Regulatory Arbitrage Strategies and Tactics in Telecommunications

Recently several states have launched investigations of certain MCI telephone call routings based on competitors' claims that the company eliminated or reduced payments it should have made. The MCI investigations may trigger closer scrutiny of numerous strategies and tactics used by telecommunications carriers to reduce the payments they make to other carriers. Also this scrutiny may call attention to how carriers exploit inconsistent regulatory treatment of functionally the same services. Regulatory asymmetry occurs when telecommunications service providers offer identical services, but incur different regulatory burdens. More extensive regulatory oversight, higher fees, and subsidy obligations may apply to carriers based on artificial classifications of services based on geography (intrastate versus interstate) and type (telecommunications as a stand alone service versus one where telecommunications is a minor element of an information service). Additionally inconsistent regulatory treatment may occur based on carrier classifications using historical market share and perceptions of their market power. Existing, "legacy" regulatory classifications have established arbitrary dichotomies based on service, which regulatory agency has jurisdiction, what services qualify for promotion through favorable regulatory treatment, and how carriers and regulators decide to allocate costs. Regulatory arbitrage results when stakeholders, such as telecommunications service providers like MCI, exploit differences in legislative and regulatory classifications to accrue financial and competitive advantages achieved by avoiding regulatory burdens, or by foisting payment obligations onto other carriers. This article will examine tactics designed to exploit regulatory arbitrage with an eye toward identifying areas where inconsistent regulatory treatment distorts the competitive marketplace without offsetting public interest benefits. The paper concludes that legislatures and regulators should eliminate opportunities to avoid regulatory burdens through routing and service classification tactics unless compelling reasons persist for maintaining regulatory asymmetry.