Monday, January 27, 2014

The FCC Should Remove Outdated Regulatory Roadblocks to an All-IP World

All-IP networks continue to overtake copper-based legacy voice services. The FCC has staked out a role for itself in furthering the IP transition. But having done so, the Commission must face the reality that transitioning to all-IP requires eliminating all monopoly-era regulations that stand in the way. 

Right now the FCC is taking public comments on a plan by CenturyLink whereby the Commission would relax but not eliminate certain legacy telephone regulations. CenturyLink seeks partial relief from certain monopoly-era network cost allocation rules – so-called Part 32 account rules, in particular.

Part 32 contains about 67 pages of complex accounting rules. It requires the maintenance of an entirely separate, detailed accounting system by incumbent voice carriers. That is, such carriers must maintain a Part 32 accounting system in addition to standard business accounting systems that follow generally accepted accounting principles. An AT&T estimate of Part 32 accounting rule compliance costs ran $15-20 million for systems and $3-4 million for personnel. This is on an annual basis.

Part 32 regulations are a relic of the monopoly-era legacy telephone regulatory system. The accounting rules were initially adopted to address potentially harmful capital and accounting cost practices incentivized by rate-of-return regulation. In a nutshell, Part 32 rules were intended to monitor rate-of-return incumbent voice carriers to prevent overbuilding capital facilities and incurring unnecessary costs. Otherwise, carriers could recover misallocated costs through rate-of-return regulated prices and use accounting tactics to hide profits. 

But incumbents such as CenturyLink have long since moved out from under rate-of-return regulation; they are now price cap carriers. Under price cap regulation, end-user charges are capped at a flat rate. That gives carriers incentive to lower overhead costs and provide more efficient services. Additional technical changes to FCC policy regarding legacy voice services – such as the FCC's 2001 freeze of separations cost allocation between interstate and intrastate jurisdictions as well as its 2011-to-present universal service and intercarrier compensation reforms – have also rendered Part 32 accounting rules unnecessary, if not irrelevant.

In the bigger picture of things, Part 32 rules are totally unnecessary because of the momentous changes in the communications marketplace over the last twenty years. Competitive and technological breakthroughs have dismantled the old monopolies and brought a bounty of choices to consumers.

According to the FCC's Local Telephone Competition Report, as of December 2013, wireless voice subscriptions number 305 million, whereas the number of switched access lines has dropped 96 million. Over the past four years 33.6 million Americans dropped their copper landlines. October 2012 data cited in the FCC's Sixteenth Wireless Competition Report indicates that 92.8% of the population is served by four or more mobile wireless voice carriers, and 80.4% is served by five or more. Interconnected VoIP service offered by cable operators offers consumers another major competitive alternative, with 42 million subscriptions nationwide.

On account of these market changes, through prior orders the FCC granted forbearance from aspects of Part 32 to various incumbent voice carriers. Such relief was conditioned on those carriers filing compliance plans outlining how they would still maintain accounting records consistent with Part 32. The Commission's USTelecom Forbearance Order (2013) likewise granted partial forbearance from Part 32 but requires carriers to continue to maintain Part 32 accounting and provide such data to the FCC upon request. But that partial relief is conditioned on filing a compliance plan. CenturyLink's compliance plan follows the conditions set out in the USTelecom Forbearance Order.

Recent data regarding voice competition and the unmistakably permanent decline in switched access lines reinforces the urgency for removing legacy telephone regulations. Incumbent voice carriers that are now migrating their own customers to VoIP services remain needlessly burdened by regulatory requirements to maintain increasingly expensive copper-based networks. The costs of keeping up duplicate networks – one copper-based network for switched access lines and the other IP-based – include the costs of duplicate accounting systems.

The FCC established a Technology Transitions Policy Task Force dedicated to facilitating the ongoing transition from copper-based legacy telephone networks to all-IP networks. When ultimately completed, the IP transition means the end of the public switched telephone network upon which legacy regulation was premised.

To encourage the completion of the IP transition process, the FCC should relieve carriers from regulations requiring them to run duplicate networks. Carriers should also be relieved from the unnecessary burden of having to run a separate set of books for outdated networks. Time and money spent by carriers to comply with the FCC's antiquated Part 32 accounting mandates are dead-weight losses. Ultimately, consumers would be better served by allowing carriers to rely on their knowledge of markets and technology by directing those freed-up resources to all-IP network deployment.  

Yes, by all means, the FCC should grant CenturyLink's compliance plan for partial relief from Part 32. But no compliance plan should have been required in the first place. Rather, the FCC already should have relieved carriers from having to maintain outdated, unnecessary, costly duplicate accounting systems. The FCC has the authority to act now and grant forbearance relief from Part 32 accounting rules in their entirety.

In dynamic markets, eliminating unnecessary regulations shouldn't be bogged down by half-measures. Granting partial relief from unnecessary and costly legacy regulations pursuant to compliance plans is a formula for needlessly dragging out the IP transition. Stacking one set of transition plans on top of another will not make for a smooth process. When it comes to advancing the IP transition, the FCC should remove monopoly-era regulations like Part 32 in full.