Top 10 Regulatory and Legislative Challenges for 2006

The regulatory mandates and laws that govern telecommunications have become obsolete, making 2006 a potential turning point in the industry. Why? Because in the past regulatory policy relied on three telecommunications business models that have now crumbled. First, it makes no sense to differentiate telecommunications from information services. Second, it makes no sense to differentiate private from public networks. And third, it makes no sense to treat CPE separately from network services.

Here are my top 10 regulatory and legislative challenges for 2006, and examples of the non-utility of relying on the information service, private network and CPE business models for regulatory purposes.

1. CALEA

The No. 1 challenge of 2006: implementing the Communications Assistance for the Law Enforcement Act. Why? First, it’s a politically charged issue at this moment, given the NSA’s highly controversial wiretap activity. Second, misinformation is floating around the industry concerning the cost and non-feasibility of applying CALEA to IP-based services. Lastly, you can’t separate international and domestic networks in an all-IP network infrastructure, making lawful intercept an issue.

Here are the realities on the CALEA issue. First, the law isn’t going away anytime soon. There is no meaningful opposition to it in Congress or the FCC that would relieve service providers of the requirement to follow its mandates for lawful intercept. Second, CALEA and other surveillance laws passed by Congress are inconsistent. The obvious case is VoIP over broadband: part of CALEA would classify it as an information service, and other parts would say it is telecommunications. There are many other examples as well.

Take tracking of targets in a mobile environment. It is very easy under CALEA for law enforcement agencies (LEAs) to get a court-ordered subpoena for a target’s calling records (called a pen register and trap-and-trace order). But tracking a target’s movement requires a very high LEA authorization. Guess what? If an LEA gets pen register data from a mobile operator, it’s the equivalent of tracking a target because of the association of pen register and cell cite location. Looked at another way, there’s not much difference between placing a cell phone in the trunk of a target’s car and attaching a tracking device to the vehicle.

So, what’s the big deal? Magistrates are now refusing to authorize subpoenas for mobile pen register orders because it also gives tracking information. Technology has made CALEA obsolete. Note: to get a court order for tracking a target, the police have to meet the same high legal standards as they do to obtain a search warrant to enter private places.

When it comes to misinformation about CALEA compliance, there is enough going on to write a book. So just con- sider this one example: universities claim that the cost of CALEA compliance required by the FCC’s August 2005 first order would be prohibitive. Note that most universities operate as a telecom service provider for students, departments, and on- and off-campus vendors. So after the FCC order came out, a university group opposed the ruling. A few universities rolled out the private network argument, saying that CALEA didn’t apply to them; but most realize that argument is not defendable, because they do in fact operate public networks where CALEA should apply.

So a fallback plan emerged whereby the universities hiring public relations companies to claim that implementing CALEA would be cost-prohibitive. This is when the misinformation began to hit the newspapers. One university CEO said that it would cost $7 billion for all universities to comply. Another said that complying would cause tuition to go up by $400 a year per student.

These cost estimates make no sense. For one thing, if these estimates were realistic, then the vendors of lawful intercept equipment and outsourcing services would have to be generating hundreds of billions of dollars. They are not—less than $1 billion is spent by service providers and governments globally per year on CALEA-type support.

OK, there must be some explanation for how university folks are coming up with the high cost of CALEA compliance they claim. So at the TeleStrategies ISS World Conference in December, I asked a university attendee how they determined the cost. His reply was that in part they estimated the number of routers in the U.S. university system and multiplied that by the cost for lawful intercept features quoted by the router vendors. So, I then asked the router vendors why they would charge universities, when they don’t charge service providers or foreign governments—for features that are built into most router products. The answer was, the vendors disable the features, because universities don’t want them! Shouldn’t the router vendors pass along these upgrades to the universities at no cost as well?

In short, university presidents, like telecommunications service provider CEOs, are not going to support new CALEA requests by law enforcement unless forced to do so, and whenever possible will supply the FCC with misleading information about economic and technical feasibility.

CALEA is also obsolete because it assumes you can segment network infrastructure into domestic and international for lawful interception purposes. But with VoIP service, you can subscribe to a service in one country that is supported by infrastructure in a second country and make or originate calls in a third country.

So here are the problems for law enforcement. One, it’s becoming harder to differentiate domestic from international calls. Two, it is extremely complex to get lawful intercept data under a U.S. court order for a target who’s calling in another country. Three, the U.S. standards based on CALEA are different from the global standards, which are largely based on the European Telecommunications Standards Institute (ETSI) and upcoming European Union mandates.

Now, what could the FCC or Congress do that would impact service providers in 2006 in terms of CALEA?

The FCC has gone as about as far as it can go with its August ruling. There are some unsettled CALEA items regarding universities and rural telephone companies. Regardless, whatever the FCC did or does will end up in court on the claim that it overstepped its bounds on CALEA. Thus Congress will have to act and rewrite a 2006 version.

One thing Congress could do is to look at what Europe has done to support LEAs with lawful intercept laws, and use ETSI’s architecture to model U.S. laws. This would allow law enforcement under court order to provision its own intercept requests, which would have a big impact on service provisioning and OSSs. Note: under CALEA, domestic provisioning of intercepts is done at service provider sites by service provider staff.

Congress could also adopt the EU mandate that would require all service providers to save all call detail records on wireline, wireless, fax, email and other messages for a year, give or take, depending on the service. U.S. service providers’ practices and mandates for CDR archiving and LEA access are murky, to say the least. Regardless, billing data retrieval systems could be impacted by changing CALEA law in 2006.

2. E911

The FCC ruled in May 2005 that VoIP over broadband service providers (VSPs) had to be E911-compliant—for example, capable of delivering the telephone number and address of an E911 caller in the correct format to the correct Public Service Answering Point (PSAP). By November 28, 2005, VSPs had to file compliance documentation. So what is left to be done by the FCC?

For starters, it’s not clear that VSPs are complying. Many say they are, and some are not saying anything but keep on adding new customers. The truth will come out in 2006, but what the FCC does is another matter.

Beyond that, many issues not covered in last year’s FCC order will be addressed this year. None is more challenging from a technical perspective than automatic location registration for nomadic users of VoIP over broadband. There is a block of VSP customers who like to take their soft-client PC- based VoIP phone with them when traveling and plug it in at a hotel. The problem with this from an E911 perspective is that the nomadic user has a temporary IP address that doesn’t associate the user’s location with the VSP. Yes, the VSP could alert nomadic users that they need to change PSAPs, but that’s not automatic location identification.

The nomadic solutions for automatic location are simple in theory, but not workable in practice. Many parties would need to cooperate, including the visiting ISP, broadband provider, foreign PSAPs and more. To achieve automatic location would require an all new E911 infrastructure based on IP.

And lastly, if nomadic VoIP phones don’t make today’s E911 network infrastructure obsolete, the next-generation IP devices capable of generating an E911 call will. Sensor devices based on RFID, IP-based surveillance cameras and the like can greatly improve public safety, if supported by a next-generation E911 network.

Again, the FCC can only push next-generation E911 regulation so far, and there will be political pressure not to cut off phone service to consumers being served by non-compliant VSPs. Congress has to act, and there were signs of this last year. It did pass a bill to begin the development of next-generation E911, but it left out one important element: funding. Another reason Congress should get on top of the E911 debate is that the current circuit-switched E911 system could be completely taken down by clever hackers—not just one PSAP, but all 6,400 at the same time!

3. A LA CARTE CABLE

The just reaction of most consumers of cable and satellite video is: “Why am I paying for a basic package that delivers programs that I never watch? Wouldn’t my service be cheaper if the provider would just drop those channels, since they are paying the content provider for them?” If most consumers see it that way, so must Congress and the FCC. The cable companies fought off the FCC and Congress until now with economic analysis showing that TV programs with few viewers would cost interested consumers more. But no one is going to care unless they have an interest in such programming.

Now a concerned parent lobby has broken the ice. If we can’t get a la carte, give us a G-rated-only family package. The cable companies are giving this a try. This could open the door for other interest groups, left and right, to demand their own channel packages.

This may or may not push the FCC and Congress to a la carte programming. But a more effective push will probably come from the ILECs rolling out IPTV. If the technology can easily support a la carte and we don’t want to be forced to take dozens to hundreds of channels to get the good programs, why do we have to?

Congress may buy that and require an a la carte option from all video providers. This would mean big changes for billing, presentment and service provisioning systems.

4. INTERCARRIER SETTLEMENTS Will this be the year for intercarrier settlement reform? The network resources to exchange a call between an ILEC and an IXC, cellular operator or VoIP service provider are equal, but the intercarrier settlement rates vary all over the place.

So what is the problem? For one thing, in a highly competitive environment, shouldn’t there be a level playing field? Besides that, rural ILECs get screwed because the big guys cheat by disguising the originating point of the call being delivered. ILECs get more money from terminating a long-distance call than a local call. What’s more, the rural ILEC knows he’s getting cheated but doesn’t have the money to buy SS7 probes to prove it. Note: The state PUCs won’t allow the ILEC to block phantom incoming calls. The FCC has sidestepped this issue for years. The simple solution is to go to a bill-and-keep settlement arrange ment. But guess what—the rural carrier gets cheated again. They make a lot of revenue by completing long-distance calls from other carriers. Best advice for 2006: beef up your revenue assurance department, because the FCC will probably punt on this issue for another year or so.

5. BROADBAND ACCESS

The FCC and Congress have a dilemma when it comes to Internet broadband policy for the RBOCs. On the one hand, the FCC has to create a regulatory structure that encourages investment in infrastructure, while on the other hand the FCC and Congress want the RBOCs to be “net neutral”—you don’t want network operators selecting what content you can or can’t get from the Internet, or charging content providers differently. And furthermore, the RBOCs can’t get a return on their fiber to the node (FTTN) investment (the old SBC and new AT&T) nor their fiber to the premises (FTTP) investment (Verizon) if they are just providing high-speed, dumb-pipe Internet access service, or a “me too” video service like cable or DBS.

So, what broadband policy do the RBOCs want from the FCC and Congress? First, they don’t want to have to unbundle FTTN/FTTP access. They have won on this one—enough said. Second, they want to drive off the “free- loaders” (VoIP over broadband service providers). How can you do this by supporting a regulatory policy? Answer: push the FCC and Congress to require VoIP service providers to support industrial-grade E911 and CALEA, and pay full access charges and USF contributions. This policy would make VoIP over their broadband economically not practical. If that didn’t work, the RBOCs could easily drive away VoIP over their broadband by creating two tiers of broadband access: One tier that’s cheap but without sufficient QoS to support VoIP, and a second tier with good QoS but too expensive for an economically viable VoIP service via a RBOC’s broadband service.

Finally, the RBOCs could go to phase 3: make money with FTTN and/or FTTP. If the FCC or Congress does nothing on the net-neutral issue, RBOCs could charge not only the consumer for video service but also the content providers who want to have access to RBOC customers. So the challenge for the FCC and Congress on this one is, do you listen to the RBOCs who are saying, “Trust us on net neutrality”? Or to Google, Yahoo, Microsoft and others who are saying, “Put net neutrality in writing,” from a legislative perspective?

6. TELECOM TAXATION

Congress will be addressing many taxation issues in 2006, as covered in my editorial in the December 2005 issue. In short, service providers don’t pay and/or collect the same amount of taxes on identical services; it’s becoming harder to differentiate digital services that are taxed from digital content that is generally not taxed; valuing service bundles for taxation purposes is a “black art”; and more.

7. FRANCHISE FEES

Franchise fees are yet another dead horse that telcos keep kicking around. Should ILECs pay franchising fees like cable companies, and more importantly should they have to get a local franchise before offering telco video? Congress could take up the issue, but it’s a no-win situation—there is no consensus among the major players. Obviously cable companies and local governments say yes to franchising; telcos and state government don’t quite say no, but they think state franchise fees (with no local ones) would be acceptable.

8. FREE VOICE

To start with, let’s figure out what “free voice” means. Ask the first 10 people you meet walking down the hallway at work, “Is your voice service free?”—meaning you pay no wireline phone, cellular or broadband connection bill— and you will get 10 nos.

On the other hand, “free” services like Skype have caused international revenues to shrink, and the next wave of corporate VoIP networks with enterprise “free” peering will reduce service providers’ retail traffic and revenue even more. At the same time, E911, CALEA, USF and access fees will go up for most individual users. How will regulators and legislators deal with the U.S. Postal Service- type rate escalation? (First-class mail volume goes down, but the cost of labor contracts, 30,000 brick-and-mortar locations, and Monday-through-Saturday delivery doesn’t go away. The result: postage rates hikes and reduced mail volume.) It can’t continue forever.

9. RURAL WIRELESS

At every turn in the telecom revolution, rural consumers increasingly seem to be getting the short end of the stick. In 2006, the FCC and Congress may have to take some action. First, every new mobile wireless network generation you see creates new value for urban users, and in many cases decreases service value for rural users. Note that as you transition from 1G (analog) to 2G (digital), the coverage for a cell site decreases in area. That’s OK in urban areas where you’ve got lots of revenue-generating traffic, but not in rural areas. Going from 2G to 3G has the same effect: shrinking coverage per cell, with no additional cell sites to maintain the coverage.

What other problems are out there for the rural wireless consumer? Well, Alltel stands a good chance of being acquired by Verizon Wireless. So, what’s the problem? Alltel provides major rural roaming support for the big Tier 1 players. If acquired by Verizon Wireless, will rural roaming and/or basic service go up?

But what about rural competition? That’s another potential regulatory or legislative problem. The big Tier 1s are warehousing or sitting on spectrum licenses not in use, thereby locking out competition. Bottom line: The FCC has created policies that stimulate growth in urban areas, but these policies don’t have the same effect in rural areas.

10. COMCAST’S IP BACKBONE

Comcast is busy developing a super IP/fiber backbone network that should have an impact on its own video-on- demand and VoIP service, as well as perhaps other cable MSO offerings. So what’s worrisome from a regulatory or legislative perspective that might generate some action? Three considerations. First, if Comcast uses their network to complete VoIP calls nationally among its own fran- chises, would those calls be considered as traversing or touching the PSTN? You could argue no, because the calls are going over Comcast’s private network. If the no-PSTN argument wins out, all the regulatory rules will have to be rewritten, because the basis for regulating VoIP as a telecommunications service assumes that a VoIP call touches the PSTN.

Second, what kind of interconnection requirements will Comcast have? Would it have to interconnect with traditional wireline networks? Obviously, from a near-term marketing perspective, it would—but at what price?

Finally, my reading of the rules regarding programming availability of cable MSO video programs is that if it goes over satellite, the cable MSOs have to make it available to non-cable companies. But it’s up in the air if the programming goes over a terrestrial network like Comcast’s IP/fiber network. Obviously some regulations may have to be revisited in 2006.

If you have an interest in what telecom regulatory attorneys and Congress watchers have to say about these top 10 issues, log on to a special Telestrategies Service Provider Club webinar scheduled for March 14, 2006, from 12:00 to 1:30 p.m. EST.

If you need to get a handle on how new technologies and services are impacting regulation, plan to attend “Understanding Next Generation Networks for Non-engineers”; or if you need to better understand telecom taxation, NG OSS/BSS, CALEA and the like, check out TeleStrategies’ Spring conference schedule at www.telestrategies.com.