Heavy Traffic: Helping Telecom Carriers Solve Infrastructure Challenges

Wednesday, May 22, 2013 - 15:48

The Editor interviews Henry T. Kelly, Managing Partner in the Chicago office of Kelley Drye & Warren LLP.

Editor: Hank, you were named Best Lawyers’ 2013 Chicago Communications Law “Lawyer of the Year” in 2012. To what do you attribute this honor?

Kelly: Kelley Drye & Warren has an outstanding reputation in the communications market, and I’m able to take advantage of that reputation with clients in Chicago and other parts of the country. Although I’m based in Chicago, we serve clients nationwide from both the Chicago and DC offices, and that has helped me work with clients not only in Chicago, but in many other parts of the country.

Editor: Please tell our readers more about your practice in the area of telecommunications-related matters. Do you do much work on compliance?

Kelly: Primarily we help telecom clients establish and create their networks, helping them as they build out their communications infrastructure to better serve customers. In large part, this involves managing their interconnection arrangements with other carriers, helping them gain efficiencies in those arrangements, and providing counsel to them when dealing with municipalities or other government agencies. We’ve done this for wireless carriers, landline carriers and VoIP (Voice over Internet Protocol) providers.

While our group does some critical and valuable work on compliance issues with the regulatory agencies, many of our clients have their own in-house compliance teams who are very much on top of the annual and monthly regulatory requirements at the Federal Communications Commission (FCC) and at the state level. I’m brought in to provide counsel when our clients want to improve their network infrastructure, when they run into problems interconnecting or exchanging traffic with other carriers, or when they encounter a municipality or a state public service commission that  keeps them from deploying their infrastructure or creating efficient networks.

Editor: Does your own work often entail working on deals between companies?

Kelly: Yes, that’s a large part of what I do. Our clients are increasingly developing business relationships with other carriers built on commercial agreements and negotiations rather than regulatory rules. The regulations simply can’t keep up with the increasingly complicated communications market and its rapidly changing technology, so companies are  relying on their business relations to exchange traffic with other carriers, and we are actively involved in those transactions.

Editor: You mention the rapidly advancing technology and the fact that the rules can’t keep up. How are the regulatory agencies – the FCC and the NTIA, in particular – responding in this context?

Kelly: They may not be succeeding in keeping up, but they are certainly trying. Both the FCC and the state public service commissions are bound by legacy statutes and regulations that they must enforce because the wording requires that they do so, but, as I mentioned, the technology and the volume of traffic have outgrown those legacy regulations, many of which have been in place since the breakup of AT&T.

In late 2011, the FCC did a reasonably good job of instituting a forward-looking intercarrier compensation regime. One of the largest issues carriers face is the rate of compensation for the exchange of traffic. Different rates apply to different types of traffic, i.e., data, voice or different types of voice; it depends on  what kind of carrier you are and what kind of facilities are being used to exchange that traffic. The FCC put in place a fairly decent and – importantly – predictable framework for carriers going forward, and carriers can now successfully adjust to this new intercarrier compensation regime.

Having said that, the 2011 ruling didn’t address a more fundamental point, which is how carriers are interconnecting their networks with each other. Many FCC regulations regarding interconnection are based on old geographic boundaries, which really no longer apply in the context of today’s technology, where Internet protocol is used to exchange traffic. By lagging behind, the FCC and the state commissions are not doing carriers any favors by failing to adjust their regulations to account for the new interconnection methodologies.

On the other hand, the National Telecommunications and Information Agency (NTIA), which is responsible for expanding broadband networks in rural and underserved areas, has been doing a much better job – especially in the last four or five years – of identifying need in those areas and providing government incentives to carriers to deploy broadband networks there.

Editor: In which telecom area are you seeing the most expansion?

Kelly: The volume of wireless traffic, whether it be voice traffic or data, is growing exponentially. For example, Cisco has estimated that wireless data traffic will have a compound annual growth rate of about 66 percent from 2012 to 2017.  So, wireless carriers are struggling to develop the infrastructure that can carry all that traffic. And, because wireless traffic is aggregated through antennas and then transferred onto higher-capacity wireline facilities, wireline carriers are struggling, too. We frequently provide counsel to both wireless and wireline carriers as they try to develop networks that will accommodate the ever-expanding volume.

Editor: Are there any other technologies that might improve the capacity of wire-line?

Kelly: Yes, the technology is constantly evolving. Five years ago, a home cable provider could promise you five megabits of speed for download, and now it’s ten times that. And it’s not because the copper wire being used to carry that traffic is thicker: the equipment in the home and in the network infrastructure has advanced such that it dramatically increases the capacity of that coaxial copper strand.

Editor: Please describe your recent representation of Madison Dearborn Partners’ due diligence work in the sale of their interest in NextG Communications to Crown Castle.

Kelly: Our involvement with Madison Dearborn was helping them with the due diligence that allowed that sale to go through.  What’s notable about this sale is that it demonstrates a trend we’re seeing in wireless infrastructure. Like other carriers, Crown Castle was looking for alternative ways to manage its growing wireless traffic other than through the large antenna systems like those you see along the highways.  While NextG is technically a wireline company, it provides wireless aggregation services and distributed antenna systems that allow for higher-capacity data such as LTE and 4G to be sent and received more efficiently. NextG installs relatively small antenna systems that can be deployed closer to the ground – on top of street poles, in parks or in other unobtrusive locations – as well as closer together, enabling broader coverage of higher-capacity data.

Editor: The Peerless Network case dealt with patent infringement claims. Please describe the case.

Kelly: This was a rewarding case for us. Peerless was a startup company, still brand new in the market, when it began providing services that caught the attention of Neutral Tandem, the primary provider of some of those services in that market. We were hired by Peerless to defend on the patent infringement case. For Peerless, it was certainly a bet-the-company litigation, and we were happy they were successful in the courtroom. The patent was declared to be invalid, all claims against Peerless were dismissed, and Peerless has since thrived in the marketplace. We’ve seen the company grow exponentially; last year they were one of the top 100 fastest-growing private companies in America.

Editor: Are they still a client?

Kelly: Yes – and that’s what’s so rewarding. We’ve developed a great partnership with Peerless that has been successful not just for them but for us as well. Even more than our win in the courtroom, I value the fact that we’ve been able to forge a very strong partnership with the client.

Editor: Please share with our readers your work advising the Illinois Power Agency (IPA).

Kelly: I began to work for the IPA shortly after it was formed by the Illinois Legislature, primarily because of our expertise at the Illinois Commerce Commission (ICC). The IPA was set up essentially to conduct competitive bids to procure electricity supplies for Commonwealth Edison and Ameren – the two largest energy retailers in the state at the time. The agency itself needed to have its plans to procure electricity through competitive bid process approved by the ICC, and so the director of the agency reached out to us to help them navigate that process. That relationship has been a great one as well, and we continue to represent the IPA today. Meanwhile, the agency has proven phenomenally successful.  During the period from 2009 to 2012, these procurement events saved residential and small business consumers in excess of $1.64 billion on their electricity bills.

Editor: I understand efforts to repeal state renewable energy mandates have failed. How are the mandates working?

Kelly: As in telecom, energy is going through fundamental changes in the market, and state policies aren’t necessarily keeping up. For example, Illinois has on occasion adopted policies that conflict with each other. Today, the IPA, the ICC and energy suppliers are struggling to implement state policies that are sometimes in conflict with each other.

For example, Illinois has a policy stating that renewable energy resources should be included in the mix of energy supply, and by the year 2025, 25 percent of all of the energy supplied in Illinois is supposed to come from renewable sources. To accomplish this, the ICC had renewable resource developers, such as wind farms, enter into long-term contracts with Commonwealth Edison and Ameren so that the developers could use those contracts to obtain financing.

The problem is, there’s also a policy to promote competition among electricity providers. As a result, Commonwealth Edison and Ameren have lost many of their residential customers.  Now Commonwealth Edison and Ameren are burdened with these long-term contracts, and they don’t have customers to pass those costs onto. The state of Illinois hasn’t yet figured out how to adjust the long-term contract financing obligation among different providers in the market as their market share fluctuates with competition.

Editor: What are some of the other vibrant practice areas in the Chicago office?

Kelly: I would say one is our Corporate group, which represents many companies in the energy market that sell either services or equipment for fracking. Attorneys in that group are also very active in financing on energy projects.

Another is our Intellectual Property Litigation group, which counts among its clients some impressive pharmaceutical companies. Like telecommunications, the pharmaceutical area is rapidly evolving, expanding into the realm of biosimilars and biologics, and our clients are entering those developing markets.

Please email the interviewee at hkelly@kelleydrye.com with questions about this interview.