Occasionally a proponent of Title II regulation of Internet access will ask, in effect, what’s so bad about Title II? What follows is a cautionary tale about the absence of regulatory certainty in the world of Title II regulation; a world into which so many net neutrality proponents want to throw the Internet.  I think this story speaks volumes about the kind of regulatory stability – so crucial to maintaining incentives to build world class Internet infrastructure – we can expect from the FCC in the years to come.  To fully understand how the Title II world undermines regulatory stability, enables regulatory capture and ultimately harms consumer welfare and innovation, let’s go back to 2010.

Once upon a time, back in 2010, AT&T was engaged in a dispute with a company called YMax (known more widely as MagicJack) over bills that AT&T was receiving from YMax for exchanging traffic. AT&T noticed that YMax was billing it for a service called “local switching.” Local switching is basically the process of peeling individual calls off of inter-office trunks on which traffic is commingled, and placing them onto the lines, or local loops, that connect to particular subscribers. When AT&T investigated YMax’s practices, we discovered that YMax was not actually connecting trunks with lines. Instead, it was simply directing all the calls it received in a commingled fashion on to the Internet. The calls then reached their destinations through the efforts of Internet backbone providers and ISPs unrelated to YMax.

AT&T filed a complaint with the FCC and argued that YMax was charging us for a service, local switching, that it was not providing. YMax argued that in fact it was providing the equivalent of local switching by connecting trunks to a “virtual” loop created by the Internet. The FCC found in favor of AT&T and said “if this exchange of packets over the Internet is a ‘virtual,’ loop, then so too is the entire public switched telephone network – and the term ‘loop’ has lost all meaning.”

This was a fairly predictable outcome based on FCC precedent. However, it did not go over well with the cable companies. Their problem was not that they delivered calls over the Internet, but rather that they had organized themselves into regulated affiliates, competitive local exchange carriers (CLECs), that were responsible for exchanging traffic with other carriers, and unregulated affiliates that actually delivered that traffic to end users. While they were providing an equivalent functionality to “local switching,” they were not doing so through the CLEC affiliate that purported to charge other carriers. And the FCC had long prohibited carriers from charging for functions that they themselves do not perform.

So, in 2011, when the FCC was considering comprehensive reform of intercarrier compensation, the cable companies sought and obtained a rule change that would enable local exchange carriers (LECs) to charge for functions that either they or a VoIP provider partner perform. This is generally known as the “VoIP symmetry” rule.  This rule change did not, however, clearly empower YMax or other CLECs that partner with over-the-top VoIP providers to charge for local switching, since they would continue to rely on the Internet for delivery of calls to individual subscribers.

Accordingly, shortly after the intercarrier compensation reform order was adopted, YMax went back to the FCC and sought a clarification that in fact the VoIP symmetry rule did authorize it to charge for local switching irrespective of what functions it or a VoIP provider partner might perform. The Wireline Competition Bureau responded quickly by denying YMax’s request and clarifying that the symmetry rule did not alter the requirement that CLECs, or their VoIP partners, actually perform a function before charging for it.

While you might think that this clarification would have put to rest all disputes over local switching charges associated with over-the-top (OTT) VoIP traffic, that’s not how “light touch” regulation under Title II actually works. For the last three years, Level 3 and other CLECs that provide service to OTT VoIP providers have continued to seek a further clarification from the FCC that it didn’t really mean what it said in response to YMax. And throughout that period of time, they have continued to charge AT&T and other long distance providers for local switching. Meanwhile, AT&T, thinking we had actually won the YMax complaint three years ago (silly us), has refused to pay these companies for local switching.

So, flash forward to 2014 – four years after we first raised these issues at the Commission and three years after the first of three FCC “final resolutions” of this issue – the Commission has circulated an Order that pretends the YMax litigation and their two subsequent confirmations of that ruling never actually occurred.  In fact, it turns out (as far as we can tell) that YMax actually won that case (irrespective of the Commission holding in that case) and can now , in fact, charge for local switching when it places traffic onto the Internet for termination. And in doing so, the Order purports to “clarify” a well-established rule.  As Yogi Berra so famously stated “It ain’t over ‘til it’s over.”

I hope this tale sheds some light on why AT&T takes no comfort from the notion that “light touch” regulation under Title II will result in the type of regulatory stability required to make long-term investments in broadband networks.  Now, given the clear history of the FCC’s actions in this proceeding, if the Commission does actually issue this Order, we will obviously appeal and, maybe in a couple of years (assuming there isn’t a remand), we might come to finality again in this area, but the regulatory cloud over the issue will linger well into the next Administration.  And that is, unfortunately, what we fear we will be looking at in all other areas of Internet regulation should the FCC go down a Title II path there too.  If they do, another Yogi-ism is sure to apply – “The future ain’t what it used to be.”

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