Posted 07/01/2001
Small Carrier Arbitrage
The FCC's Latest Bete Noire
By Jon E. Canis
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There are some things the FCC (www.fcc.gov) really dislikes, and they become a major focus of new telecom regulatory policy. Today, some forms of arbitrage top the FCC's list.
What is telecom arbitrage? It's when carriers zero in on high-profit market niches that have been created by regulation. The FCC's favorite example is reciprocal compensation. This is when a CLEC wins an Internet service provider customer, the ISP can generate large volumes of terminating dial-up modem traffic and can result in the ILEC paying substantial amounts of reciprocal compensation to CLECs.
The FCC's response? It recently exercised jurisdiction over this traffic, and it is phasing out the reciprocal compensation rates to prevent large payments from ILECs to CLECs.
The FCC's goal of eliminating regulatory arbitrage is the right thing to do, from a regulatory, economic and policy perspective.
I previously have written in support of the FCC's new intercarrier compensation rulemaking initiative, in which the FCC will undertake a plenary review of all the ways carriers trade traffic in the hope of eliminating all forms of regulatory arbitrage.
What gives me heartburn is that, while the intercarrier compensation proceeding is pending, the FCC is taking dramatic action to stop arbitrage, but it is focusing on arbitrage that benefits CLECs and is not aggressively pursuing arbitrage that benefits ILECs and IXCs at CLECs' expense.
For example, last May, the FCC ordered that CLECs can get EELs (loop/transport combinations). As of today, all the large ILECs, except BellSouth Corp. (www. bellsouth.com), have refused to obey the FCC's rules. The result, CLECs must purchase ILEC special access services, paying more than twice the rates that EELs would cost.
Is that arbitrage? You bet.
The FCC's response? It will conduct informal meetings, and is hearing a complaint by one CLEC. But it's not clear when we'll see an industry wide solution.
Here's another example. Last year, some large ILECs and IXCs negotiated dramatic reductions in ILEC access charges in what has become known as the "CALLS Plan." As a result, in about half the states in the country, some switched access services are priced below the incremental cost-based rates for equivalent unbundled network elements.
What does this mean? CLECs have to pay more for wholesale network elements than the ILEC's retail service costs. Not only is this arbitrage that benefits IXCs, it is a textbook example of an anticompetitive "price squeeze" that ensures CLECs cannot compete for some ILEC retail services.
How can the FCC eliminate regulatory arbitrage while being fair to all parties? It can step up its work on the new intercarrier proceeding. The FCC can implement new rules within two years if it assigns the appropriate resources.
In the meantime, it must enforce existing rules, but not adopt any additional piecemeal reform. This will avoid regulatory shock and keep the playing field level until the FCC can implement plenary reform that will eliminate arbitrage industry wide, without disproportionately affecting any one segment--like CLECs.
Jon E. Canis writes a monthly column on regulatory issues. He is an attorney at law with Kelley Drye & Warren LLP, and can be reached at canis@kelleydrye.com.
