The Changing Face of Telecom – How New Technology Is Altering the Regulatory Scheme
By Harry Malone
Think – when was the last time you used a payphone? For that matter, when was the last time you even saw a payphone? Or actually used a dial to “dial” a telephone number? Do you remember when cell phones were actually installed in a car, complete with the curly antenna on the rear window? And since when did you really worry about long distance charges?
Many people can still remember when they were served by only one phone company (usually AT&T) and there was only one way to make a phone call, with a hardwired handset. If you needed to be reached on the road, you carried a pager that would beep at you and, if it was particularly sophisticated, might display a callback number for when you found the nearest payphone. If you needed reference material, you travelled to it, instead of downloading it to you.
In the last 25 years, momentous changes have occurred in the telecommunications industry. In that time, AT&T has been broken apart (and partially reconstituted), a separate long distance industry has grown and waned, competition has developed for local phone service, the mobile phone has become an essential personal accessory, phone calls can be made over the Internet, and the Internet can be accessed over the phone.
Technology advancements, particularly in wireless and broadband, have played a great part in these developments. Some of these developments are also owed to changes in the law, primarily the federal Telecommunications Act of 1996. But in many respects, the law has trailed behind these developments. Regulation has evolved in fits and starts amidst legal battles between traditional telecommunications carriers and new market entrants. These days, much of the work of telecom lawyers continues to be focused on this clash of the old and the new.
Telecom regulation has its roots in the law applicable to common carriers of freight. (In fact, up until 1934, telephone service was regulated by the Interstate Commerce Commission, and most of the Communications Act of 1934 was drawn directly from the Interstate Commerce Act of 1887.) Originally, telecommunications laws and regulations assumed certain physical and business characteristics about the industry. For example, independently powered copper wires directly traceable to a particular physical location were assigned a unique phone number. Telephone traffic in a particular geography was carried by a single company, and if traffic was carried outside of the local network, it was exchanged with an affiliate or a friendly non-competitor. In order to provide reasonably priced service to all market segments, the industry was laced with invisible subsidies.
Long distance service subsidized local service, business service subsidized residential service, urban service subsidized rural service, high volume customers subsidized low volume customers, add-on features (e.g. call waiting, voicemail, etc.) subsidized basic service. Most importantly, because of its monopoly position and critical importance in daily life, the local telephone company was heavily regulated by both the Federal Communications Commission (“FCC”) and state public utility commissions in accordance with a complicated but workable system for separating jurisdictional authority.
Predictability reigned. Local phone rates were stable and fairly uniform regardless of where you lived. For billing and regulatory purposes, all that was needed to determine if a call was local or long distance, or intrastate or interstate, was to compare the phone numbers at each end of the call. System failures were rare and swiftly remedied. Dial tone was often available during a power failure and, in most areas, 911 calls went to a special emergency response center that could instantly identify the street address of the caller. Interconnection agreements between carriers were fairly simple and rarely involved the exchange of compensation.
Beginning in the 1980s, technology advances and regulatory reform combined to disrupt this system and multiply the legal and regulatory issues. For example, when cell phones first came on the scene, they were bulky and expensive, with monthly service charges to match. They were merely an adjunct to regular phone service, and by no means an alternative. Since then, they have become the multifunctional and ubiquitous devices carried by over 250 million subscribers in this country.
A recent report indicated that nearly 18 percent of American homes have given up land lines entirely in favor of cell phones, and a further 13 percent who still have land lines receive all or almost all calls on a cell phone anyhow. Furthermore, broadband Internet service has enabled the development of Voice over Internet Protocol (VoIP) service as another alternative to traditional landline service. Firms like Vonage, Skype and Comcast can now provide voice telephone service over a customer’s existing Internet connection.
In concert with new technology, the Telecommunications Act of 1996 introduced further competition when it opened up the local telephone market to competitive local exchange carriers like BayRing, segTEL and One Communications. At the same time, Congress mandated an end to the implicit subsidies inherent in the old scheme, in favor of explicit mechanisms. As a result, many subsidies have been shifted to the federal Universal Service Fund, which is supported by a fee on interstate telephone charges. This fee, currently around 9.5 percent of carrier charges, generates over $7 billion a year to support high-cost users, low-income users, and other programs. Even then, the system of implicit subsidies has not been completely unwound, and they still exist in the industry, most notably in the access charges that long distance carriers pay to local carriers to interconnect to the local networks.
These developments present a number of issues for regulators. One major issue is the line loss suffered by the incumbent carriers. Network infrastructure costs are highly inelastic. Once the sunk costs of switches, routers and transmission lines are incurred, the incremental cost of carrying a call or adding a user is miniscule. However, when an incumbent carrier loses a customer, it cannot divert that phone line to another use, or scale down its switching capacity incrementally. It must still carry and absorb those sunk costs for which it is receiving no revenue. The problem is compounded by the fact that these line losses tend to occur with more lucrative business and urban customers.
Such is the nature of competition, but it places considerable pressure on incumbent carriers like FairPoint Communications, the TDS Telecom companies or Granite State Telephone, who as the carriers of last resort in their respective service territories have regulatory obligations that their competitors do not have. These include offering basic services to all, maintaining certain rates, meeting certain performance and build-out goals, and even providing services to support the operations of their local competitors. Market developments have reduced revenues in other ways as well. One example now occupying regulators involves the previously mentioned long distance access charges. VoIP service is currently regarded by the FCC as an information service, not a telecommunications service, and thus is not subject to the same level of regulation. Consequently, some providers of VoIP claim that they are not subject to access charges, although they carry a considerable amount of traffic that from a practical and geographical perspective would traditionally be considered long distance calls.
There are a number of public safety issues to contend with as well. Cell phone chargers and VoIP Internet modems rely on house electrical power to operate, and may not be available in disaster situations, whereas the wireline network often is. In extraordinary situations, like 9/11 or the recent presidential inauguration, wireless networks tend to become overloaded. One of the most significant issues relates to 911 service. It is estimated that fully one third of 911 calls now originate from cell phones.
Several years ago, in response to instances where wireless callers were unable or incapable of relaying their location to 911 operators, the FCC began requiring technology that would enable wireless service providers to transmit the location of a 911 caller to the 911 operator. However, the rules only require a location accuracy of at best 150 feet, and many local 911 operations centers have not been upgraded to be able to process the information. Similar problems exist for “nomadic” VoIP users, who take the handsets on the road or place calls from their laptop.
Another prominent issue involves so called “network neutrality.” This is a loaded term, but regulators generally take it to mean the ability of users to transmit and access any information of their choosing without unreasonable restrictions. Contrast this, for example, with cable television service, in which the cable company determines what content is available and at what rate. A number of instances over the last few years have kept this issue in the spotlight. In 2005, the CEO of AT&T implied that he was the gatekeeper between end users and content providers and that he should be compensated for the use of “his pipes.” That same year, Madison River Communications was fined by the FCC for blocking its customers’ access to Vonage. In 2007, Verizon Wireless was criticized for blocking access to text messages from certain groups. Last year, the FCC investigated Comcast for throttling access to BitTorrent download streams.
As these new network technologies become the 21st century versions of the post office, newspaper, telephone and town square, users expect to still be able to communicate as freely as they have through these traditional means. At the same time, network operators are searching for ways to manage increasingly massive amounts of traffic and recover their investments in backbone infrastructure while maintaining an affordable pricing model.
The challenge to regulators, telecommunications carriers, and the attorneys who advocate on their behalf is to encourage new technology and the benefits of competition while accommodating the need for dependable and affordable service in all situations. The FCC and the states have addressed these problems from different angles and to varying degrees. Over the last few years, 911, USF, wiretapping, and phone number portability rules have been extended to VoIP services, even though VoIP services have not been regulated as telecommunications services for other purposes. Much remains to be done, however, especially in regard to how carriers compensate each other for exchanging traffic, how basic local service is preserved, and how the demands on the Universal Service Fund can be brought under control. Increasingly, state commissions look to Washington for guidance on these thorny issues of national scope. It will be interesting to see whether, and how, the new administration in Washington approaches these problems.
Harry Malone recently joined the Telecommunications & Utility Practice Group of Devine Millimet & Branch in Manchester. He has practiced law since 1998, is admitted to practice law in Maryland and the District of Columbia, and is currently pursuing admission to the New Hampshire bar. Harry most recently practiced in the Washington, D.C. office of Bingham McCutchen. He can be reached at firstname.lastname@example.org.