FCC must step in to immediately correct the market failure that has resulted in anti-competitive pricing. • The FCC must also remove the impediments to the development of a competitive access market, including anticompetitive contracting practices used by the Bell Companies.