FCC Struggles to Regulate Interconnection In the Age of Internet Protocol Calling

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By Paul Barbagallo  

One of the biggest questions facing the next chairman of the Federal Communications Commission is this: What constitutes regulated “telecommunications” in the age of Internet calling?

For the past five years, telecom carriers throughout the United States have been slowly scrapping billions of dollars of network equipment that is still based on an old technology called time division multiplexing, or T.D.M., and replacing it with newer, internet protocol technology--known generally as I.P.--which has proven itself a far cheaper and more efficient means of moving digital information of all kinds, especially phone traffic.

This mass migration is nearing the point where the FCC must decide whether or not to grandfather any “telecommunications” regulations, notably the obligation imposed on carriers to interconnect with each other's networks. The issue has already touched off a fierce battle within tight industry factions, pitting large companies against small companies and leaving the incoming FCC chairman, Tom Wheeler, with no easy path forward.

“It would be a knee-jerk reaction for the FCC to take the old interconnection rules and apply them to the incumbent local exchange carrier [ILEC] in the I.P. world and no one else,” Robert Quinn, AT&T Inc.’s senior vice president for federal regulatory and chief privacy officer, told Bloomberg BNA in an interview.

A Problem of Asymmetrical Regulation

In Quinn's view, the market for real-time, two-way voice communications services in the United States is and has been robustly competitive, with nearly every market player--AT&T included--now having integrated Internet-based technology at points along their networks so they can route calls over the web. At the same time, FCC regulations remain neatly divided: different rules govern telecommunications, cable, wireless, and voice-over-internet protocol, or VoIP, services.

For AT&T, as an ILEC-descendant of regional Bell operating companies created by the breakup of the original American Telephone and Telegraph Company in 1984, the carrier still must provide a quick dial tone, a sure connection, and resiliency during storms and power outages. The company also must offer service to every residence in its territory. Comcast Corp., Vonage Holdings Corp., and Skype Communications, as VoIP providers, bear none of these social responsibilities.

Perhaps most critically, under section 251(a)(1) of the Communications Act, as amended by the Telecommunications Act of 1996, AT&T and all “telecommunications carriers” must “interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers.” Section 251(c)(1) requires AT&T to “negotiate in good faith,” and section 251(a)(2) authorizes the state utility commissions to mediate contract disputes, if necessary.

But as AT&T sees it, once every telecommunications carrier revamps its network to deliver all phone calls in I.P., these provisions should be null in void. To AT&T, VoIP is not the same as a regulated telecommunications service, but rather a loosely regulated “information” service, like broadband internet service. The other big ILECs, such as Verizon Communications Inc. and CenturyLink Inc., agree.

And history may be on their side. Since the early 2000s, the FCC has taken pains to keep VoIP in a separate regulatory framework, while not saying one way or the other what VoIP is--an “information” or “telecommunications” service.

At first, the agency merely attempted to demarcate the different types of VoIP. The agency reasoned that the VoIP services offered by Vonage and Comcast are “interconnected VoIP” services because they rely on a subscriber's broadband connection and an FCC-regulated telecom carrier partner or affiliate--such as a competitive local exchange carrier--to carry the phone traffic to the public-switched telephone network (PSTN). In contrast, the FCC explained, “peer-to-peer VoIP” service offered by Skype does not connect to the phone network at all; the calls are between the subscribers' computers. Hence, the two classes of VoIP services should be treated separately.

Then, in 2005 and 2006, the agency voted to require all interconnected VoIP providers to offer 911 services and also to contribute a percentage of their long-distance revenues to the Universal Service Fund.

And yet even while taking these actions, the FCC still balked at classifying VoIP.

“The largest VoIP provider in the world, Skype, has a quarter of a billion subscribers,” noted AT&T's Quinn. “If the FCC were to regulate I.P. interconnection, you would have a world where Vonage is subjected to [Communications Act section 251 and 252] rules and Skype is subjected to no rules. How does that make sense?”

Is the Act 'Technology Neutral’?

Not surprisingly, though, competitors of AT&T have begun lobbying the commission to regulate I.P.-to-I.P. interconnection in much the same way as T.D.M.-to-T.D.M. interconnection.

“This is an issue of market power,” Thomas Cohen, a partner at Kelley Drye & Warren LLP who represents XO Communications Inc. and the American Cable Association on the issue, told Bloomberg BNA in an interview. “ILECs may not be the only providers in most markets, but they still are dominant because of the facilities they control and the large number of customers they serve, including through the wireless affiliates of the largest ILECs. Consequently, they can exert leverage to the detriment of competition and still need to be required to interconnect on reasonable terms if a competitor's customers are to talk to an ILEC's customers.”

Meanwhile, from a technical point of view, some market players have suggested that if a call still originates and terminates over local telephone networks, it makes no difference whether the call is based in I.P. or T.D.M.

“The Communications Act is technology neutral,” said Cathy Sloan, vice president of government relations for the Computer and Communications Industry Association, a trade group backed by both tech giants like Google Inc. and Microsoft Inc. and traditional wireless and telecommunications carriers including Sprint Nextel Corp., T-Mobile USA Inc., and XO Communications Inc.

“The act doesn't talk about 'voice,’” Sloan told Bloomberg BNA in an interview. “It doesn't talk about T.D.M. or I.P. It talks about the interconnection of telecommunications carriers.”

To the original architects of the ’96 Telecom Act, the ability of carriers to connect with the PSTN--to interconnect with the ILEC, which in most states is either AT&T, Verizon, or CenturyLink--was crucial to ensuring that customers of one company could seamlessly communicate with customers of another. Otherwise, competition would be stifled and universal service would be unachievable.

“That process that has been established since 1996 works because the interconnection agreements are public and open to other carriers opting in,” Jerry James, CEO of COMPTEL, an industry trade association that represents competitive local exchange carriers, told Bloomberg BNA in an interview. “Because they're public, they're nondiscriminatory. And that's essential when you're negotiating with a party that has a much larger customer base and market power.”

But the ILECs--whose market share has eroded as consumers continue to drop landlines in favor of competing options like wireless, cable, Vonage, and Skype--want I.P.-to-I.P. interconnection agreements to be free from government intervention, negotiated more like Internet peering deals.

Some within the industry have grudgingly accepted this as an inevitability, but still worry about whether such deals will get done at all.

“We're fine with commercial agreements, but right now, the ILECs have no incentive to come to the table and negotiate with us,” Lisa Youngers, vice president and assistant general counsel for federal affairs at XO, a telecommunications company based in Herndon, Va., told Bloomberg BNA in an interview. “We need that regulatory backstop [of section 251 and 252] to bring the incumbents to the table.”

In fact, to date, not one ILEC and CLEC have concluded an I.P.-to-I.P. interconnection agreement.

According to one industry source, who spoke to Bloomberg BNA on the condition of anonymity, representatives from an unnamed ILEC agreed to speak recently to a CLEC about a potential deal, but “did not want to write anything down.”

The sticking point in these negotiations, the source said, was how to guarantee the quality of service of Internet-based calls. In the old T.D.M. world, it was standard for the CLEC to ask for and be granted assurances from the ILEC that their calls simply go through with a certain level of quality. For Internet calling, however, those promises may be harder to keep, according to Harold Feld, senior vice president at Public Knowledge, a nonprofit company that focuses on information policy.

“We have to start by acknowledging that VoIP [service] using phone numbers is different from VoIP services that don't use phone numbers--and all other Internet traffic--because it's so latency-sensitive,” Feld told BNA in an interview.

“Internet traffic was designed from the beginning to flow in a 'best efforts' universe,” he added. “That is the problem with comparing Internet traffic and traditional voice traffic. They are such radically different things.”

One difference is the number of interconnection points. According to technical experts, the transition of the nation's telephone networks to I.P. will allow some companies to maintain as few as two interconnection points across the United States. As a point of comparison, under FCC rules, ILECs must interconnect with any rival upon request at any Local Access and Transport Area in the country. Today, there are nearly 200. In California alone, there are 12.

That means smaller companies that serve only a part of a state or a rural area would have to transport their traffic much farther distances, at a much higher cost.

“That's going to be unsustainable if there aren't clear rules to govern where the points of interconnection are and how and where the costs are borne,” Michael Romano, senior vice president of policy for the National Telecommunications Cooperative Association, a group that represents rural providers, told Bloomberg BNA in an interview. “It calls into question whether we can have universal service or not, because you run the risk of severing off certain areas of the country unless a small company decides to accept these take-it-or-leave-it new terms and conditions for I.P. interconnection.”

States' Role in Jeopardy

For states, those fears are even greater. Amid all the industry infighting and lobbying at the FCC, state legislatures and governors have been busy passing and signing bills to block their state commissions from regulating VoIP in the same way as traditional phone service, which has left regulators struggling to protect consumers and ensure universal access for rural and low-income Americans and the disabled.

Late last month, the National Association of Regulatory Utility Commissioners issued a report, “Cooperative Federalism and Telecom in the 21st Century,” arguing that the states are “well positioned” to continue to oversee the interconnection process as provided for in sections 251 and 252 of the act, as the “rules for interconnection do not and should not depend on the technology used by the interconnecting providers.”

“Changes to the underlying structure of the network or the technology used to carry information do not change the need for reliable, robust, affordable, and ubiquitous communications services that are universally available and reasonably comparable regardless of location,” the report's authors wrote.

One of their recommendations to the FCC was to determine, once and for all, the regulatory status of VoIP and other IP-enabled services, warning that until the agency does so, “questions about the responsibility for ensuring that communications services remain safe, reliable, and ubiquitously available (including interconnection) will remain unanswered.”

“There is still a role for the states to play here,” said John Burke, a member of the Vermont Public Service Board and chairman of NARUC's Telecommunications Committee. “In areas where interconnection doesn't work where you want it to work, somebody's got to arbitrate that, and I don't think the FCC wants every interconnection agreement--I.P. or otherwise--in front of them for arbitration.”

At the very least, states have the experience, and can more easily resolve disputes, Burke said.

“If you're going to be changing a lot of the rules, at least keep the cops the same,” he told Bloomberg BNA.

In 2010, Burke and the Vermont Public Service Board concluded that “fixed” VoIP services fall within the statutory definition of a “telecommunications service” under Vermont state law, and the board's authority to regulate such services is not preempted by federal law. The board did this, in part, to maintain its role as the state's telecommunications watchdog, particularly as telecommunications companies begin to rout calls over the internet.

FCC's Battery of Legal Options

As far as the FCC's next steps are concerned, legal experts are divided over whether the agency must first reclassify VoIP as a telecommunications service before imposing the mandates of sections 251 and 252 on ILECs with I.P. phone services.

One lawyer who spoke to BNA on the condition of anonymity said the FCC could issue a declaratory ruling asserting that sections 251 and 252 apply to I.P.-to-I.P. interconnection, using its ancillary authority under section 4(i) of the Communications Act, which directs the agency to “perform any and all acts, make such rules and regulations, and issue such orders…as may be necessary in the execution of its functions.”

The FCC can exercise this “ancillary” authority only if the action is “reasonably ancillary to the…effective performance of its statutorily mandated responsibilities.” Here, the FCC's responsibilities are clear. Multiple provisions in the act call for “quality services” to be available at “just, reasonable, and affordable” rates, and for “access to advanced telecommunications services” to be provided in “all regions of the nation.”

Another option is for the FCC to convene discussions on voluntary, industry-driven standards for interconnection, as well as for 911 service, disability access, and storm resiliency.

One ILEC executive who asked not to be identified said many companies within the industry are taking a wait-and-see approach in the hope that the I.P. trials AT&T has proposed will produce a mutually agreeable framework agreement for interconnection.

“It's a test,” the ILEC executive said. “Let's see what it yields.”

Wheeler's Plans Unclear

FCC Chairman-in-waiting Tom Wheeler has yet to state a position on the matter or even indicate his line of thinking.

On Feb. 22, Zachary Katz, the chief of staff to former FCC Chairman Julius Genachowski, posted a blog on the FCC's web site in which he warned that I.P.-based calling will not remain free of regulation. Though Wheeler's views may differ, the blog post offers a glimpse of how FCC staff sees the world of I.P.

“Some have suggested that an all-Internet Protocol communications market will necessarily be competitive--'Deregulate for a competitive, all-IP world!’ would be the bumper sticker--eliminating the need for FCC policies to foster and protect competition,” Katz wrote. “But basic economics and the facts on the ground show that's simply not true. Technological change brings great benefits, but it doesn't automatically bring vibrant competition, particularly in high-fixed-cost, network-effects-driven market segments. At the same time, it's also not true that all legacy regulations remain appropriate for promoting competition in today's marketplace. We must take a nuanced, data-driven approach to determining which policies to keep, which to eliminate, and which to add or modify.”


To contact the reporter on this story: Paul Barbagallo in Washington at pbarbagallo@bna.com

To contact the editor responsible for this story: Bob Emeritz at bemeritz@bna.com

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