Wilkinson Barker Knauer Memo

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August 15, 2005 MEMORANDUM To: From: Re: Chris Peirce Teresa Griffin-Muir Lawrence J. Movshin Robert G. Morse U.S. Regulatory Overview

Allstream has asked that we provide an overview of U.S. Federal communications law governing the regulation of Voice over Internet Protocol (“VoIP”) services and the wireline broadband facilities and services used in the provision of VoIP services, principally incumbent LECs‟ (“ILEC”) Digital Subscriber Line (“DSL”) services and cable operators‟ cable modem services. As discussed, this memorandum focuses on the requirements of the Communications Act of 1934, as amended (the “Act”), including the amendments to the Act enacted in the Telecommunications Act of 1996 (the “1996 Act”), and the regulations of the Federal Communications Commission (“FCC”) implementing those statutory provisions. This memorandum does not provide an exhaustive discussion of all of the relevant FCC law and precedents, but nonetheless is intended to address the principal statutes, rules, and FCC and judicial precedents relevant to the above subject matter. INTRODUCTION/EXECUTIVE SUMMARY The FCC‟s regulation of facilities used to provide broadband services, as well as the regulatory treatment of VoIP applications, stem from FCC decisions dating back to the 1970s. Under this framework, the FCC has traditionally imposed more stringent requirements on dominant carriers‟ provision of the facilities used to provide enhanced/information services, particularly on ILEC services. Prior to the 1996 Act, due to the consent decree and Modification of Final Judgment (“MFJ”) governing the U.S. Department of Justice‟s breakup of AT&T, the seven Regional Bell Operating Companies (“RBOCs”) were prohibited from offering interLATA/interexchange (i.e., long distance/toll) services as well as information services. Today, to some extent, the scope of regulation for broadband services is in a state of flux, with several rulemaking proceedings addressing these issues pending and a number of FCC decisions adopted but not yet in effect. In short, ILECs‟ provision of broadband services and facilities remains subject to a number of competitive safeguards, but the FCC has lifted or eased a number of such restrictions in recent years, particularly with respect to competing ISPs‟ and competitive LECs‟ (“CLEC”) access to ILEC services and facilities. Notably, a significant FCC decision

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 2 reclassifying DSL service as an “information service” likely subject to fewer regulatory requirements was adopted on August 5, 2005 but the full text of the FCC‟s decision has not yet been released. Cable modem service is already classified as an information service not subject to such traditional regulations. The FCC to date has classified IP-based applications provided via such services, including VoIP, on a case-by-case basis, but has generally proposed that such applications would be subject to minimal economic regulation (although some services with an IP nexus have been classified as telecommunications services still subject to a panoply of common carrier regulation). Following is an executive summary of the subject matter addressed in this memorandum:  Section I -- Current Statutory Framework: Different providers of competing broadband offerings are regulated pursuant to different provisions of the Communications Act. Section I provides an overview of these regulatory “silos,” as well as the FCC‟s jurisdiction over “Interstate” versus “Intrastate” services. A service provider‟s regulatory classification will determine which of these regulatory requirements apply to its offering. This memorandum principally focuses on Title II of the Act, which sets forth the requirements imposed on common carrier telecommunications service providers (including ILECs), and Title I of the Act, which the FCC has indicated is a potential basis for imposing certain regulations on providers of “information services,” including cable modem and, in the near future, DSL. Section II – Information v. Telecom Services. This section discusses the evolution of FCC regulation of telecommunications and information services, beginning with the FCC‟s initial “Computer Inquiry” decisions and their progeny, which established the “enhanced” versus “basic” services dichotomy. In the 1996 Act, Congress established the current definitions for telecommunications services (which are subject to Title II regulation) and information services (which are subject to Title I jurisdiction and could become subject to Title II-like obligations, such as universal service contributions or access). The FCC has determined that the two terms are mutually exclusive; a service can be either a telecommunications or information service, but not both. The Supreme Court recently upheld the FCC‟s statutory interpretation in its Brand X decision, and the FCC‟s determination that cable modem service is an information service has recently been extended to DSL. Section III – Current Regulatory Framework. This section discusses in detail the FCC‟s current and proposed regulation of VoIP services and the broadband delivery systems over which VoIP and other IP-based services and applications are provided. The FCC to date has addressed whether particular VoIP services are telecommunications versus information services on a case-by-case basis. The FCC‟s decisions in Vonage (involving an interconnected VoIP service) and Pulver (involving peer-to-peer type

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Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 3 services) underscore the FCC‟s minimal regulatory approach toward VoIP/information services. The FCC based the Vonage decision on its interstate jurisdiction, but noted that, if Vonage were classified as a telecommunications service, it “would be considered a nondominant, competitive telecommunications provider” not subject to economic regulation. The FCC‟s decision holding that AT&T‟s IP-provisioned interexchange service is a telecommunications service subject to access charges indicates that this trend will be subject to some limits. The FCC has a pending rulemaking proceeding to consider the appropriate regulatory treatment of VoIP services in which it states its general belief that traditional economic regulation designed for the legacy network should not apply outside the context of the PSTN. The FCC has already imposed E911 emergency calling and wiretap-related on certain interconnected VoIP services. The FCC‟s regulation of telecom carriers‟ wireline broadband delivery systems addresses two general aspects of broadband services: the offering of underlying transport or transmission services to end users (including end user Internet/enhanced service providers competing with the carrier‟s own offering); and competing carriers‟ access to unbundled facilities for the purpose of offering competing local services. As to transport or transmission service offerings, the FCC has traditionally imposed dominant carriertype regulations on ILECs‟ provision of the transport/transmission services underlying their enhanced services. However, the FCC has now adopted an Order reclassifying DSL as an “information service” likely exempt from such regulations – an approach similar to that taken for cable modem service. As to competitors‟ access to unbundled facilities, the FCC‟s Line Sharing decisions initially required ILECs to unbundle the high frequency portion of the local loop under certain circumstances. This approach was significantly modified in the 2003 Triennial Review Order which largely limited ILECs‟ unbundling obligations to stand-alone copper loops, and phased out line sharing obligations. Unbundling obligations no longer extend to the high frequency portion of their loops or to other features/capabilities related to new technologies, although the FCC continues to require unbundling of DS-1 and DS-3 loops to “enterprise” customers except in narrow circumstances. DISCUSSION I. CURRENT STATUTORY FRAMEWORK

Different providers of competing broadband and VoIP offerings are regulated pursuant to different provisions of the Communications Act for their various service offerings: Titles I, II, III and VI. Notably, Title II of the Act in particular, governing common carrier telecommunications services, further distinguishes between the regulation of “interstate” and “intrastate” telecommunications services. The extent to which a particular VoIP or broadband service falls into one of these particular regulatory “silos” – particularly Title II – will determine the extent to which a service will be subject to economic regulation.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 4 A. Title II – Common Carrier Regulation

Scope. Title II sets forth the common carrier obligations traditionally associated with telephone utility regulation. “Telecommunications carriers” – i.e., providers of “telecommunications services,” are defined by the 1996 Act as common carriers and, as explained below, are subject to Title II regulation.1 Title II was substantially amended in the Telecommunications Act of 1996 (“1996 Act”). Prior to the 1996 Act, due to the consent decree and Modification of Final Judgment (“MFJ”) governing the U.S. Department of Justice‟s breakup of AT&T, the seven Regional Bell Operating Companies (“RBOCs”)2 were prohibited from offering interLATA/interexchange (i.e., long distance/toll) services as well as information services.3 The 1996 Act superseded the consent decree and established a broader framework governing ILECs‟ service offerings, the circumstances under which they could offer information services, and their obligations toward CLECs. ILECs‟ DSL offerings are presently regulated under Title II (although the FCC has announced that such classification will change) and, to the extent that certain VoIP services are deemed “telecommunications services,” they are potentially subject to various Title II regulations as well. General Common Carriage Obligations. All telecommunications carriers, irrespective of market position or their particular services, are subject to general obligations regarding the reasonableness of and nondiscrimination in rates, terms and conditions of service, as well as complaint procedures.4 Tariffing requirements are set forth in Sections 203-205 of the Act, but are now applicable only to carriers regulated as “dominant” which includes ILECs‟ interstate exchange access services.5 Section 214 of the Act imposes certification requirements for the provision of new telecommunications services and facilities, although the FCC now forbears from requiring certification prior to service launch with respect to domestic interstate services.6
1

See 47 U.S.C. §§ 153(44), 201 et seq. Under FCC precedent, “common carrier status turns on: (1) whether the carrier „holds himself out to serve indifferently all potential users‟; and (2) whether the carrier allows „customers to transmit intelligence of their own design and choosing‟.” See United States Telecom Ass’n v. FCC, 295 F.3d 1326 (D.C. Cir. 2002); see also Southwestern Bell Tel. Co. v. FCC, 19 F.3d 1475, 1480 (D.C. Cir. 1994), citing National Ass’n of Regulatory Util. Comm’rs v. FCC, 525 F.2d 630, 640-41 (D.C. Cir. 1976) (“NARUC I”), and National Ass’n of Regulatory Util. Comm’rs v. FCC, 533 F.2d 601, 608-09 (D.C. Cir. 1976) (“NARUC II”)). In contrast, “[i]f the carrier chooses its clients on an individual basis and determines in each particular case „whether and on what terms to serve‟ and there is no specific regulatory compulsion to serve all indifferently, the entity is a private carrier for that particular service and the Commission is not at liberty to subject the entity to regulation as a common carrier.” See Southwestern Bell Telephone v. FCC, 19 F.3d at 1481. 2 The original seven RBOCs were: BellSouth; Bell Atlantic and NYNEX (now, along with GTE, Verizon); Ameritech, Pacific Telesis and Southwestern Bell (now SBC); and U S WEST (now Qwest). 3 United States v. American Telephone and Telegraph Co., 552 F. Supp. 131 (D.D.C. 1982) aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). 4 47 U.S.C. §§ 201-202, 207-208. 5 Id. §§ 203-205; see Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as amended; and Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local Exchange Area, Notice of Proposed Rulemaking, 11 FCC Rcd 18877, ¶¶ 7-8 (1996) (describing RBOCs‟ market power in and price cap regulation of exchange access services). 6 47 U.S.C. § 214(a); 47 C.F.R. § 63.01.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 5 Economic Regulation of ILECs. Title II also includes ILECs‟ Section 251 obligations, including resale, unbundling, and interconnection, which are discussed in relevant part at Section III.B.1.b below.7 Differing degrees of obligations apply as between CLECs and ILECs.8 Section 271 of the Act also imposes so-called “checklist” obligations which require that RBOCs meet enumerated conditions as a condition of entry into in-region long distance service in a particular state. These obligations generally echo the ILECs‟ Section 251 obligations, and the RBOCs have obtained Section 271 approval in all 50 states.9 Section 272 imposes separate affiliate obligations on RBOCs with respect to their provision of information services.10 Social Policy Obligations. Title II also imposes certain social policy obligations on telecommunications carriers. For example, all telecommunications carriers are required to contribute to federal universal service programs.11 Currently, these contributions amount to over 10% of a carrier‟s end-user telecommunications revenue.12 Similarly, all telecommunications carriers are required to contribute to the costs of supporting telecommunications relay service (“TRS”).13 Interexchange carriers are subject to rate integration and geographic rate averaging requirements principally intended to ensure that services to Alaska and Hawaii, and in rural areas, are not subject to discriminatorily high pricing.14 All telecommunications carriers are also subject to requirements concerning law enforcement access to facilities for wiretap purposes,15
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47 U.S.C. § 251(c). Section 251(c) of the Act imposes stringent unbundling, interconnection, and resale obligations exclusively on ILECs. CLECs and ILECs alike, however, are subject to rights-of-way access, number portability and dialing parity requirements, and CLECs are subject to less stringent interconnection and resale obligations. 47 U.S.C. §§ 251(b)(c). 9 See Application by Qwest Communications International, Inc. for Authorization to Provide In-Region InterLATA Services in Arizona, Memorandum Opinion and Order, 18 FCC Rcd. 25504 (2003). 10 47 U.S.C. § 272. Section 272 imposes various structural and transactional requirements, including a requirement that competitive services be provided independently from the RBOC through a separate affiliate, with separate books, records, and accounts, as well as separate officers, directors, and employees from the RBOC. Id. § 272(b). All transactions with the RBOC must be on an arms-length basis, and the RBOC must deal with its affiliate on a nondiscriminatory manner and consistent with FCC-approved accounting principles. Id. § 272(c). These provisions are subject to sunset dates. Id. § 272(f). 11 Id. § 254(d). 12 See Public Notice, Proposed Third Quarter 2005 Universal Service Contribution Factor, CC Docket No. 96-45, DA 05-1664 (June 2005) (announcing a proposed contribution factor of 10.2% of a carrier‟s interstate and international end user telecommunications revenues). 13 47 U.S.C. § 225; 47 C.F.R. § 64.604. The TRS contribution factor currently amounts to just over one half of one percent of a carrier‟s interstate and international end user telecommunications revenues. See Public Notice, CC Docket No. 98-67, DA 05-1175 (rel. April 28, 2005). 14 47 U.S.C. § 254(g); 47 C.F.R. Subparts R and S. 15 47 U.S.C. §§ 229, 1001 et seq. These requirements of the Communications Assistance for Law Enforcement Act (“CALEA”) are separate from Title II, but the definition of “telecommunications carrier” for CALEA purposes is based on the common carrier definition of Title II. See 47 U.S.C. § 1001(8). The FCC has stated that in most instances, the Communications Act‟s and CALEA‟s definitions of telecommunications carrier will lead to the same result, although in a to-be-released Order the FCC has determined, pursuant to certain provisions of CALEA, that some non-common carrier services should be subject to CALEA‟s requirements as well. See Communications Assistance for Law Enforcement Act, Second Report and Order, 15 FCC Rcd. 7105, 7112 ¶ 13 (2000); News

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 6 and must ensure that their services are accessible to persons with disabilities.16 Finally, Title II imposes restrictions on carriers‟ use of customer proprietary network information.17 Prior to the 1996 Act, restrictions on the use of CPNI were limited to ILECs and AT&T and were principally viewed as a competitive safeguard;18 Congress in the 1996 Act modified these restrictions and viewed as both a competitive safeguard and a privacy protection measure for consumers.19 Dominant v. Nondominant Carrier Classification. Within the scope of its Title II authority, the FCC has generally distinguished between dominant carriers (e.g. ILECs‟ exchange access services, AT&T‟s long distance services prior to 1995) and non-dominant carriers. The FCC‟s rules define a “dominant carrier” as “a carrier found by the FCC to have market power (i.e., power to control prices).”20 The FCC looks not just at market share in any determination of market power, but also at other factors, including the ability to raise prices by restricting output, the ability to raise and maintain price above the competitive level without driving away so many customers as to make the increase unprofitable, market share, control of bottleneck facilities, rate of return and actual or potential competition.21 Prior to the 1996 Act, the FCC could only go so far in deregulating carriers through detariffing, but nondominant carriers were nonetheless subject to less stringent tariffing requirements and were not subject to accounting requirements, certain access obligations, or prior certification requirements.22 In the 1996 Act, the FCC was given authority to forbear from enforcing all Title II obligations on telecommunications carriers (except for ILECs‟ Section 251 obligations, which are not subject to

Release, FCC Requires Certain Broadband and VoIP Providers to Accommodate Wiretaps, rel. Aug. 5, 2005 (“Broadband CALEA News Release”). 16 47 U.S.C. § 255; 47 C.F.R. Parts 6-7. 17 47 U.S.C. § 222. 18 See, e.g., Filing and Review of Open Network Architecture Plans, 4 FCC Rcd. 1, 209-210 (1988) (CPNI requirements for RBOCs); In the Matter of Application of Open Network Architecture and Nondiscrimination Safeguards to GTE Corp., CC Docket No. 92-256. Report and Order, 9 FCC Rcd 4922. 4944-45, ¶ 45 (1994) and Application of Open Network Architecture and Nondiscrimination Safeguards to GTE Corp., CC Docket No. 92256. Memorandum Opinion and Order, 11 FCC Rcd 1388. 1419-25, ¶¶ 73-86 (1995) (imposing CPNI restrictions on GTE). 19 Compare 47 U.S.C. § 222(b) (prohibiting use of another carrier‟s proprietary information for own marketing purposes) and § 222(c) (restricting use of individual customer CPNI). 20 47 C.F.R. § 61.3(q). 21 See Motion of AT&T Corp. to be Classified as a Non-Dominant Carrier, Order, 11 FCC Rcd. 3271, 3274-75 ¶ 5 (1995). 22 See MCI Telecomms. Corp. v. AT&T Corp., 512 U.S. 218, 231 (1994); Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (describing FCC‟s history of detariffing efforts); 47 C.F.R. §§ 61.22, 61.54 (1995) (exempting non-dominant carriers from detailed filing requirements); 47 C.F.R. § 63.07 (1991) (affording nondominant carriers blanket Section 214 certification); 1998 Biennial Regulatory Review — Review of Accounting and Cost Allocation Requirements; United States Telephone Association Petition for Rulemaking, Notice of Proposed Rulemaking, 13 FCC Rcd 12973, ¶ 3 (1998) (explaining that ILECs are subject to Part 32 accounting rules); infra § III.B.1 (discussing various access requirements).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 7 forbearance until they “have been fully implemented”)23 The FCC has exercised this authority to forbear from imposing tariffing obligations on nondominant carriers entirely. Interstate v. Intrastate Jurisdiction. Title II establishes the framework for imposing economic regulation on telecommunications carriers‟ interstate services.24 Carriers‟ intrastate services are generally subject to the jurisdiction of state regulatory commissions.25 States thus have their own approach for intrastate services which, while often similar to the federal regulatory regime, has differed in some respects. For example, some states have sought to require ILECs to sell “naked DSL,” although there is ongoing dispute over the FCC‟s ability to preempt such state determinations to the extent they create burdens that are different from or beyond those imposed by the FCC.26 B. Title I – FCC’s General Regulatory Authority Over “Interstate and Foreign Communications”

Section I of the Act establishes the FCC‟s general regulatory jurisdiction and provides limited legal authority to regulate outside of the more specific authority provisions of the Communications Act – so-called “ancillary authority.” Section I of the Act is significant for purposes of the instant discussion because the FCC has posited that regulation of information services, including broadband and VoIP offerings, could be subject to regulation under Title I. The FCC has long held that it has jurisdiction to regulate computer-based services under Title I, and the U.S. Supreme Court in its recent decision in Brand X found that the FCC “remains free to impose special regulatory duties on facilities-based [Internet service providers] under its Title I ancillary jurisdiction.”28 The FCC‟s authority is not without limits, however,
27
23

See 47 U.S.C. 160(a), (c). Congress had granted the FCC similar authority with respect to mobile wireless services in 1993. See 47 U.S.C. § 332(c)(1). The amendments in the 1996 Act essentially expanded the scope of the FCC‟s forbearance authority and extended it to wireline carriers. 24 See id. §§ 151-152, 201. “Interstate” service is defined as “communication or transmission (A) from any State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia, to any other State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia, (B) from or to the United States to or from the Canal Zone, insofar as such communication or transmission takes place within the United States, or (C) between points within the United States but through a foreign country ….” Id. § 153(22). 25 See id.. § 152(b). “Intrastate” service is defined as “wire or radio communication between points in the same State, Territory, or possession of the United States, or the District of Columbia, through any place outside thereof, if such communication is regulated by a State commission.” Id. § 153(22). 26 See, e.g., BellSouth Telecommunications, Inc. Request for Declaratory Ruling that State Commissions May Not Regulate Broadband Internet Access Services by Requiring BellSouth to Provide Wholesale or Retail Broadband Services to Competitive LEC UNE Voice Customers, Memorandum Opinion and Order and Notice of Inquiry, FCC 05-78 (rel. March 25, 2005) (“BellSouth Order”). 27 See In the Matter of Section 64.702 of the Commission’s Rules & Regulations, 77 F.C.C. 2d. 384, 431-33 (1980) (noting the FCC only had authority over enhanced services under the general provisions of Title I and refraining from imposing regulations). 28 National Cable & Telecommunications Ass’n v. Brand X Internet Services, 125 S.Ct. 2688, 2708 (2005) (“Brand X”).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 8 and courts have sometimes held that certain subject matter falls outside the scope of the FCC‟s Title I authority.29 In addition, States are free under Title I to regulate purely intrastate services except in enumerated circumstances (e.g. mobile wireless services). In some circumstances, however, including the Vonage decision discussed below, the FCC has declared a service “interstate” (or mixed, non-severable use) and pronounced exclusive federal jurisdiction.30 C. Title III – Wireless Regulation

The FCC views broadband wireless services as another intermodal broadband competitor, albeit on a limited basis with wireline.31 Wireless broadband operators (licensed and unlicensed alike) are subject to licensing and various service-specific requirements of Title III of the Act. Wireless common carriers are subject to many Title II obligations and potentially Title I regulation as well. The FCC does not, however, regulate wireless operators as dominant carriers under Title II. Thus, they are not subject to, for example, Section 251 unbundling and resale requirements. D. Title VI – Cable Regulation

Cable operators are regulated under Title VI of the Act. While cable operators are still generally considered dominant in the provision of video programming, provisions of Title VI addressing cable operator dominance issues are not applicable to cable operators‟ provision of cable modem service.32 In addition, as discussed previously, the FCC‟s determination that cable modem service offered by cable operators is an information service was recently upheld by the Supreme Court in the Brand X decision. II. EVOLUTION OF FCC REGULATION OF TELECOMMUNICATIONS AND INFORMATION SERVICES

Whether a VoIP service or the underlying broadband service is regulated as a “telecommunications service” or an “information service” will have a significant – if not determinative – impact on the extent to which the FCC imposes various Title II regulatory
29

The FCC may exercise this “ancillary jurisdiction” only when “(1) the Commission‟s general jurisdictional grant under Title I covers the regulated subject and (2) the regulations are reasonably ancillary to the Commission‟s effective performance of its statutorily mandated responsibilities.” See American Library Ass’n v. FCC, No. 041037 (D.C. Cir. 2005). 30 Vonage Holdings Corp., Memorandum Opinion and Order, 19 FCC Rcd. 3307 (2004) (“Vonage”); Pulver, Memorandum Opinion and Order, 19 FCC Rcd 3307 (2004). 31 See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps To Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, Third Report, 17 FCC Rcd 2844, ¶¶ 55-59 (2002). 32 In a recent development, the National Cable & Telecommunications Association (“NCTA”), the cable operators‟ principal U.S. trade association, has argued to the FCC that SBC‟s and other ILECs‟ proposed “IP video services” fall within existing definitions of Title VI and are subject to Title VI regulation. See NCTA Ex Parte Letter and Memorandum in WC Docket No. 04-36, filed July 29, 2005.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 9 obligations on the service. Many of the long-standing restrictions and obligations (which the FCC now intends to eliminate) imposed on ILECs‟ provision of information services, arose from the same decisions in which the FCC first drew regulatory distinctions between the two service categories. An overview of this precedent follows below in Section II. A. Pre-1996 Act -- Computer II/III and MFJ and Progeny

In a series of decisions beginning nearly 30 years ago in the so-called Computer Inquiry proceedings, the FCC created an “enhanced” versus “basic” services dichotomy.33 In this series of decisions, the FCC distinguished between bottleneck common carrier facilities and services for the transmission or movement of information on the one hand and, on the other, the use of computer processing applications to act on the content, code, protocol, or other aspects of the subscriber‟s information.34 The FCC found that it had jurisdiction over enhanced services under Title I, but declined to exercise that jurisdiction given the competitiveness of the market. In contrast, basic services offered by RBOCs are subject to Title II common carrier regulation. Moreover, all common carriers that offer enhanced services over their own facilities must make the underlying basic transmission path available on a non-discriminatory basis.35 As discussed below, many of these Title II obligations remain in effect now, although the FCC‟s August 5th Wireline Broadband Order, once it becomes effective, will presumably eliminate or modify many of these requirements.36 Separate and apart from the FCC‟s requirements, the MFJ governing the breakup of AT&T prohibited the RBOCs from providing “information services.” The court‟s approach largely reflected the FCC‟s enhanced versus basic distinction, and the definition of “information services” adopted in the 1996 Act reflects the MFJ‟s language.37 The court concluded that the
33

See Regulatory and Policy Problems Presented by the Interdependence of Computer and Communication Services and Facilities, Docket No. 16979, Notice of Inquiry, 7 FCC 2d 11 (1966) (Computer I NOI); Regulatory and Policy Problems Presented by the Interdependence of Computer and Communication Services and Facilities, Docket No. 16979, Final Decision and Order, 28 FCC 2d 267 (1971) (Computer I Final Decision); Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Tentative Decision and Further Notice of Inquiry and Rulemaking, 72 FCC 2d 358 (1979) (Computer II Tentative Decision); Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Final Decision, 77 FCC 2d 384 (1980) (Computer II Final Decision); Amendment of Section 64.702 of the Commission's Rules and Regulations (Third Computer Inquiry), CC Docket No. 85-229, Report and Order, 104 FCC 2d 958 (1986) (Computer III) (collectively the “Computer Inquiries”). 34 See Computer II Final Decision, 77 FCC 2d at 387. 35 See Independent Data Communications Manufacturers Ass’n Petition for Declaratory Ruling that AT&T’s InterSpan Frame Relay Service Is a Basic Service, Memorandum Opinion and Order, 10 FCC Rcd 13717 (1995). Note in this regard that AT&T‟s frame relay service was separately held to be a basic common carrier telecommunications service. Id. 36 See infra Section III(B)(1)(a). 37 The MFJ defined information service as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information which may be conveyed via telecommunications, except that such service does not include any use of any such capability for the management,

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 10 RBOCs “would have the same incentives and the same ability to discriminate against competing information service providers that they would have with respect to competing interexchange carriers” and reasoned further that if “excluded from the information services market, [the RBOCs] will have an incentive, as time goes on, to design their local networks to accommodate the maximum number of information service providers, since the greater the number of carriers the greater will be the [RBOCs‟] earnings from access fees.”38 (AT&T, in contrast, was expressly permitted to engage in “data processing and other computer-related services,” as the court rejected arguments that AT&T could use monopoly profits from its interexchange business anticompetitively.)39 Under the MFJ, the provision of gateways (involving address translation, protocol conversion, billing management, and the provision of introductory information content) to information services fell within the “information services” definition.40 Electronic mail, like other store-and-forward services, including voice mail, was similarly classed as an information service.41 While the 1996 Act adopted the “information service” nomenclature, the terms of the MFJ were superseded by the 1996 Act.42 B. 1996 Act -- Telecommunications v. Information Services

Congress in the 1996 Act largely codified the Computer Inquiry framework, amending the Communications Act to expressly define “telecommunications” and “information” services.43 The Act defines “telecommunications service” as “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of facilities used.”44 “Telecommunications,” in turn, is “the transmission, between or among points specified by the user, of information of the user‟s choosing, without change in the form or content of the information as sent and received.”45 Under this definition, an entity provides telecommunications only when it both provides a transparent transmission path and it does not change the form or content of the information.46 The FCC applies this definition

control, or operation of a telecommunications system or the management of a telecommunications service.” 552 F.Supp. at 131. 38 Id. at 189. 39 Id. at 179-80. 40 See Federal-State Joint Board on Universal Service, Report to Congress, 13 FCC Rcd 11501, ¶ 75 (1998) (citing United States v. Western Electric Co., 673 F. Supp. 525 (D.D.C. 1987) and 714 F. Supp. 1, 11, 19 n.73, 18-24 (D.D.C. 1988). 41 See id. 42 Telecommunications Act of 1996, Pub. L. 104-104, § 601(a)(1). 43 See Pulver at ¶ 18 n.64 (citing Implementation of the Non-Accounting Safeguards of Sections 27 and 272 of the Communications Act of 1934, as amended, First Report and Order and Further Notice of Proposed Rulemaking, 11 FCC Rcd 21905, 21955-56 ¶ 102 (1996). 44 47 U.S.C. § 153(46). 45 Id. § 153(43). 46 Universal Service Report to Congress, 13 FCC Rcd. 11501, 11521 ¶ 41 (1998) (“Report to Congress”).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 11 irrespective of whether a service is circuit- or packet-switched.47 If this offering is made directly to the public for a fee, it is deemed a “telecommunications service.”48 The Act defines “information service” as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.”49 The term includes “electronic publishing, but does not include any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.”50 Importantly, “[w]hen an entity offers subscribers the „capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications,‟ it does not provide telecommunications, it is using telecommunications.”51 Thus, the FCC has held that the terms “telecommunications service” and “information service” are mutually exclusive; a service cannot be both.52 An information service is thus not subject to the myriad of Title II obligations. Notably, providers of information services are not presently subject to USF contributions and the charges paid by interexchange carriers to LECs for originating and terminating access services (access charges).53 In contrast, and with respect to Internet-based services in particular, the FCC to date has adopted a policy of minimal regulation for information services, and even “nonregulation” for the Internet.54 Finally, note that Section 271 of the Act effectively prohibited RBOCs from offering some information services by virtue of the restriction on interLATA services. RBOCs are now permitted to offer information services without such restrictions now that they have 271 authority to provide interLATA services, albeit subject to any applicable Section 272 separate affiliate obligations.55

47 48

See id. at ¶ 89. 47 U.S.C. § 153(46). 49 Id. § 153(20). 50 Id. 51 Report to Congress, 13 FCC Rcd. at 11521 ¶ 41. 52 See id. at ¶ 32; Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities; Internet Over Cable Declaratory Ruling; Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, Declaratory Ruling and Notice of Proposed Rulemaking, 17 FCC Rcd 4798, 4823-24 ¶ 41 (2002) (“Cable Modem Declaratory Ruling”)(citing Report to Congress, 13 FCC Rcd. at 11520 ¶ 39), aff’d in part, vacated in part, and remanded sub. nom., Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir. 2003), rev’d sub. nom. National Cable & Telecommunications Ass’n v. Brand X Internet Services, 125 S.Ct. 2688, 2708 (2005). 53 See Access Charge Reform / Price Cap Performance Review For Local Exchange Carriers / Transport Rate Structure And Pricing / End User Common Line Charges, First Report and Order, 12 FCC Rcd 15982, ¶ 345 (1997); MTS and WATS Market Structure, Memorandum Opinion and Order, Docket No. 78-72, 97 FCC 2d 682, 711-22 (1983); Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 3 FCC Rcd 2631 (1988). 54 See Pulver.com Declaratory Ruling, 19 FCC Rcd. at 3307 ¶ 1. 55 47 U.S.C. §§ 271, 272(a)(2)(C).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 12 C. Cable Modem/DSL Service – Brand X Decision and FCC’s Wireline Broadband Order

The FCC‟s first significant application of the Act‟s telecommunications versus information services distinction to broadband services was in the context of cable operators‟ cable modem services. In its 2002 Cable Modem Declaratory Ruling, the FCC found that cable modem service is an information service, irrespective of the fact that the cable operator provides the service via its own telecommunications facilities. Competing ISPs successfully argued before a federal appeals court that cable modem service is a telecommunications service and, thus, that cable operators must provide common carrier access to competing ISPs.56 On June 27, 2005, however, the Supreme Court overruled the appeals court and affirmed the FCC‟s interpretation in its Brand X decision.57 In the Cable Modem Declaratory Ruling, the FCC found that “[c]able modem service is not itself and does not include an offering of telecommunications service to subscribers.”58 While cable modem service provides various Internet-based services “via telecommunications,” “[t]hat telecommunications component is not … separable from the data-processing capabilities of the service.”59 Rather, “[a]s provided to the end user the telecommunications is part and parcel of cable modem service and is integral to its other capabilities.”60 The FCC expressly declined to impose the Computer II requirements on cable modem services.61 As noted above, the FCC has recently adopted the same approach for wireline DSL services. While the full text of the decision has not yet been released, a news release announcing the decision stated that “the Commission determined that wireline broadband Internet access services are defined as information services functionally integrated with a telecommunications component.”62 In his separate statement, Chairman Martin stated the Computer Inquiry requirements (wherein the FCC previously classified the transmission component of the carrier‟s service as a basic telecommunications service) “were based on the assumption that, without the imposition of strict regulation, telephone companies would be able to exert considerable market power over unaffiliated entities in the provision of information services.”63

56

See Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir. 2003), rev’d and remanded sub nom., National Cable & Telecommunications Ass’n v. Brand X Internet Services, 125 S.Ct. 2688 (2005). 57 Id. 58 Cable Modem Declaratory Ruling, 17 FCC Rcd. at 4823, ¶ 39. 59 Id. 60 Id. ¶ 40. 61 Id. ¶ 43. 62 News Release, FCC Eliminates Mandated Sharing Requirements on Incumbents’ Wireline Broadband Internet Access Services, Aug. 5, 2005, at 1 (“Wireline Broadband News Release”). 63 News Release, Chairman Kevin J. Martin Comments on Adoption of Wireline Broadband Internet Access Order, Aug. 5, 2005, at 1.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 13 With respect to access obligations in the cable modem context, in 2001 the FCC indicated concern that cable operators might exercise market power in anticompetitive manner. In considering the AOL/Time Warner merger, the FCC found that “the proposed merger conceivably could undermine competition and diversity in the emerging broadband Internet arena, if customers did not have the ability to choose among viable, alternative broadband Internet access providers or ISPs” but “that those harms will be avoided if: (a) consumers can choose among various alternative broadband access providers, such as DSL, wireless, and satellite; or (b) unaffiliated ISPs are permitted access to the merged firm‟s cable network.”64 While the FCC “expect[ed] the Applicants to adhere to the a number of voluntary commitments,”65 they were not mandatory and the FCC expressly “decline[d] to impose an „open/forced access‟ requirement on the merged firm‟s cable systems as a condition of this merger based on arguments regarding alleged disparate regulatory treatment of cable operators and telephone companies offering broadband Internet access.”66 The FCC instead deferred those ISP access issues to its then-pending proceeding considering the regulatory status of cable modem service, which ultimately resulted in the Cable Modem Declaratory Ruling and the Supreme Court‟s Brand X decision.67 In the still-pending Notice of Proposed Rulemaking adopted concurrently with the Cable Modem Declaratory Ruling, the FCC seeks comment on whether it has Title I jurisdiction to impose a “multiple ISP” access obligation on cable modem providers and, if so, whether to impose such an obligation.68 Although the FCC‟s Wireline Broadband Order appears to have eliminated the access obligations imposed on DSL, the FCC concurrently announced a Policy Statement69 in which it adopted “four principles to encourage broadband deployment and preserve the open and interconnected nature of [the] public interest” and will “incorporate these principles into its

64

Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from; MediaOne Group, Inc., Transferor, To AT&T Corp. Transferee, Memorandum Opinion and Order, 15 FCC Rcd 9816, ¶ 116 (2000). 65 Id. at ¶ 126 (emphasis added). The FCC noted favorably that AOL/Time Warner agreed to enter into “private contracts with multiple ISPs in order to offer those ISPs reasonably comparable access prices, the opportunity to market and bill consumers directly, and the opportunity to differentiate service offerings and to maintain brand recognition in all such offerings,” “to allowing unaffiliated ISPs using its cable systems to obtain Internet backbone capacity from AT&T's own service, if they so choose,” and “to facilitating maximum access by its customers to any content of their choosing, including streaming video. Id. at ¶ 121. 66 Id. at ¶ 126. 67 See Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 15 FCC Rcd. 19287 (2000). 68 See Cable Modem Declaratory Ruling, 17 FCC Rcd. at 4839-47, ¶¶ 72-95. 69 A policy statement in itself does not have the force of law. See 5 U.S.C. Sec. 553(b)(3)(A); Telecommunications Research and Action Center v. FCC, 800 F.2d 1181, 1186 (1986) (policy statement is “„neither a rule nor a precedent. . . . Like a press release, [it] presages an upcoming rulemaking or announces the course which the agency intends to follow in future adjudications‟”, quoting Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 38 (D.C. Cir. 1974)); American Bus Association v. ICC, 627 F.2d 525, 529 (D.C. Cir. 1980) (policy statement “acts [only] prospectively” and “genuinely leaves the agency and its decisionmakers free to exercise discretion.”).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 14 ongoing policymaking activities.” 70 One of the principles adopted is that “consumers are entitled to competition among network providers, application and service providers, and content providers.”71 (The full text of the Policy Statement has not yet been released.) Note that the FCC has also separately requested public comment on whether cable operators and ILECs should contribute to universal service contributions based on the underlying telecommunications components of their respective services.72 In this regard, the news release announcing the Wireline Broadband Order also indicates that the FCC “will take whatever action is necessary to preserve existing funding levels.”73 III. CURRENT REGULATORY FRAMEWORK

This section discusses two separate aspects of the FCC‟s regulation of VoIP/broadband service: (A) the FCC‟s regulatory treatment of VoIP services, and (B) the FCC‟s regulation of the delivery systems used in the transmission of such services. A. Regulatory Treatment of VoIP Services

The FCC first discussed the regulatory implications of VoIP services in its 1998 Report to Congress on federal universal service issues.74 Since that initial decision, the FCC has addressed the appropriate regulatory classification of VoIP on a case-by-case basis. Two significant decisions, one involving Vonage‟s DigitalVoice service and pulver.com‟s “Free World Dialup” service, underscore the FCC‟s policy of imposing minimal regulation on IP-based services generally, including VoIP, although a subsequent decision concerning AT&T‟s “phoneto-phone IP telephony” service indicates there are limits to that approach. 1. Report to Congress and Phone-to-Phone VoIP as a Telecommunications Service

In the Report to Congress, the FCC did not make any definitive pronouncements, but generally concluded that “computer-to-computer IP telephony,” whereby “individuals use software and hardware at their premises to place calls between two computers connected to the Internet,” is an information service.75 In these circumstances, the FCC found, “[t]he IP telephony software is an application that the subscriber runs, using Internet access provided by its Internet service provider” and “the Internet service provider does not appear to be
70

See News Release, FCC Adopts Policy Statement, New Principles Preserve and Promote the Open and Interconnected Nature of Public Internet (rel. Aug. 5, 2005) (“Policy Statement News Release”). 71 Id. 72 See Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket Nos. 0233, 95-20, 98-10, Notice of Proposed Rulemaking, 17 FCC Rcd 3019, ¶¶ 79-80 (2002) (“Wireline Broadband NPRM”). 73 Wireline Broadband News Release at 2. 74 Report to Congress, 13 FCC Rcd. at 11501. 75 Id., 13 FCC Rcd. at 11543 ¶ 87.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 15 „provid[ing]‟ telecommunications to its subscribers.”76 In contrast, the FCC found that “phoneto-phone” IP telephony service bears the characteristics of a telecommunications service subject to USF contributions and other Title II regulatory requirements.77 In these circumstances, the FCC found, “[f]rom a functional standpoint, users of these services obtain only voice transmission, rather than information services such as access to stored files.”78 The FCC found that an alternative interpretation could lead to regulatory arbitrage opportunities. The FCC concluded that, “to the extent that certain forms of phone-to-phone IP telephony” are telecommunications services, providers of such services would be subject to universal service contribution requirements.79 (While the FCC did not address the issue, certain other Title II obligations would presumably apply as well.) The FCC also found that “[i]f such providers are exempt from universal service contribution requirements, users and carriers will have an incentive to modify networks to shift traffic to Internet protocol and thereby avoid paying into the universal service fund or, in the near term, the universal service contributions embedded in interstate access charges.”80 While the Report to Congress made no definitive pronouncements on any particular service provider‟s offering, to date the FCC‟s limited precedent has largely reflected this distinction between phone-to-phone and computer-tocomputer offerings, albeit through a different analysis. 2. FCC Determinations on Individual VoIP Offerings.

In its Order addressing pulver.com‟s “Free World Dialup” (“FWD”) service, the FCC found the FWD “offering to be an unregulated information service subject to the Commission‟s jurisdiction.”81 The FCC‟s decision is consistent with the pronouncement of the Report to Congress concerning computer-to-computer VoIP, albeit via different reasoning. The FCC described FWD as “facilitat[ing] free communications over the Internet between one on-line FWD member using a broadband connection and other on-line FWD members using a broadband connection.”82 The FCC found that “FWD is an Internet application” and neither pure “telecommunications” nor a “telecommunications service.”83 The FCC thus found that “any state regulations that seek to treat FWD as a telecommunications service or otherwise
76 77

Id. at 11543-44 ¶¶ 87-88. Id. at 11544 ¶¶ 88-89. Phone-to-phone IP telephony service was described as “services in which the provider meets the following conditions: (1) it holds itself out as providing voice telephony or facsimile transmission service; (2) it does not require the customer to use CPE different from that CPE necessary to place an ordinary touch-tone call (or facsimile transmission) over the public switched telephone network; (3) it allows the customer to call telephone numbers assigned in accordance with the North American Numbering Plan, and associated international agreements; and (4) it transmits customer information without net change in form or content.” Id. ¶ 88. 78 Id. ¶ 89. 79 Id. at 11548-49 ¶ 98. 80 Id. 81 Petition for Declaratory Ruling that pulver.com’s Free World Dialup is Neither Telecommunications Nor a Telecommunications Service, Memorandum Opinion and Order, 19 FCC Rcd 3307 ¶ 1 (2004). 82 Id. at ¶ 2 n.3. 83 Id. at ¶¶ 8-10.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 16 subject it to public-utility type regulation would almost certainly pose a conflict with our policy of nonregulation.”84 The FCC expressly rejected Pulver‟s argument that FWD is not an information service. Pulver argued that it “does not offer transmission to its members” and would have essentially kept FWD out from under FCC jurisdiction all together. The FCC, however, found that the statutory definition “speaks only to the offering of various types of computing capabilities via telecommunications, not the offering of telecommunications itself” and that the information service provider need not “be the entity that provides or offers the telecommunications over which the information service is made available to its members.”85 The FCC‟s Order addressing Vonage‟s DigitalVoice service responded to the State of Minnesota‟s efforts to regulate Vonage as a telephone company subject to state PUC jurisdiction. The state regulatory commission had determined that Vonage offered intrastate telephone service subject to state jurisdiction. The FCC, however, there held that Vonage‟s DigitalVoice service is an interstate service subject to exclusive FCC jurisdiction, but did not reach the issue of whether it is a telecommunications or information service.86 The FCC held that it had exclusive jurisdiction over Vonage‟s service, which had the effect of precluding state regulators from imposing economic regulation on Vonage‟s services. The FCC did not decide Vonage‟s status as a telecommunications or information service, but indicated that, in either case, it would not be appropriate to subject Vonage to burdensome Title II-type regulation. The FCC noted that while “DigitalVoice resembles the telephone service provided the circuit-switched network… there are fundamental differences between the two types of service.”87 Such differences include the need for a broadband connection and specialized CPE, the portability of the service, and the various enhanced features accompanying the service.88 Indeed, the FCC likened a Vonage-to-Vonage call to Pulver‟s FWD.89 The FCC also found that, even if Vonage were classified as a telecommunications service, it “would be considered a nondominant, competitive telecommunications provider for which the Commission has eliminated entry and tariff filing requirements ….”90 In this regard as well the FCC likened Vonage to CMRS providers which would be “expressly exempt from the type of state economic regulation” the State of Minnesota sought to impose on DigitalVoice. However, an April 2004 Order addressing the appropriate regulatory treatment of AT&T‟s “phone-to-phone IP telephony” service confirms that the extent to which the FCC may

84 85

Id. at ¶ 15. Id. at ¶ 14 (emphasis added). 86 Vonage, 19 FCC Rcd. 22404. 87 Id. at 22406 ¶ 4. 88 Id. at 22406-08 ¶¶ 5-9. 89 Id. at 22408 ¶ 8 n.24. 90 Id. at 22415 ¶ 20.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 17 deregulate VoIP services is subject to statutory constraints.91 AT&T‟s service involved an interexchange service whereby AT&T‟s Internet backbone was used to route certain calls; the offering also (1) uses ordinary customer premises equipment with no enhanced functionality; (2) originates and terminates on the PSTN; and (3) undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider‟s use of IP technology.92 The fact that AT&T‟s Internet backbone was used was deemed to be a decision made internally by AT&T and akin to “internetworking” conversions. For these reasons, the FCC found AT&T‟s service to be a telecommunications service, as users “obtain only voice transmission with no net protocol conversion, rather than information services such as access to stored files.”93 3. The FCC Has Proposed Generally that IP-Enabled Services Not Be Subject to Economic Regulation

In a pending Notice of Proposed Rulemaking, the FCC has requested comment generally on the appropriate regulatory treatment of IP-enabled services (“IPES”), which include VoIP services.94 At the outset, the FCC “ask[s] whether it can best meet its role of safeguarding the public interest by continuing its established policy of minimal regulation of the Internet and the services provided over it.”95 The FCC posits that “providers offering VoIP services are beginning to challenge traditional telecommunications carriers in residential markets – and even today use IP to transport residential interexchange calls” and that increasing broadband deployment “therefore has prompted the development of services and applications that provide broader functionality and greater consumer choice at prices competitive to those of analogous services provided over the [PSTN].”96 In the IPES NPRM, the FCC also emphasizes the differences between VoIP and circuit-switched services, finding that “VoIP services are not necessarily mere substitutes for traditional telephony services, because the new networks based on the Internet Protocol are, both technically and administratively, different from the PSTN.”97 The FCC generally believes “that traditional economic regulation designed for the legacy network should not apply outside the context of the PSTN, and therefore will be inapplicable in the case of most IP-enabled services.”98 Nonetheless, the FCC states that “[t]o the extent the
91

Petition for Declaratory Ruling that AT&T’s Phone-to-Phone IP Telephony Services are Exempt from Access Charges, Order, 19 FCC Rcd 7457 (2004), appeal voluntarily dismissed, AT&T Corp. v. FCC, No. 04-1197 (D.C. Cir. dismissed Sept. 13, 2004). 92 Id. at 7457 ¶ 1. 93 Id. at 7457 ¶ 12. 94 IP-Enabled Services, WC Docket No. 04-36, Notice of Proposed Rulemaking, 19 FCC Rcd 4863 (2004) (“IPES NPRM”). “IP-enabled services” are described as “services and applications relying on the Internet Protocol family.” Id. at ¶ 1 n.1. For purposes of the IPES NPRM, VoIP is described generally as “includ[ing] any IP-enabled services offering real-time, multidirectional voice functionality, including, but not limited to, services that mimic traditional telephony.” Id. at ¶ 4 n.7. 95 Id. at ¶ 2. 96 Id. at ¶ 3. 97 Id. at ¶ 4. 98 Id. at ¶ 35 n.116.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 18 market for IP-enabled services is not characterized by … monopoly conditions, we seek comment on whether there is a compelling rationale for applying traditional economic regulation to providers of IP-enabled services.”99 Notably, the FCC has sought comment on the appropriate scope of Title II economic regulation generally, noting that the most stringent of such requirements have been reserved “for carriers considered „dominant‟” such as “a monopoly provider using its bottleneck facilities to provide services to a public that is without significant power to negotiate the rates, terms, and conditions of those services.”100 The FCC seeks comment “on whether any of these economic regulations are appropriate in the context of IPenabled services, given that customers often can obtain these services from multiple, intermodal, facilities- and non-facilities-based service providers.”101 In the IPES NPRM, the FCC has also requested public comment on the appropriate regulatory framework for IPES on a number of issues, including: public safety; disabilities access; intercarrier compensation; universal service; rural areas; and consumer protection.102 The FCC has indicated that it is more receptive to imposing certain “social policy” obligations on VoIP providers. Indeed, in June 2005 the FCC imposed E911 requirements on certain interconnected VoIP providers and requested public comment on whether to impose additional E911 obligations and to expand the types of VoIP services subject to E911 capabilities.103 In a separate rulemaking proceeding, the FCC requested public comment on how and to what extent wiretap capability requirements should be imposed on IP-based services.104 In an August 5, 2005 press release announcing an Order in this proceeding, the FCC found that certain broadband and interconnected VoIP service, including circuit-switched voice and dial-up Internet access, are subject to wiretap requirements imposed on telecommunications carriers.105 B. Regulatory Treatment of Delivery Systems 1. Wireline Telecommunications Carrier Broadband Services and Facilities

The FCC‟s regulation of broadband delivery systems addresses two general aspects of broadband services: the offering of underlying transport/transmission services to end users (including end user Internet/enhanced service providers competing with the carrier‟s own

99

Id. at ¶ 5. Id. at ¶ 74. 101 Id. 102 See id. 103 E911 Requirements for IP-Enabled Service Providers, First Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd. 10245 (2005). 104 See Communications Assistance for Law Enforcement Act and Broadband Access and Services, ET Docket No. 04-295, RM-10865, Notice of Proposed Rulemaking and Declaratory Ruling, 19 FCC Rcd 15676 (2004). The full text of the FCC‟s Order has not yet been released. 105 See Broadband CALEA News Release at 1.
100

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 19 offering); and the competitor‟s access to unbundled facilities for the purpose of offering competing local services. These are discussed in turn below. a. Access to Transport/Transmission Services Until the Wireline Broadband Order, the FCC traditionally imposed dominant carriertype regulations on ILECs‟ provision of the transport/transmission services underlying their enhanced services. Under the current Computer Inquiry regulations, RBOCs and, to a lesser degree other carriers, are subject to a number of restrictions in their provision of the broadband telecommunications underlying their information/enhanced services, including:   Offering the transmission component of an information service separately pursuant to tariff.106 The option of adopting either full structural separation or nonstructural safeguards such as Comparably Efficient Interconnection (CEI), Open Network Architecture (ONA), quality, installation and maintenance reporting. CEI requires that RBOCs offering enhanced service must offer network interconnection opportunities to competitive enhanced service providers that are comparably efficient to the interconnection that its own enhanced service operation enjoys. ONA is the overall design of a carrier‟s basic network services to permit all users of the basic network, including the enhanced service operations of the carrier and its competitors, to interconnect to specific basic network functions and interfaces on an unbundled and equal access basis.107 As part of their general Title II nondiscrimination obligations, nondominant common carriers owning transmission facilities and providing enhanced services must unbundle their basic from enhanced services and offer transmission capacity to other enhanced service providers under the same terms and conditions under which they provide such services to their own enhanced service operations.108



Under current law, DSL transport is not considered a service provided “at retail” but instead is “an input component to the Internet Service Providers‟ retail high-speed Internet service.”109 As such while law currently in effect requires the carrier to offer this service to end
106 107

See Computer II, 77 FCC 2d at 474-75, ¶¶ 231. See Computer III Phase I Order, 104 FCC2d at 1019, ¶ 112. Both the RBOCs and AT&T were initially subject to CEI requirements. Id. at 1026-27, ¶¶ 129-31. In subsequent orders, the FCC first modified, and then relieved, AT&T of the CEI requirements. See Computer III March 1999 Order, 14 FCC Rcd at 4294-95, n.17-18. The FCC has never imposed CEI requirements on GTE or any other independent LEC. 108 See Policy and Rules Concerning the Interstate, Interexchange Marketplace; Implementation of Section 254(g) of the Communications Act of 1934, as amended; 1998 Biennial Regulatory Review—Review of Customer Premises Equipment and Enhanced Services Unbundling Rules in the Interexchange, Exchange Access and Local Exchange Markets, Report and Order, 16 FCC Rcd 7418, 7442 ¶ 40 (2001). 109 Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket No. 98-147, Second Report and Order, 14 FCC Rcd 19237 (1999) (AOL Bulk Services Order).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 20 users, for wholesale purposes the ILEC need not offer the service to CLECs for resale with a discount based on “avoidable costs” (roughly 20 percent).110 Once the Wireline Broadband Order becomes effective, however, DSL providers will no longer be required to tariff their services for offering to ISPs (other than for a one-year transition period), nor will they be subject to the Computer II/III CEI and ONA requirements.111 Wireline providers may offer the transmission component of their broadband Internet access service to either affiliated or unaffiliated ISPs on a common carrier basis, non-common carrier basis, or a combination of both.112 While the full text of the Wireline Broadband Order explaining the FCC‟s full rationale has not yet been released, in the Wireline Broadband NPRM, the FCC tentatively concluded “that the end user is receiving an integrated package of transmission and information processing capabilities from the provider” and “that wireline broadband Internet access service provided over a provider‟s own facilities is an information service.”113 The FCC also tentatively concluded that “the transmission component of the end-user wireline Internet access service provided over those facilities is „telecommunications‟ and not a “telecommunications service.”114 This rationale was largely the same as that applied to cable modem service. Notwithstanding the reclassification of DSL as an information service, as adopted the Wireline Broadband Order requires that facilities-based DSL providers continue to contribute at current levels to federal universal service obligations for a 270-day period or until the FCC adopts new USF contribution rules to possibly expand the contribution base, whichever occurs earlier – although the FCC clarified that it may extend the 270-day period.115 The FCC has also requested comment on an appropriate consumer protection framework for broadband Internet access service.116 Note also that in the news release announcing the FCC‟s Broadband Policy Statement, the FCC stated that “consumers are entitled to competition among network providers, application and service providers, and content providers.”117

110

See id. In the AOL Bulk Services Order, the FCC analyzed the circumstances under which DSL transport services provided by incumbent LECs to ISPs would be considered services provided “at retail” and concluded that “advanced telecommunications services sold to Internet Service Providers as an input component to the Internet Service Providers‟ retail Internet service offering shall not be considered to be telecommunications services offered on a retail basis that incumbent LECs must make available for resale at wholesale rates to requesting telecommunications carriers.” See 47 C.F.R. § 51.605(c). 111 Wireline Broadband News Release at 1-2. 112 Id. at 2. 113 Wireline Broadband NPRM at ¶ 24. 114 Id. at ¶ 25. 115 Wireline Broadband News Release at 1-2. 116 Id. at 2. 117 See Policy Statement News Release.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 21 b. Competitors’ Access to Broadband Facilities The Communications Act and the FCC‟s implementing regulations impose unbundling obligations on ILECs which have evolved since Section 251‟s enactment in 1996.118 This section focuses on the FCC‟s application of UNE requirements to broadband-related facilities. Section 251(c)(3) of the Act imposes on ILECs a “duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and Section 252” and “in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service.”119 Section 252 of the Act provides further that “[i]n determining what network elements should be made available … the [FCC must] consider, at a minimum, whether-- (A) access to such network elements as are proprietary in nature is necessary; and (B) the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer.”120 Section 252(d), in turn, requires that “the just and reasonable rate for network elements … shall be -- (i) based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection or network element (whichever is applicable), and (ii) nondiscriminatory, and (B) may include a reasonable profit.”121 The FCC first sought to explicitly address the unbundling of broadband facilities used for DSL in its 1999 and 2001 Line Sharing decisions. Those decisions required ILECs to provision the high frequency portion of the loop (HFPL) as a separate unbundled network element when the ILEC provisioned voice service on the low frequency portion of the loop (LFPL).122 These decisions established three possible circumstances for sharing a loop facility between different carriers: (1) the line sharing obligation was limited to ILEC voice service combined with CLEC data service, provided over the same loop; (2) ILECs were required to enable line splitting – the sharing of a single loop facility between a competitive carrier providing voice services and a competitive carrier providing data services; and (3) ILECs had no obligation to provide DSL service over the HFPL of an unbundled loop used by a CLEC to provide voice service over the
118 119

See 47 U.S.C. § 251(c); 47 C.F.R. Part 51. 47 U.S.C. § 251(c)(3). 120 Id. § 251(d). 121 Id. § 252(d). 122 Deployment of Wireline Services Offering Advanced Telecommunications Ability and Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Docket Nos. 98-147, 96-98, Third Report and Order in CC Docket No. 98-147 and Fourth Report and Order in CC Docket No. 96-98, 14 FCC Rcd 20912, 20947, ¶ 72 (1999), vacated, United States Telecom Ass’n v. FCC, 290 F.3d 415 (D.C. Cir. 2002), Deployment of Wireline Services Offering Advanced Telecommunications Ability and Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Docket Nos. 98-147, 96-98, Third Report and Order on Reconsideration and Third Further Notice of Proposed Rulemaking in CC Docket No. 98-147 and Fourth Report and Order on Reconsideration and Sixth Further Notice of Proposed Rulemaking in CC Docket No. 96-98, 16 FCC Rcd 2101 (2001).

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 22 LFPL – a requirement that would effectively mandate unbundled access to the LFPL for the competitive voice provider.123 The line sharing requirements were vacated in court124 and largely eliminated in the FCC‟s 2003 Triennial Review Order (“TRO”) via a 3-year phase out, although the line splitting obligation remains.125 In the TRO the FCC adopted the following “impairment” standard for determining whether unbundling is required: We find a requesting carrier to be impaired when lack of access to an incumbent LEC network element poses a barrier or barriers to entry, including operational and economic barriers, that are likely to make entry into a market uneconomic. That is, we ask whether all potential revenues from entering a market exceed the costs of entry, taking into consideration any countervailing advantages that a new entrant may have.126 In its analysis the FCC looked at a number of entry barriers, including scale economies, sunk costs, first-mover advantages, and absolute cost advantages. The FCC found that “actual marketplace evidence is the most persuasive and useful kind of evidence” and in particular “granular evidence that new entrants are providing retail services in the relevant market using non-incumbent LEC facilities….”127 In this regard, “evidence of facilities deployment by competitive LECs” or lack thereof was given substantial, but not determinative weight. Intermodal alternatives were considered as well, as were “cost studies, business case analyses, and modeling if they provide evidence at a granular level concerning the ability of competitors economically to serve the market without the UNE in question.”128 Using this analysis, in the TRO the FCC retained unbundling requirements for DS1 and DS3 loops and transport, except in narrow circumstances. DS1 loops must be unbundled unless there are at least four or more fiber-based collocators and at least 60,000 business lines in the wire center.129 DS3 loops must be unbundled unless there are at least four fiber-based collocators and 38,000 business lines.130 The FCC estimated that comparatively few ILEC wire centers met these thresholds for elimination of unbundling (0.5 percent and 1 percent,
123 124

See id. See USTA v. FCC, 290 F.3d at 429. 125 Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Deployment of Wireline Services Offering Advanced Telecommunications Capability, Report and Order and Order on Remand and Further Notice of Proposed Rulemaking, 18 FCC Rcd 16978 (2003) (“TRO”), aff’d in part, remanded in part, vacated in part, United States Telecom Ass’n v. FCC, 359 F.3d 554 (D.C. Cir. 2004), on remand Order on Remand, 20 FCC Rcd. 2533 (2005), petitions for review pending. 126 TRO at ¶ 84. 127 Id. at ¶ 93. 128 Id. at ¶¶ 95-99. 129 Id. at ¶ 146. 130 Id.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 23 respectively).131 Thus, based on the FCC‟s data, as of the date of the TRO, unbundling of DS1 and DS3 loops was required in more than 98% of all central offices. (A number of ILECs and their trade association have appealed these provisions of the TRO to a Federal appeals court, which remains pending.132) Regarding DS1 and DS3 transport, the FCC found that there were competitive alternatives to such transport only on a localized basis.133 Regarding DS3 loops, the FCC found “inability to recover the significant fixed and sunk construction costs of DS3 loops” in many circumstances, and for DS1 loops the FCC found “extremely high economic and operational barriers in deploying DS1 loops to serve [enterprise] customers” given that “small and medium enterprise customers served by DS1 loops provide much lower revenue opportunities than large enterprise market customers and, generally, resist long-term contract obligations” – and thus CLECs “do not have the ability the recover sunk costs in self-deploying DS1 loops.”134 The FCC also further modified ILECs‟ unbundling obligations for other broadband or fiber-based services (for “mass market” customers), packet services and the high-frequency portion of a loop. ILECs must continue to offer unbundled access to stand-alone copper loops and subloops for the provision of narrowband and broadband services, 135 but subject to a grandfather provision and a transition period, ILECs do not have to provide unbundled access to the high frequency portion of their loops.136 The FCC concluded that “the increased operational and economic costs of a stand-alone loop (including costs associated with the development of marketing, billing, and customer care infrastructure) are offset by the increased revenue opportunities afforded by the whole loop.”137 The FCC also concluded that CLECs are no longer “unable to obtain the HFPL from other [CLECs] through line splitting.”138 The FCC also cited to the fact that “cable modem service is the most widely used means by which the mass market obtains broadband service.”139 ILECs must offer unbundled access to the Time Division Multiplexing (TDM) features, functions, and capabilities of their hybrid copper/fiber loops.140 Similarly, only in fiber loop overbuild situations where the ILEC elects to retire existing copper loops must the ILEC offer unbundled access to those fiber loops for narrowband service only.141 In this situation, the FCC found that a fiber to the home (“FTTH”) overbuild “enables an [ILEC] to replace and ultimately
131 132

Id. at ¶¶ 174, 180. See Covad Communications Co. v. FCC, Brief for ILEC Petitioners, Nos. 05-1095 et al., (D.C. Cir. Filed July 26, 2005). 133 TRO at ¶¶ 386-393. 134 Id. at ¶¶ 325-26. 135 Id. at ¶¶ 247-254, 296-97. 136 Id. at ¶¶ 255-269. 137 Id. at ¶ 258. 138 Id. at ¶ 259. 139 Id. at ¶ 262. 140 Id. at ¶ 289. 141 Id. at ¶ 277.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 24 deny access to the already-existing copper loops that [CLECs] were using to serve mass market customers.”142 ILECs do not have to offer unbundled access to newly deployed or “greenfield” fiber loops (including FTTH, fiber-to-the-curb (“FTTC”) and fiber-to-primarily residential MDUs).143 The FCC concluded that “entry barriers appear to be largely the same for both incumbent and competitive LECs – that is both … must negotiate rights-of-way, respond to bid requests for new housing developments, obtain fiber optic cabling and other materials, develop deployment plans, and implement construction programs.”144 Nor do ILECs need to unbundle the packet-switching features, functions, and capabilities of their hybrid loops. The FCC found that factors such as other loop alternatives and intermodal competition from cable modem service rendered unbundling unnecessary, and that generally a line should be drawn between legacy and newer technologies.145 The FCC also relied on additional factors relevant to the policy object of fostering broadband deployment. ILECs are not required to unbundle packet switching, including routers and Digital Subscriber Line Access Multiplexers (DSLAMs), as a stand-alone network element.146 The FCC found that “a wide range of competitors are actively deploying their own packet switches, including routers and DSLAMs to serve both the enterprise and mass markets, and that these facilities are much cheaper to deploy than circuit switches” and that “collocation costs and delays incurred by requesting carriers to provide packet switched services” do not warrant a different outcome.147 The FCC has separately confirmed that state commissions may not require an ILEC to provide digital subscriber line (DSL) service to an end user customer over the same unbundled network element (UNE) loop facility that a CLEC uses to provide voice services to that end user, as such obligations are inconsistent with the Act and the FCC‟s federal unbundling rules and policies set forth in the TRO.148 2. Cable Modem

Unbundling/facilities access obligations such as those imposed on ILECs are not imposed on cable operators‟ cable modem service offerings. In its Declaratory Ruling that was ultimately upheld by the U.S. Supreme Court, the FCC held that cable modem service is an interstate information service, not a cable or telecommunications service. Thus, by its terms Title II obligations do not apply. The FCC also found that the Computer Inquiry framework did not
142 143

Id. Id. at ¶¶ 273-280. 144 Id. at ¶ 275. 145 Id. at ¶¶ 288-293. 146 Id. at ¶ 537. 147 Id. at ¶¶ 538-39. 148 See BellSouth Order ¶ 1.

Chris Peirce/Teresa Griffin-Muir August 15, 2005 Page 25 apply to cable operators‟ provision of cable modem service, even where the cable operator itself is offering local exchange service.149 As a result, cable operators are not required to unbundle their services for competing ISPs. The FCC also found that even insofar as cable operators are providing access to particular ISPs on an individualized basis, they do so on a private carriage basis and not indiscriminately to all ISPs.150 Further, in adopting this approach for cable modem service the FCC distinguished the broadband market from “traditional wireline services and facilities.”151 Nonetheless, citing its Title I authority, the FCC has separately sought comment on whether it is necessary to require that cable operators provide unaffiliated ISPs with the right to access cable modem service customers directly.152 As noted above, it appears that the FCC has now addressed this issue, at least in part, in its to-be-released Policy Statement. The FCC has also separately sought comment on whether to impose USF obligations on cable modem providers.153 ***** Please feel free to contact us if you have questions or need additional information.

149 150

See Cable Modem Declaratory Ruling at ¶ 44. See id. at ¶ 55. 151 Id. at ¶ 43. 152 Id. at ¶ 74. 153 See Wireline Broadband NPRM.