An evaluation of the proposals in the FCC's Intercarrier Compensation Reform Docket related to tandem transit services.

• Author: Harrington, John R.

1. INTRODUCTION AND SUMMARY II. TANDEM TRANSIT SERVICES: AN OVERVIEW III. RECENT STATE COMMISSION DEVELOPMENTS A. Background B. Commission Rulings 1. Georgia 2. New York 3. Illinois 4. Michigan 5. Minnesota IV. PROPOSED REGULATIONS CONCERNING TRANSITING IN THE FCC's UNIFIED INTERCARRIER COMPENSATION DOCKET A. The Intercarrier Compensation Docket B. The Missoula Plan C. The 2008 FCC Reform Proposal D. Comments in Response to the Missoula Plan & the Reform Proposal 1. Should Transit Providers Be Granted Non-Discriminatory Interconnection Rights? 2. Should Tandem Transit Service Providers Ever Serve as a Bill Collector to Help the Terminating Carrier Collect Reciprocal Compensation? 3. Is Any Further Regulation of Tandem Transit Providers Necessary and Appropriate? 4. If Further Regulation is Necessary, Are ILECs Obligated To Provide Tandem Transit Services? 5. Should the FCC Regulate Transit Rates? V. A PROPOSAL TO FACILITATE COMPETITION FOR TANDEM TRANSIT SERVICES VI. CONCLUSION I. INTRODUCTION AND SUMMARY

   In November of 2008, as part of its Intercarrier Compensation Reform Docket, (1) the FCC requested comments on a proposal for intercarrier compensation reform offered by former FCC Chairman Kevin Martin and the Staff of the FCC (Reform Proposal). (2) Among his proposed suggestions are regulations related to "tandem transit" services.

   Tandem transit services are the switching and transport services that enable the delivery of local telecommunications calls between telecommunications carriers that are not directly connected with each other. These services were historically provided, though not always willingly, by incumbent local exchange carriers (ILECs) such as AT&T, Verizon, and Qwest to enable competitive local exchange carriers (CLECs), cable telephony providers and wireless carriers, to complete calls to and from each other's networks. (3)

   A number of state regulatory commissions have recently considered disputes involving tandem transit services provided by Neutral Tandem, Inc., an alternative provider of tandem transit services. (4) These cases appear to be the first ones in the country addressing issues surrounding the provisioning of tandem transit services on a competitive basis. These commissions considered public policy questions such as the benefits of competitive tandem transit service, interconnection rights for tandem transit providers, and financial responsibility for calls that are delivered using competitive tandem transit services.

   The Authors suggest that the state commissions generally recognized that public policy interests are served by establishing rules that facilitate the development of competition in the market for tandem transit services. (5) As the state commissions found, competition in the tandem transit market can best be facilitated by affording nondiscriminatory interconnection rights for carriers seeking to deliver tandem transit traffic. The state commissions also generally recognized that the originating carrier--not the transiting provider--should continue to maintain responsibility for paying the costs necessary to deliver the call to the terminating carrier's point of interconnection.

   The Authors submit, however, that certain price regulation proposals could harm the development of competition among tandem transit providers. In particular, proposals to require ILECs to provide tandem transit services at prices based on the total element long-run incremental cost rate (TELRIC) (6) methodology seem likely to inhibit the development of competition in this market. The Authors suggest that competition has already developed in this market in many areas. The Authors further suggest that, in markets where facilities-based competition already exists, there does not appear to be a need for any price regulation.

   Part II of this Article provides an overview of tandem transit services. Part III reviews the state commission decisions addressing the public policy issues posed by nascent competition in the tandem transit market. Part 1V discusses the various plans proposed by the FCC for regulating tandem transit services. Part V concludes by offering the Authors' suggestions for optimal regulations of the tandem transit market.

2. TANDEM TRANSIT SERVICES: AN OVERVIEW

   Tandem transit services include switching and transport services that enable the indirect delivery of local telecommunications calls between different carriers. (7) Transiting enables an end-user of a competitive telecommunications provider (or the "originating carrier") to make a call to an end-user of another competitive provider (or the "terminating carrier") by allowing the originating carrier to deliver the call to an intermediary's (8) tandem switch, who then routes the call to the terminating carrier. (9)

   In the absence of transiting, telecommunications providers would be forced to establish direct connections with every switch in a market to exchange calls between their networks. Creating a direct connection, and incurring the costs of establishing and maintaining the direct interconnection, only makes sense from the carriers' perspectives if sufficient traffic is exchanged between the two relevant switches over the direct connection to make the connection economically efficient. Specific switches often do not exchange sufficient traffic to justify a direct connection. (10) Thus, in an era where a wide variety of telecommunications carriers provide telecommunications services to consumers--including traditional CLECs, cable telephony providers, and wireless carriers--many providers depend on tandem transiting to efficiently and effectively route calls to the many other carriers to which they are not directly connected. (11)

   Traditionally, competitive carriers could obtain indirect interconnection with one another only through ILECs like AT&T, Verizon, and Qwest. Because ILECs compete with the competitive carriers for enduser customers, their control of this bottleneck facility raised the concern that incumbents could impose unreasonable terms and conditions on competitive carriers in order to gain a competitive advantage. (12) Certain incumbents have also resisted the notion that they are required to provide tandem transit services to their competitors. Although the FCC has never resolved this issue, (13) it has suggested that ILECs may be able to refuse to continue providing transiting services when the levels of traffic exchanged between two competitive carriers justify the establishment of a direct connection between those carriers. (14)

   Notwithstanding the lack of comprehensive regulation, some issues related to tandem transiting services have been raised in enforcement proceedings before the FCC and before various state commissions. For example, the FCC has declared that originating carriers must continue to pay reciprocal compensation (15) even if traffic is routed through an intermediary, such as a tandem transit provider. The FCC has held that, under controlling federal rules, originating carriers pay for the delivery of local traffic to the terminating carrier (16) whether the traffic is exchanged directly or indirectly. (17) For this reason, the FCC repeatedly has found that transiting carriers should not be forced to serve as a billing clearinghouse--that is, to help terminating carriers collect reciprocal compensation from the originating carrier. (18) A number of states have found that they have authority, not only to require ILECs to provide transiting services, but to do so at regulated prices. (19)

   Recently, alternative tandem services, provided by non-incumbent, competitive carriers, have become available in several markets. (20) This competition for tandem switching service has been recognized as bringing many benefits to the telecommunications industry including lower transit costs, increased network reliability, and the promotion of market entry and competition among facilities-based providers. (21) Nevertheless, despite the increasingly important role tandem transit services play in the evolving competitive marketplace, many policy issues surrounding the development of competition in the tandem transit market remain unresolved.

3. RECENT STATE COMMISSION DEVELOPMENTS

   Several state commissions recently addressed many of these developing issues when Neutral Tandem, a competitive tandem transit provider, filed petitions for interconnection with a large CLEC. Neutral Tandem filed the petitions after the CLEC, which previously had received tandem transit traffic from Neutral Tandem, indicated that it would no longer allow Neutral Tandem to continue delivering tandem transit traffic.

   The dispute was tried to a decision before several state commissions. Each of the commissions that addressed the merits of the dispute considered many of the public policy issues that are also being debated before the FCC in the Intercarrier Compensation Docket. Although each state commission addressed the dispute under applicable state law, (22) the rulings were based, at least in part, on the commissions' findings that a direct interconnection between Neutral Tandem and the terminating CLEC was necessary to the public interest and consistent with federal law and policy. The decisions thus provide useful guidance for federal regulators as they address this important and pressing issue in the Intercarrier Compensation Docket.

   1. Background

      Since 2004, Neutral Tandem and the CLEC had been interconnected pursuant to a series of commercial contracts. (23) Under the commercial contracts, the carriers had a two-way relationship. Neutral Tandem delivered both the CLEC's originating traffic to other carriers and the terminating traffic to the CLEC sent by other competitive carriers through Neutral Tandem. (24)

      In early 2007, the CLEC notified Neutral Tandem that it sought to terminate several of its existing agreements with them. (25) Because the CLEC's correspondence indicated that it planned to terminate the...