Predicting the Obama Effect on Communications Regulation and Net Neutrality

When last we spoke of net neutrality, the Federal Communications Commission ("FCC") was considering the case of Comcast which  was accused of using new technology to peek inside packets traversing its network and intentionally slowing or degrading the operation of "peer-to-peer"  and similar applications.  One of the potential motivations for Comcast's behavior is that peer-to-peer applications are often used to exchange media content [music or video] that might be substituted for the content Comcast sells to its cable customers.[1]  On August 20, 2008, the FCC issued its enforcement order requiring that Comcast, a cable operator, stop the challenged network management practices.  Comcast, however, was expressly allowed to use alternative network management practices so long as those practices were reasonably disclosed to the FCC and the public.[2]  Does this mean that the net neutrality debate is over?  Hardly.  Net neutrality refers to a broad range of technologies and information that may traverse the Internet and the ability of various users to access and use that technology through their connections.  End users like residential cable or broadband customers are connected to the Internet either through the PSTN (public switched telephone network) or cable.  That last mile connection is virtually always through an incumbent, former monopoly entity. 

While the cause for net neutrality was somewhat advanced by the Comcast decision, it did not come close to resolving all of the issues.  In particular, the issue has not been resolved with respect to voice-embedded Internet applications such as Skype, xBox and other Internet applications that are capable of touching the PSTN in one way or another.  This aspect of net neutrality is burdened not only by blocking or boycotting of new technology but also the billions of dollars at stake in access charges that incumbents receive from interexchange carriers to terminate calls on the PSTN.  Although the FCC ruled that interexchange carriers using IP in the middle to transmit calls PSTN-to-PSTN between LATAs must pay access,[3] there has been no decision on calls that originate on the Internet and terminate on the PSTN such as GoogleTalk, Skype or even a WiFi-enabled Blackberry over your home Internet wireless router.

Various proceedings continue at the FCC that touch on the regulatory treatment of voice-embedded Internet technology connecting to the PSTN, including some that will challenge new appointees.[4]  Efforts to obtain guidance on the regulatory treatment of Internet-to-PSTN traffic for the past seven years have largely failed.  One proceeding, a petition for forbearance under 47 U.S.C. §160 from the access charges assessed by incumbents was set for decision by Jan. 21, 2009.[5]  Embarq, an ILEC-affiliated entity, filed a mirror opposite petition for forbearance seeking to impose access tariffs on all Internet-originated traffic terminating on the PSTN, specifically seeking forbearance from the ESP (enhanced service provider) exemption found at 47 C.F.R. §69.5.[6]  Embarq's forbearance petition was set to be disposed by January 8, 2009, but that date has been extended to February.[7]  "While these petitions are mirror opposites, together they force the commission's hand on one of the more politically sensitive and difficult questions facing the regulators - whether IP-based voice traffic should be subject to intercarrier compensation payments similar to any other switched voice provider or whether such traffic should be exempt under the [ESP exemption]."[8]

Meanwhile, speculation abounds about what an Obama appointee would do with the intercarrier compensation issue, if anything.  Obama supports net neutrality, stating in a variety of media that that he opposes positions taken by lobbyists for incumbents seeking to enable "gatekeepers to charge different rates to different Web sites," and pledged that net neutrality would be "the principle that my FCC commissioners [would apply] as we move forward."[9]  Although Obama's policy statements have been limited to broadband, both the neutrality policy and the technology require that the larger question of intercarrier compensation and the routing, rating and signaling of IP to PSTN calls be addressed - an issue critical to our technological advancement commensurate with other developed countries.

"Regulatory uncertainty . . . in itself may discourage investment and innovation" of the very technologies that Congress intended the Act to promote.[10]  Indeed, numerous critics of the FCC cite examples of regulatory blame for the United States being behind Europe in technological deployment despite consumers paying some of the highest rates for both service and equipment.  Ben Scott, policy director for the nonprofit Free Press, reports that the United States has fallen out of the top 10 countries in the world when it comes to the percentage of households using broadband.  "If you look overseas ... most of the world's leading nations have a half dozen or more different companies offering similar broadband product.  They're competing on price.  They're competing on speed.  They're competing on the attractiveness of the services they offer on top of their broadband package."[11]   

Is our communications regulatory system is broken?  Several commentators believe that it is.   Professor Lawrence Lessig wrote in the Dec. 24, 2008 issue of Newsweek that the FCC should be "rebooted":[12]

The solution here is not tinkering. You can't fix DNA. You have to bury it. President Obama should get Congress to shut down the FCC and similar vestigial regulators, which put stability and special interests above the public good.[13]

There is a saying among bankruptcy lawyers that "all of the tough issues end up getting decided in bankruptcy court."  True to form, the broader ESP exemption question was decided in bankruptcy court already with nary a hand wrung or navel gazed.  In In re Transcom Enhanced Services Inc., Judge Harlin D. Hale had to decide whether the debtor could assume its agreement with AT&T without paying SBC Texas (now d/b/a AT&T Texas) large access charge bills that SBC claimed that AT&T owed. [14] Although the decision was reversed on other grounds on appeal, the bankruptcy court's order was a straightforward application of the ESP exemption to Internet traffic terminating on the PSTN being exempt from access charges.[15]

The regulators continue to leave a trail of corporate carnage in their wake of regulatory punctiliousness and deferred decisions.  This paradigm will continue until major change comes to the FCC.  Will Obama deliver the change we need, or will even more bankruptcy lawyers need to bone up on telecom law?