Unsafe at Any Rate

Posted by: Hank Hultquist on November 24, 2010 at 12:54 pm

In recent blogs I have explored: (a) the FCC’s absurd practice of regulating the structure of long distance pricing even as long distance is rapidly vanishing as a distinct consumer service; and (b) the foolishness of extending obsolete interconnection rules to IP networks.

Today, I will try to tie these seemingly distinct modes of transportation together and, in so doing, explain how the FCC can finally put this industry on the road to rationality.

It is axiomatic that interconnection on the telephone network (a.k.a., the PSTN) has become an upside-down world of inefficiencies and arbitrage. This entire system is built on a series of arbitrary rules and assumptions that have long been overtaken by reality.

We have a system that entitles service providers to file tariffs pursuant to which they can unilaterally extract payments from other service providers for “terminating” calls from those other service providers’ customers. To make matters worse, and despite the fact that the functions performed in “terminating” all calls are identical, the applicable rates can vary greatly depending on whether a call is “local,” “intrastate long distance,” or “interstate long distance,” or dialed from a mobile smartphone, skyped from a laptop or placed from the dusty home “landline.”   

You may be wondering what it means to “terminate” a telephone call? Simply put, it’s opening a circuit between a trunk and a line so that the called party can talk to the calling party. The “theory” behind allowing carriers to unilaterally charge other carriers for this “service” via tariff is that: (a) network costs can accurately be “measured out with coffee spoons” to into individual minutes; and (b) the calling party has “caused” the called party’s service provider to incur “costs” in order to “terminate” the call. What a mound of malarkey!

In reality, both customers benefit from a phone call, until they don’t.  Which is why we retain the ability to hang up on or, as my six-year-old says, “turn off” the person at the other end.  In reality, network costs are almost entirely fixed and not divisible by regulators into “minutes of use.” In reality, consumers no longer recognize “local,” and “intrastate toll,” and “long distance” as separate services.  In fact, many of our customers are more concerned about needing to communicate something in 140 characters or less.

So, why do regulators so willingly suspend their disbelief when it comes to these fictions? They have wanted to maintain, at subsidized rates, the universal availability of “basic local exchange service.” To do so has required this vast apparatus of intercarrier compensation rates, as well as network interconnection on a local market-by-local market basis. Meanwhile, more and more consumers have voted with their wallets for all-distance voice services.

But there is a way out of this mess. If regulators were to take away the regulated intercarrier compensation meter and require providers to recover costs from their own customers (potentially including willing wholesale customers as in the broader IP transit market) or, when appropriate, from explicit subsidy mechanisms, the industry would be free to move to more rational, more competitive, and less confusing for consumers, business practices. This would not be a world without rules (despite the red herring assertions of some).

It would be a world without regulated rates for arbitrary “services.” In such a world, “long distance” would increasingly be a wholesale service purchased by local access providers in order to connect their customers to everyone else. “Local interconnection” would fade away as carriers interconnected at higher capacities and at fewer locations. And rate-driven arbitrage, like traffic pumping, would cease. The single biggest obstacle to getting there is the continued existence of regulated rates for intercarrier compensation.

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