Channel Partners

June 1, 2001

9 Min Read
Soap Box - Regulatory Paradox

Posted: 06/2001

Soap Box

Regulatory Paradox
Should There be a Distinction Between Local and Long-Distance Regulation?
By James E. Magee, Kristie Stokes Hassett and Jennifer A. Newberry

The evolution of the communications industry has received significant attention since the passage of the Telecommunications Act of 1996. However, as technological developments and industry restructuring continue to alter the way in which carriers provide local and long-distance telephone services, the major revolution in the telecommunications industry may be yet to come.

The wave of the future may be the bundling of long distance and local telecommunications services together with cable, Internet and/or other advanced communications services on a packet-switched network. Yet regulatory policy appears to be lagging behind technological and business developments, thereby potentially thwarting the efficient development and growth of the communications industry.

The historic distinction between local and long-distance services is essentially an outdated regulatory fiction. The long-distance/local split was intended in large part to promote the development of competition in the long distance market, while conceding the local markets to the incumbent monopolist. Given the extensive physical facilities already in place at that time, which functioned as the only “gateway to individual telephone subscribers,” the development of competition was not even attempted in local markets on the assumption that the local exchange market constituted a natural monopoly. i The 1996 act challenged this view, by attempting to open local markets to competition. CLECs may now resell ILEC services and purchase separate “unbundled network elements” from the ILECs with which to begin to create their own networks.ii

Nevertheless, despite market-opening efforts, local and long-distance carriers continue to confront disparate regulatory regimes. Operating in a fully competitive market, long distance carriers face relatively light regulatory burdens in comparison to local service providers. By simply registering with the FCC (www.fcc.gov), companies can begin providing interstate long-distance services, without even filing a tariff. Regulation of international services has also been dramatically reduced with a streamlined application process available to most carriers, and the FCC has recently adopted an order de-tariffing the service offerings of non-dominant international carriers. Even at the state level, state public utility commissions have, as a general matter, significantly reduced regulatory burdens on intrastate long-distance providers.

In stark contrast, local service providers face burdensome regulation, including detailed tariffing requirements, lengthy application processes for CLECs, and numerous ongoing reporting requirements. Local services are viewed as requiring a higher degree of scrutiny and regulatory control. Yet, as changing competitive conditions and advancements in technology transform the way in which communications services are offered, maintaining the current regulatory regime makes less and less sense. Already, the entry of long-distance providers into the local market and the entry of local providers into the long-distance market indicate that the traditional “local” vs. “long distance” distinction is fast becoming obsolete. A telephone call to a neighbor down the street is not significantly different from a call to a friend in a distant state, and as local markets are opened to competition, there is no regulatory justification for treating the two differently.

Retaining a strict regulatory distinction between local and long distance services will distort or impede the growth of the industry, the development of local competition and the evolution of advanced telecommunications services. The current trend among CLECs is towards consolidation and “right-sizing” as companies struggle to survive in the local market, and while recent market volatility may explain some of this trend, burdensome state regulation of local services is certainly a contributing factor. Most states still have an expensive and lengthy application process for CLECs, and once licensed, CLECs are plagued with annual and monthly reporting requirements that vary from state to state. Reducing local regulatory requirements could prove useful to existing CLECs seeking to compete with the incumbents and would also likely encourage new market entrants. More importantly, the eventual elimination of the distinction between local and long-distance services could open the door much wider to competition at the local level through innovative service offerings. In fact, CLECs have already had more success in selling specialized services than standard local services.iii Competition in the local market may survive and even thrive through the packaging of local and long-distance offerings with other advanced telecommunication services, such as cable, wireless, and Internet. Ultimately, ILECs will also benefit from a less restrictive regulatory environment by having increased flexibility to compete through a broader range of communications services.

The long-distance market also reflects the changing nature of the communications industry. As a result of technological advances and the more streamlined regulation of long-distance carriers, long-distance competition is so intense that several major carriers, such as AT&T (Corp.www.att.com) and WorldCom (Inc.www.worldcom.com), have announced restructurings to “spin off” their long-distance operations from their other more profitable service offerings. At the same time, ILECs are scrambling to compete in the already saturated long-distance market to establish a national, as opposed to regional, presence. Simply being a “local” provider or a “long-distance” provider is not enough to compete in today’s global communications marketplace, and companies are struggling to avoid these pigeonholes. The restructuring of major long-distance players, along with the consolidation trend among struggling CLECs, suggests that carriers are unable to reap what they consider to be adequate profits in either the nascent local markets or the hyper-competitive long-distance business. The entire industry is branching out from traditional telecommunications services into broader geographic and product markets.

Today’s strict divide between local and long-distance services is a holdover from an era that is quickly passing and could stymie progressive service offerings. Because carriers must comply with a vast array of regulatory requirements, especially pertaining to local service, they are not free to simply provide “voice” communications, without distinction between local and long-distance calls, as part of a larger package of communications services. Yet, except for possible political ramifications, it should not be especially difficult to begin moving in the direction of a new regulatory structure for telecommunications carriers. The goal of a similar regulatory scheme for both local and long distance providers could largely be achieved by efforts at the state level to deregulate, or to at least streamline, regulation of local providers, commensurate with long-distance regulation.

One obvious first step is for state PUCs to follow the FCC’s lead in detariffing. However, any shift away from the current local/long distance dichotomy will inevitably raise significant transitional issues concerning the timing and method of deregulating local service for CLECs and ILECs. ILECs must continue to open their local networks to competitors, but in return, must be allowed to effectively compete in the developing communications market.

Further, with the advent of fewer regulatory requirements, the role of state regulators would transition away from that of a licensing authority, to an increased emphasis on enforcement. State regulatory agencies would continue to monitor and adjudicate individual consumer complaints and protect consumers against abuses such as slamming and cramming by unscrupulous carriers.

Regulatory changes in the treatment of local and long-distance services would also give rise to policy concerns regarding “affordable” local service for low-income families and programs such as Lifeline Assistance. The very term “Lifeline” appropriately describes the way in which local telephone service is viewed–a critical link for households to the rest of society. Yet, if carriers choose to offer traditional local and long-distance services simply as “voice” communications and/or only in conjunction with other advanced services, limiting Lifeline support to state-defined “local” services may no longer be possible. Indeed, local telephone service could cease to exist as such with the disappearance of the regulatory differentiation between local and long-distance services.iv State regulators may be faced with the choice of requiring carriers to provide “local” service to low-income customers who are unable to afford more comprehensive communications packages, or to expand subsidies for low-income customers beyond traditional local telephone service to include long-distance or Internet services. Indeed, in light of the current “digital divide,” the future scope of Lifeline-type support will have to be addressed at some point, and the elimination of the split between local and long-distance services may be an ideal time to do so.

The source of Lifeline funding will also be brought into question. An industry evolving away from less profitable traditional services toward advanced communications services could make assessing and collecting universal service contributions from “long-distance” voice services increasingly difficult, if not impossible. An excise tax on broader “communications” services, as opposed to the universal service contributions from long-distance carriers, is one politically sensitive choice that lawmakers and regulators will confront.

Despite the many transitional and policy issues stemming from the elimination of the artificial distinction between local and long-distance services, the overriding consideration must be to allow the regulatory structure to evolve with the communications industry. A regulatory structure that accommodates technological advances and permits new services and innovative business arrangements will ultimately benefit all consumers through a broader, more competitive marketplace.

James E. Magee, partner, and Kristie Stokes Hassett and Jennifer A. Newberry, attorneys, are with the law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol in Wash-

ington, D.C., which can be reached at

+1 202 429 0004. This article reflects the personal views of the authors and does not necessarily reflect the views of the firm or its clients.

i United States v. American Tel. & Tel. Co., 552 F. Supp. 131 (D.C. Cir. 1982).

ii Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 458, 104th Cong., 2d Sess. at 118.

iii Federal Communications Commission, Trends in Telephone Service (March 2000).

iv An emergency call to 911 is the essence of a critical local telephone call and would seem to be an exception, and therefore an appropriate area for continued local supervision.

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ROUNDTABLE

On whether UNE-P should be made available to CLECs by incumbent carriers.”There is a huge difference of opinion on this issue, and we at PACE are not in the same place as Allegiance is on this issue. There’s definitely not agreement on UNE-P availability.”

–Genevieve Morelli, PACE co-founder and Washington telecom counsel with Kelley Drye & Warren LLP (www.kelleydrye.com)

“Real progress is being made, but only where the [Telecom] Act has been enforced and allowed to work. Unfortunately, the Bells seem to think they are entitled to decide where and when that is.”

–Richard E. Burk, president and CEO, nii Communications (www.niicommunications.com)

“UNE-P is very different than an unbundled loop. Other elements meet [the FCC’s] necessary and ‘impair’ standards. My opinion is that the whole UNE-P is resale because there are no facilities involved.”

–Royce Holland, chairman and CEO, Allegiance Telecom Inc. (www.allegiancetelecom.com)

“This is not resale. It’s totally different. The UNE-P involves competitors leasing combinations of the UNEs of an ILEC’s network. Resale means a competitor is beholding to an ILEC and has to resell whatever the ILEC sells. Local switching, then, is a UNE that CLECs must have for the UNE-P, which won’t work without it. Why not get rid of the local loop as a UNE then since fixed wireless bypasses it? That would be the natural extension of Royce’s argument. It’s unfortunate, but this has put a schism in the CLEC community.”

–Steve Trotman, vice president of industry relations, Association of Communications Enterprises (ASCENT,
www.ascent.org)

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