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The reality for BDS is increased prices

The Federal Communications Commission, based on a review of its April 2016 order on tariffs and pricing methodology for business data services, doesn’t pay attention to pending decisions of its sister agency, the Federal Reserve. This Friday, Federal Reserve chairman, Janet Yellen, is expected to give a speech in Jackson Hole, Wyoming that may provide some signals on what the U.S. central bank may decide to do regarding its federal funds rate. The federal funds rate is the overnight rate banks assess each other when lending their reserves to one another.

The Federal Reserve has set a target federal funds rate between .25% and .50% and if there is to be a rate increase this year, it is expected to occur after the November general elections. ┬áRaising rates, the theory goes, is a part of a central bank’s strategy for moderating the growth of a heated economy. Raising overnight rates incentivizes banks to keep their reserves in the Fed’s vaults thus limiting the supply of money. Following the laws of supply and demand, money gets more expensive because banks are lending less to the public.

What does this have to do with telecommunications services, particularly business data services? As a capital intensive industry, telecommunications providers will depend on the bond markets to finance the construction and deployment of facilities necessary for delivering future services. For example, Verizon, in its February 2016 10-K filing with the U.S. Securities and Exchange Commission, argues that adverse changes in the credit markets could increase its borrowing costs and access to financing. The company, as of December 2015, has $110 billion in debt. Verizon argues that an inability to retire debt could make it more difficult to access the additional financing necessary for obtaining working capital or making additional capital expenditures.

Placing restrictions on a telecommunications service provider’s ability to raise prices signals the markets that there is increased risk to the rate of return investors expect from selling money to telecommunications providers. ┬áPricing restrictions by the Commission combined with a Federal Reserve decision to raise the fed funds rate could work to reduce the supply of business data services, an outcome that runs counter to the Commission’s stated public policy of increasing choice for consumers of business data services.

The Commission should take the external economic environment into account, an environment heavily influenced by the Federal Reserve, when it considers going forward on regulating business data services prices.

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