The FCC’s decision on January 30, 2014 to launch a proceeding to determine the path for transitioning the current Time Division Multiplexing (TDM) network to one based on Internet Protocol (IP) while “preserving and enhancing the values consumers have come to expect from communications networks,” initiates the key industry proceeding for 2014 and beyond. The Commission’s adoption of a Report and Order, Notice of Proposed Rulemaking (NPRM) and Notice of Inquiry (NOI) in Docket, 13-5 Technology Transitions will set off an industry lobbying effort that will rival the frenzy that occurred when the 1996 Telecom Act was in the process of being written. Moreover, whatever decisions the Commission makes regarding the rules for the new network will be greeted with court appeals by the side that perceives it has lost. We will have more information on the TDM-to-IP technology experiments to come when the Commission releases its Order, NPRM and NOI. 

In the meantime, it is worth noting how interconnection in the coming IP world will impact the telecommunications market. AT&T has urged the Commission to establish a date certain for moving the industry to an all IP network, and has argued for the free market to determine IP interconnection prices, terms and conditions. AT&T’s CLEC competitors have argued precisely the opposite. They claim that regulation is needed to protect smaller carriers from falling victim to the superior negotiating power of the ILECs when negotiating interconnection agreements. These differences are well known, but another important IP interconnection issue has not been the focus of industry lobbying and will clearly have major industry implications for CLECs. That is the issue of direct versus indirect interconnection in the IP world.

AT&T stated in a January 24, 2014 FCC filing that it believes that IP interconnection will occur on a nationwide basis and at a relatively small number of places. According to AT&T, IP interconnection would not distinguish between local and long-distance calling. Carriers would be responsible for getting traffic to and from aggregation points where it can be exchanged with other carriers. Thus, IP interconnection would look more like the peering and transit arrangements for the exchange of Internet traffic than the TDM arrangements for the current TDM network which require calling party networks to deliver traffic to many locations. In such a world, interconnection agreements would have to deal with the burden of determining who provides the transport to the few traffic aggregation points. 

AT&T envisions a scenario in which peers of similar size and geographic scope would directly interconnect while smaller carriers would have to purchase transit service from a large carrier to reach the aggregation points.  Transit service is needed because small carriers usually do not have the traffic volume to justify directly connecting with other small carriers.  Instead, they usually purchase transit service from an ILEC and send traffic to a terminating small carrier through the ILEC tandem.

AT&T believes that transit prices would be disciplined by the market, however smaller carriers would never agree to that and would seek transit price controls. Unfortunately for CLECs, they have argued unsuccessfully for years that transit service should be a part of the section 251 interconnection rules in the 1996 Act and like other interconnection elements should be priced at an incremental cost basis. Although the Commission has considered the issue for years, it has never reached a final decision, allowing ILECs to continue price transit service as they wish. If this continues in the new IP network, ILECs will have a significant price advantage over CLECs forced to purchase transit service.

Making things more difficult for CLECs, AT&T contends that in a national network with few aggregation points, FCC generated concepts like LATAs, interstate and intrastate become meaningless. Therefore, state along with federal regulation would be impractical and unlawful. This would leave CLECs complaining about interconnection issues with few regulatory protections.

CLECs are going to spend a huge amount of money over the next couple of years lobbying the FCC to regulate direct carrier-to-carrier IP interconnection, that is a given. It is less clear that they understand the enormous implications of unchecked transit prices in a world where all but the largest carriers will have to rely on indirect interconnections to reach customers.

By Andrew Regitsky, President, Regitsky & Associates

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