IP Convergence: Beyond VoIP, Beyond Cost Savings

In a decision released July 8, 2008, the U.S. Court of Appeals for the District of Columbia issued a Writ of Mandamus compelling the FCC to finally provide the legal justification for a decision it made 6 YEARS AGO concerning reciprocal compensation for traffic destined to ISPs.
The fact that it took the court so long to take this action is testimony to one of the biggest problems plaguing the telecommunications industry today - process paralysis. The matter at issue is actually one that dates back more than 10 years. During the 1990s, when CLECs succeeded in besting the Bell Companies at their own game of access charges and began collecting enormous sums of revenue for traffic destined to Internet Service Providers, the Bell Companies asked the FCC to eliminate compensation for ISP-bound traffic (rather than compete for the ISP business directly). On February 26, 1999 the FCC released a Declaratory Ruling, which concluded that ISP-bound traffic was "jurisdictionally mixed and largely interstate, and the reciprocal compensation obligations do not apply to this traffic." In March 2000, the District Court vacated and remanded the FCC’s decision for lack of adequate justification. In 2001, the FCC issued a further decision attempting once again to provide legal justification for its 1999 decision and establishing a new compensation regime for ISP-bound traffic.
In May 2002, the District Court remanded the FCC’s decision a second time, but this time without vacating the decision because as the District Court stated, “we thought there was a ‘non-trivial likelihood’ the Commission would be able to state a valid legal basis for its rule.” In issuing the Writ of Mandamus this week, the District Court dismissed the FCC’s continued assurances that it would act by November 5, 2008 on the issue. So basically 9 YEARS AFTER robbing CLECs of inter-carrier compensation with no apparent legal justification, the FCC’s defense was still “trust us, we’ll address the issue.”

This episode, as much as any other, highlights the criticality of reform for the regulatory decision-making process. The issue started as a contract dispute between CLECs and the Bell Companies that in normal commercial practices would have been negotiated out or put before a commercial arbitrator in a matter of weeks or months. But because the Bell Companies invoked the regulatory process they were able to use their political, legal, and regulatory resources to achieve what they would otherwise not have been able to achieve at the bargaining table and drag this process out for 9 years. Worse still, the Bell Companies achieved this victory with no apparent legal basis.

What a different industry it might have been if the FCC refused to take up the dispute and forced the Bell Companies to either live with the bargain they struck or negotiate a new one. The CLEC industry would have been flush with cash to fund their network expansion. The Bell Companies would have been forced to develop more competitive services for ISPs. Who knows what the impact would have been on mergers and acquisitions. Unfortunately, there are multiple examples like the ISP-bound traffic issue that if the FCC had handled differently would have been of enormous benefit to the broader telecommunications industry.

Well, the FCC does have one more opportunity to not only address compensation for ISP-bound traffic, but all traffic. In its May decision capping universal service support, the FCC stated it intended to address comprehensive inter-carrier compensation and in subsequent statements set a target date of November 5, 2008.

Let’s hope that after 9 years the FCC can finally figure this out because the telecommunications industry in the United States is severely handicapped relative to its overseas counterparts by an anachronistic inter-carrier compensation regime that burdens the industry with endless litigation and exorbitant costs. Hopefully come November we won’t still be scratching our heads wondering what it is the FCC has done to this industry.