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 uncover instances of unlawful practices designed to shore up revenues, reduce payments to local exchange carriers for call delivery, avoid tax liability and shift local exchange access payment burdens to other carriers. Perhaps more significantly the investigations may trigger closer scrutiny of numerous strategies and tactics used by telecommunications carriers to reduce payments they make to other carriers. Also, this scrutiny may call attention to how carriers exploit inconsistent regulatory treatment of functionally the same services. A fuzzy line separates lawful efforts to achieve least cost routing of traffic on one hand, and deliberate efforts unlawfully to reduce or avoid financial obligations by deceiving other carriers as to where a call originated on the other hand.
Regulatory arbitrage results when stakeholders, such as telecommunications service providers as 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.