An Introduction To U.S. Telecommunications Law / Edition 2

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This completely revised and updated edition includes a comprehensive look at the Telecommunications Act of 1996, its sweeping reforms, and the short-term increase in TC regulation complexity resulting from its passage. An Introduction to U.S. Telecommunications Law, Second Edition is a concise, jargon-free reference describing how electronic media and telecommunications companies are required to price their services, interconnect with customers and other service providers, and respond to competition.

Learn how the rapid advance of telecommunications technology has drastically altered regulations first developed when TC meant fixed networks, copper wire and mechanical switches. Since this book first appeared, new telecommunications systems such as Internet telephony have greatly impacted telecommunications law in local, state, and national jurisdictions, and the new edition addresses these changes.

Using simple case studies to show how courts and regulators affect business decisions, this convenient, single-volume source is indispensable for all telecommunications managers and enables members of corporate legal departments to learn more about regulatory and legal issues outside their areas of specialization. And in the wake of the passage of the 1996 Telecommunications Act, learn how decisions by the FCC, state utilities commissions and federal courts have further complicated the regulatory clutter the Act was supposed to sweep aside.

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Editorial Reviews

Introduces themes of telecommunications law, for readers with no background in the law, economics, or technology of telecommunications. General discussions of theory and history are avoided in order to focus on legal and business problems. Chapters sketch the legal and regulatory environment in which each of the major categories of regulated telecommunications companies operates. Part I covers incumbent local exchange carriers (ILECs) and how much they can charge for local exchange and nonbasic services, ILEC interconnection with other service providers, the Bell operating companies, and competing local exchange carriers. Part II covers non-ILECs, with chapters on interexchange carriers, pay telephones and operator services providers, mobile telephone companies, Internet service providers, universal service, and International services. A 35-page appendix outlines the economic background of telecommunications law. Kennedy is a partner in a law firm. He teaches in the Columbus School of Law at Catholic University of America. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9780890063804
  • Publisher: Artech House, Incorporated
  • Publication date: 6/30/2001
  • Series: Artech House Telecommunications Library Series
  • Edition description: Second
  • Edition number: 2
  • Pages: 412
  • Product dimensions: 6.14 (w) x 9.21 (h) x 1.00 (d)

Meet the Author

Charles H. Kennedy is a partner in the law firm of Morrison & Foerster, LLP, and a member of the adjunct faculty of the Columbus School of Law, Catholic University of America. He is the author or coauthor of four books on communications law and cyberlaw, and advises a wide range of clients on the problems posed by domestic and international regulation of telecommunications and Internet-based services. Mr. Kennedy is a graduate of The University of Chicago Law School, where he was an editor of The University of Chicago Law Review. His email address is ckennedyC>
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Read an Excerpt

Excerpt from Part 1:1

How Much May Incumbent Local Exchange Carriers Charge for Local Exchange Services?

Because Peninsula is an ILEC rather than an unregulated business, your freedom to set rates for your core services is limited. Your state public utilities commission (PUC) will control your rates for intrastate services, including local exchange service, interconnection rates charged to CLECs, and access charges for intrastate calls carried by interexchange carriers (IXCs). The Federal Communications Commission (FCC) will control your rates for services within its jurisdiction, including access charges for interstate calling. This chapter describes how your state PUC will regulate your rates for local exchange services. Later, in Chapter 3, we describe how state and federal regulators will determine your rates for exchange access and interconnection with other types of service providers.

Regulatory control does not mean that you will wait passively for the PUCs to tell you what your rates will be. In fact, the initiative in ratemaking lies chiefly with the ILEC, which develops proposed rates, presents those rates to the appropriate PUC in a public document called a tariff, and performs the prescribed recordkeeping and reporting on which the PUC will rely in determining whether those rates are justified. The PUCs respond to the ILECs' rate proposals by permitting them to take effect without comment, or by investigating and possibly rejecting them [I]. If a PUC decides to investigate it can choose from a spectrum of procedural options, ranging from modest requests for additional data to extensive evidentiary hearings.

Each PUC has its own rules for determining whether an ILEC's proposed rates are )ustified, but they all use variants of two approaches-rateof-return regulation and price-cap regulation.

The rate-of-return approach-once the dominant form of rate regulation-still is used by many state PUCs (especially in regulating intrastate rates of smaller ILECs) [2] and by the FCC in regulating the interstate access charges of some small and mid-size ILECs [3]. Under this regime, the PUC does not try to set individual rates on a service-by-service basis; instead, it decides how much revenue the ILEC may earn overall, and permits the ILEC to set rates calculated to produce that amount. So long as ILEC's earnings do not exceed the allowable maximum, the PUC will not disturb particular rates unless they are "unreasonable" or "unreasonably discriminatory."

The price-cap approach has been adopted by the FCC for regulation of the interstate access charges of the larger ILECs, and is used by most state PUCs as well. Under price caps the PUC sets maximum rates for particular services, but does not establish a maximum level of earnings. If the ILEC can earn more within the rate ceiling by cutting its costs, it is permitted to do so; but if its profits exceed a prescribed level, the carrier may be required to "share" part of the largess with ratepayers through refunds or rate reductions [4] .

To show how rates and earnings are set under these two regulatory systems, we now return to Peninsula Telephone and work through some simplified examples of ratemaking.

I. Peninsula Telephone: Local Exchange Service Rates Under Rate-of-Return Regulation

We saw earlier that rate-of-return regulation is based on an overall cap on earnings (a number often called the ILEC's "revenue requirement") rather than scrutiny of individual rates. If Peninsula operates in a rate-of-return state, therefore, your principal regulatory goal is to persuade your state PUC to set a revenue requirement that is adequate to the needs of your business. Once you know your revenue requirement, ratemaking becomes a matter of setting prices for regulated service that are sufficient, in light of anticipated demand, to yield the permitted amount of revenue.

Peninsula's PUC will set the revenue requirement based on a more or less intensive inquiry into Peninsula's expenses and investment [5]. Regardless of the procedure used, the PUC will try to establish a level of earnings that permits Peninsula to do two things: first, recover all of its reasonably incurred operating expenses; and second, earn a reasonable return on the capital invested in the enterprise. The process may be summarized by the equation [E + r(RB)] = RR, where E represents the ILEC's anticipated expenses, r is the permitted rate of return on investment, RB is the rate base (i.e., capital invested in the enterprise), and RR is the company's revenue requirement.

Calculation of E-Peninsula's anticipated expenses-is straightforward. During the time in which the proposed rates will be charged, Peninsula will incur expenses-salaries, rent, fuel, and the like-associated with providing exchange service. Peninsula will tell the PUC what kinds and amounts of expense it anticipates for the years in which the revenue requirement will apply. The PUC may disallow some of Peninsula's expenses as unreasonable, but all allowed expenses will become part of the revenue requirement [6].

The second item-the rate-of-return calculation-requires more explanation.

Like all ILECs, Peninsula is a capital-intensive company: buildings, switches, trucks, and transmission facilities are expensive to acquire, upgrade, and replace; growing demand and advances in technology exert constant pressure to expand the network and replace obsolete equipment and facilities. Peninsula must raise the funds for all of this in the capital markets-by borrowing, selling bonds, and issuing preferred and common stock [7].

The constant need to raise capital creates two sets of claims on the revenue requirement. First, fairness to Peninsula's investors requires that they earn a reasonable return on the money they have contributed to the enterprise. (Bondholders have a contractual right to a specific rate of interest, and shareholders expect-although they are not guaranteed-a return comparable to that paid on securities offering similar risks [8].) Second, Peninsula must protect its creditworthiness and ability to raise additional capital [9].

The rate base/rate of return calculation is intended to satisfy these claims at minimum cost to ratepayers. To determine the appropriate level of earnings, the PUC must arrive at two numbers: the value of the capital invested in the enterprise (the "rate base"), and the percentage return on the rate base that will compensate investors fairly and attract new investment (the "rate of return"). Multiplying these two numbers yields a figure that will be added to the allowable operating expenses to produce the total revenue requirement [10].

To illustrate the setting of the revenue requirement, suppose that Peninsula is facing rising costs and advises its state PUC that it must increase its exchange service rates substantially. The PUC schedules a rate hearing and directs Peninsula to file data supporting all elements of the proposed, new revenue requirement. (We make the simplifying assumption that the PUC's inquiry will ignore all services except local exchange service, and that Peninsula offers only flat-rate local calling, at the same rate for all customers, with no optional features.)

A. Allocating Costs to Local Exchange Service

Before calculating Peninsula's revenue requirement, there is one refinement we must describe (i.e., the correct allocation of costs to the service for which the rates will be charged).

As we noted earlier, Peninsula's PUC is setting the revenue requirement for Peninsula's local exchange service rates. It will set a level of earnings sufficient to recover the costs associated with that service only.

But local exchange service is not the only service Peninsula provides. For example, we already saw that Peninsula provides interstate access service, the rates for which are regulated by the FCC [11]. Peninsula also provides fully competitive services (such as yellow pages) that are not regulated by either PUC. Fairness to Peninsula's ratepayers requires that the exchange service revenue requirement not include any of the costs of providing these other services.

Allocating these costs would be simple if Peninsula had three separate divisions-one providing interstate access service, another providing exchange service, and the third providing unregulated service-and if each division had its own plant, equipment, and staff. Then the costs of each division could be directly assigned to the service or services it provided. Like all ILECs, however, Peninsula uses many of its people and much of its plant to provide more than one service. How are these so-called common costs divided?

The FCC and the states have developed elaborate accounting systems to address this problem. One system, called jurisdictional separations, allocates costs between services regulated by the FCC and services regulated by the states [12]. Another system, usually called Part 64 accounting after the section of the FCC rules in which it is addressed, allocates costs between regulated and nonregulated services [13].

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Table of Contents

Pt. I Incumbent Local Exchange Carriers 1
1 How Much May ILECs Charge for Local Exchange Services? 5
2 How Much May an ILEC Charge for Nonbasic Services? 23
3 When Must an ILEC Interconnect Its Facilities with Those of Other Service Providers? 35
4 Special Cases: The Bell Operating Companies 61
5 Competing Local Exchange Carriers 85
Pt. II Non-ILECS: The Competitive Telecommunications Industry 101
6 Interexchange Carriers 103
7 Pay Telephones and Operator Services Providers 115
8 Mobile Telephone Companies 123
9 Internet Service Providers 139
10 Universal Service 185
11 International Services 199
App. A The Economic Background of Telecommunications Law 209
App. B Selected Sections of the Communications Act of 1934 251
About the Author 359
Index 361
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