Getting wireless carriers wired for less: an argument for federal regulation of LEC-CMRS interconnection agreements.

• Author: Yeo, Derek
• Position: Local exchange carriers and commercial mobile radio service

In 1993, Congress enacted legislation that significantly transformed the regulatory treatment of mobile telephone services. Section 6002 of the Omnibus Budget Reconciliation Act of 1993 (the "Budget Act")(1) amended section 332 of the Communications Act of 1934 (the "1934 Act")(2) to preempt state regulation of entry into the wireless market and state regulation of rates charged by wireless service providers.(3) In addition, section 6002 of the Budget Act granted the Federal Communications Commission (FCC or the "Commission") authority to regulate interconnection between commercial mobile radio service (CMRS)(4) providers and other common carriers.(5)

Less than three years later, Congress enacted the Telecommunications Act of 1996 (the "1996 Act"),(6) which significantly amended the 1934 Act and sought to establish a "pro-competitive, de-regulatory national policy framework" for the U.S. telecommunications industry.(7) One of the most far-reaching objectives of the 1996 Act is the opening of local exchange markets to competition.(8) Congress sought to achieve this goal by imposing on incumbent local exchange carriers (LECs),(9) which tradition ally operated in a monopolistic environment,(10) a number of duties,(11) including the duty to interconnect with any telecommunications carrier that requests interconnection with the LEC's network.(12) Under the 1996 Act, incumbent LECs(13) must negotiate in good faith with all requesting telecommunications carriers(14) to reach agreement on the terms of interconnection.(15) If parties are not able to agree on terms of interconnection, then the 1996 Act provides that a party may request arbitration of unresolved terms by a state commission.(16)

The 1996 Act, therefore, presented the Commission with a dilemma: whether the 1996 Act, which broadly governs interconnection between telecommunications carriers and LECs, applies to LEC-CMRS interconnection, thus granting jurisdiction over arbitration proceedings to state commissions, or whether section 332 of the 1934 Act reserves jurisdiction over LEC-CMRS interconnection for the FCC. On April 19, 1996, the Commission initiated a rulemaking, which included a request for comments on the LEC-CMRS interconnection issue,(17) to implement the local competition provisions of the 1996 Act.(18)

On August 8, 1996, the FCC released its First Report and Order in the interconnection proceeding.(19) In Section X of the Interconnection Order, the Commission concluded that sections 251 and 252 of the 1996 Act apply to LEC-CMRS interconnection.(20) The Commission, however, acknowledged section 332 as an alternative basis for jurisdiction over LEC-CMRS interconnection and reserved the option of revisiting this jurisdictional question in the future.(21)

This Note discusses the alternative bases for jurisdiction over LEC-CMRS interconnection. The Note argues that section 6002 of the Budget Act granted the FCC jurisdiction over LEC-CMRS interconnection and that the FCC's jurisdiction remained intact after Congress's enactment of the 1996 Act. This Note also considers factors that support the assertion of federal jurisdiction in this area. First, LECs subjected CMRS providers to discriminatory treatment for many years in the area of interconnection. This treatment existed despite regulatory oversight by state public utility commissions. Moreover, several states promulgated regulations that discriminated against CMRS providers. Second, although CMRS providers have negotiated substantially more favorable interconnection agreements since the 1996 Act, some LECs continue to subject CMRS providers to discriminatory treatment. Finally, recognizing FCC jurisdiction to regulate LEC-CMRS interconnection will further Congress's stated policy goals of promoting interconnection between LECs and CMRS providers, fostering the development of a national wireless infrastructure, and furthering the goal of a procompetitive telecommunications regulatory framework.

In light of the past and current experiences of CMRS providers at the state level, this Note argues that the FCC should assert its jurisdiction over LEC-CMRS interconnection and regulate LEC-CMRS interconnection agreements. This Note also proposes one solution: federal arbitration of LEC-CMRS interconnection agreements.

THE IMPORTANCE OF LEC-CMRS INTERCONNECTION

By definition, all CMRS providers interconnect with the public switched network.(22) CMRS providers must interconnect(23) with the public switched network so that a wireless customer can place a call to a landline,(24) i.e., nonwireless customer, or vice versa.(25) Because there are many more wireline phones than mobile phones,(26) a substantial majority of calls made by wireless subscribers are routed through the public switched network via a LEC.(27) The LEC interconnecting a CMRS provider to the public switched network thus controls a "bottleneck" in the completion of most telephone calls to or from mobile phone users.(28)

The FCC has recognized that LEC-CMRS interconnection is essential to the provision of wireless telecommunications since the early stages of its regulation of cellular telecommunications.(29) In a 1994 rulemaking order implementing the Budget Act, the FCC emphasized that "commercial mobile radio service interconnection with the public switched network will be an essential component in the successful establishment and growth of CMRS offerings."(30)

Interconnection Charges

LECs impose charges on CMRS providers for interconnection with the public switched network. LECs apply these charges primarily on a "minute of use" basis for LEC transport and termination of calls originated by wireless customers, although many LECs also impose flat rate fees for use of their wireline facilities.(31) "Transport" involves the transmission of telecommunications traffic from the point of physical interconnection between the two carriers to the LEC switch that serves the called party.(32) "Termination" encompasses the remaining portion of the call: switching of the traffic on the LEC switch and delivery of the call to the called party's telephone.(33) By collecting transport and termination costs, therefore, an LEC recovers the costs of completing a call originated by another carrier.

The rates charged by LECs for transport and termination of traffic handed over by CMRS providers are a significant factor in determining the growth of the wireless industry because interconnection charges constitute a significant part of wireless carriers' operating expenses.(34) In 1996, MTA-EMCI, a Washington telecommunications consulting firm, estimated that wireless carriers paid $1.3 billion annually in interconnection fees.(35) Prior to the 1996 Act, LECs, as monopoly providers of wireline telephone exchange service in most areas, frequently used their greater bargaining power to impose higher transport and termination rates on CMRS providers than those offered to wireline carriers.(36) If LECs can obtain such discriminatory interconnection rates in interconnection agreements negotiated or arbitrated pursuant to the 1996 Act, then they can continue to hinder the development of the wireless industry.(37)

Mutual Compensation

The principle of mutual or reciprocal compensation(38) is also important to the continued development of the wireless industry. Mutual compensation entails the payment of transport and termination charges by each interconnecting carrier for traffic originating on its network and handed over to the other carrier.(39) In essence, under mutual compensation, "compensation flows in both directions between interconnecting networks."(40)

LECs traditionally have entered into interconnection agreements with other LECs that provide for mutual compensation for traffic exchanged between the carriers.(41) Prior to the 1996 Act, however, LECs rarely entered into mutual compensation interconnection agreements with CMRS providers.(42) As a result, CMRS providers traditionally paid LECS transport and termination charges for traffic originated on the wireless network, but could not recover the costs they incurred in terminating calls that originated on the wireline network. By refusing to enter reciprocal compensation interconnection agreements with CMRS providers, LECs discriminated against CMRS providers, deprived CMRS providers of a significant stream of revenues,(43) and thus hindered the ability of wireless providers to offer telephone service competitive with wireline telephone service.

THE STATUTORY AND REGULATORY FRAMEWORK GOVERNING LEC-CMRS INTERCONNECTION

The propriety of the Commission's determination in the Interconnection Order that sections 251 and 252 govern LEC-CMRS interconnection must be examined in the context of the statutory and regulatory framework that existed prior to enactment of the 1996 Act. This Note now discusses the Commission's jurisdiction over LEC-CMRS interconnection before and after the Budget Act of 1993.

The Statutory and Regulatory Framework Prior to the Budget Act

The Communications Act of 1934: The Interstate/Intrastate Dichotomy

The 1934 Act creates a dual regulatory structure for interstate and intrastate telecommunications.(44) Section 1 of the 1934 Act authorizes the creation of the FCC for the purpose of "regulating interstate and foreign commerce in communication by wire and radio."(45) Title II of the 1934 Act authorizes the FCC to regulate common carriers(46) engaged in interstate communications.(47) Section 201(a) imposes a duty on every common carrier to interconnect with other carriers if the Commission finds such interconnection is in the public interest.(48) In addition, section 201(b) requires that common carriers charge "just and reasonable" rates for services provided pursuant to section 201(a).(49)

Section 2(b) of the 1934 Act, however, specifically withholds jurisdiction from the Commission with regard to intrastate services, subject to a number of exceptions.(50) Section 301 of the 1934...