Intercarrier Compensation Under Scrutiny

The FCC in March launched the second phase of its comprehensive rulemaking proceeding regarding intercarrier compensation. Policies and regulations adopted as a result of it likely will affect all corners of the telecommunications industry.

The commission’s objective in the proceeding perhaps is summarized best by Commissioner Michael J. Copps: “Our intercarrier compensation system is Byzantine and broken. We have in place a scheme under which the direction and amount of payments vary depending on whether carriers route traffic to a local provider, a long-distance provider, an Internet provider, a CMRS carrier, or paging provider. In a marketplace defined by convergence and technological change, this hodgepodge of rates looks more like a historical curiosity than a rational system of compensation.”

The FCC’s Further Notice of Proposed Rulemaking is intended to begin the process of replacing the existing myriad intercarrier compensation regimes with a fair and unified regime designed for today’s marketplace. The FCC seeks industry comment on a range of proposals to comprehensively reform the existing intercarrier compensation process as well as the impact they are likely to have upon Universal Service and end-user customers.

Under the current intercarrier compensation regime, federal and state access charge rules govern the payments IXCs and commercial mobile radio service (CMRS) providers make to LECs that originate and terminate long-distance calls. By contrast, the reciprocal compensation rules established under Section 251(b)(5) of the Telecommunications Act of 1996, as amended, generally govern compensation between telecommunications providers for the transport and termination of calls not subject to access charges. These rules apply different cost methodologies to similar services in ways that increasingly distort marketplace competition.

Numerous factors have rendered the existing regime difficult to maintain. First, dramatic changes in the telecommunications marketplace have led to the development of new service offerings. For example, most wireless services were not widely available in the 1980s when the FCC initially adopted its access charge regime. Today, there are at least 160 million wireless subscribers and the numbers continue to increase. The advent of VoIP technology has introduced a new massmarket alternative to traditional fixed telephone service. Even the wireline telecommunications business has changed significantly as carriers now offer a broad range of local, long-distance and other services in one flat-rated service package. These bundled offerings and novel services blur traditional industry and regulatory distinctions among various types of services and service providers, making it increasingly difficult to enforce the existing compensation regime.

Second, the existing compensation regime is based largely on the recovery of switching costs through per-minute charges. In a recent proceeding before the FCC, a number of carriers argued that a substantial majority of switching costs do not vary with minutes of use. For example, AT&T Corp. argued that switches generally have excess capacity so that increases in usage do not increase the cost of a switch. Exacerbating this problem is the fact that overall capacity of telecommunications networks has increased dramatically due to increased deployment of fiber-optic facilities.

Finally, the ability of customers to manage their own telecommunications services warrants a re-evaluation of the existing intercarrier compensation regime. Today, carriers offer a number of call-screening services that permit customers to block unwanted calls, such as telemarketing calls. This trend has been accelerated through the introduction of VoIP services that provide consumers far greater control over if, how, and when they receive calls. This increased ability of consumers to avoid calls for which they may not perceive a benefit means they generally will benefit from calls they choose to accept. This, in turn, calls into question the fundamental assumption underlying the FCCs current rules that the calling party is the primary beneficiary of any given call and, therefore, should bear all the costs of the call. As the FCCs notice observes, it may be more rational to assume that both the calling and called party benefit from any given call.

PROPOSALS FOR REFORM

Numerous industry groups have submitted proposals to the FCC to comprehensively reform federal and state intercarrier compensation mechanisms. The following major groups have submitted proposals which are referenced in the FCCs notice: Intercarrier Compensation Forum (ICF), the Expanded Portland Group, the Alliance for Rational Intercarrier Compensation, the Cost-Based Intercarrier Compensation Coalition, Cellular Telecommunications and Internet Association, National Association of State Utility Consumer Advocates, National Association of Regulatory Utility Commissioners, Western Wireless, Home Telephone Company and PBT Telecom.

While the notice summarizes many of these proposals, it is helpful to review at least one - the proposal of the ICF. The ICF is a diverse group of nine carriers (i.e., AT&T, GCI, Global Crossing Ltd., Iowa Telecommunications Services Inc., Level 3 Communications Inc., MCI, SBC Communications Inc., Sprint Corp. and Valor Telecom) representing different segments of the telecommunications industry. The ICF has developed a comprehensive plan for reforming the current network interconnection, intercarrier compensation and Universal Service rules. Among other things, the ICF plan would reduce per-minute termination rates from existing levels to zero over a six-year period. Specifically, the compensation rate for interstate access, intrastate access, and most other types of nonaccess traffic would be reduced in equal steps over four years to a unified rate of 0.0175 cents per minute of use. This rate is reduced further in the fifth year of the transition to 0.00875 cents per minute of use, and finally it is eliminated a year later. Revenue eliminated as a result of the transition to bill-and-keep under the ICF plan would be replaced by a combination of enduser charges and a new Universal Service support mechanism. As intercarrier payments decline, the cap on the subscriber line charge (SLC) would increase in equal steps from the current level of $6.50 to $10 in areas served by nonrural carriers and up to $9 in areas served by certain rural LECs.

The FCC seeks comment on the various proposals and asks parties whether it would be preferable to adopt a single proposal in its entirety rather than adopting a modified version of any particular proposal or attempting to combine different components from individual plans.

State Jurisdiction.

A significant issue on which the FCC seeks public comment is the agency’s legal authority to reform intrastate access charges as part of its comprehensive intercarrier compensation reform. Access charges for intrastate traffic historically has been an area within the exclusive jurisdiction of state public utilities commissions. Thus, any proposal that includes reform of intrastate access charges has the potential to raise federalstate jurisdictional issues. State public utilities commissions can be expected to seek to constrain FCC efforts to exercise jurisdiction over and reform intrastate access charges.

Rate Integration/Averaging.

Highlighting an issue that could affect insular areas and specialized regional providers, the FCC seeks public comment on the relationship between the access charge reform proposals and the FCC’s rate-integration and rate-averaging requirements. Section 254(g) of the Telecommunications Act of 1996 codifies the FCC’s pre-existing rate-integration and geographic rate-averaging policy. The socalled “Rate Integration Rule,” as codified in Section 254(g), requires providers of interexchange telecommunications services to charge rates in each state that are no higher than those in any other state. Similarly, the so-called “Geographic Rate Averaging Rule,” as incorporated in Section 254(g), requires providers of interexchange telecommunications services to charge rates in rural and high-cost areas that are no higher than the rates they charged in urban areas.

According to the notice, the FCC is concerned that, absent access charge reform, the rate-integration and rateaveraging requirements eventually will have the effect of discouraging IXCs from serving rural areas. The FCC also notes that these requirements may place specialized, regional providers at a competitive disadvantage vis-`-vis providers serving urban markets. According to the notice, “[w]e are thus concerned that the competitive realities of the marketplace may drive increasing specialization of companies serving rural as opposed to nonrural areas, ultimately leading to higher costs to fewer competitive choice for rural consumers.” Among other things, the FCC inquires as to whether there are additional steps the agency should take to address these concerns or whether there are circumstances where the FCC should forebear from applying the rate-integration and rate-averaging requirements.

Cost Recovery.

The FCC also seeks comment on whether carriers will be permitted to offset revenue previously recovered through interstate access charges if, as part of the reform process, the FCC reduces or eliminates the ability of LECs to impose interstate switched-access charges on IXCs. While interstate access charges have declined over the years, both “price cap” LECs and “rate-of-return” LECs still generate significant revenue from access charges (and concomitantly IXCs still incur significant costs associated with access charges). Some proposals before the FCC rely upon two mechanisms - the SLC and some form of Universal Service support - for offering “price cap” carriers the opportunity to recover costs previously recovered from IXCs through interstate switched-access charges. The notice asks whether the FCC should rely solely on enduser charges, or whether it also should rely on Universal Service support mechanisms to offset revenue no longer recovered through interstate access charges.

Since a comprehensive reform effort could entail similarly reducing or eliminating intrastate switched-access charges, these same questions are posed with respect to intrastate access charges and whether they can be replaced with additional Universal Service funding and SLC increases. The notice queries whether the FCC should create a federal mechanism to offset any lost intrastate revenue or whether the states should be responsible for establishing alternative cost recovery mechanisms for LECs within the intrastate jurisdiction.

Implementation.

Under the FCC’s access charge regime, the rates, terms and conditions under which carriers provide interstate access services generally are contained in tariffs filed with the FCC. By contrast, the exchange of traffic under Section 251(b)(5) is governed by interconnection agreements. The notice seeks comment on how to reconcile these two fundamentally different approaches if the agency moves to a unified rate for all types of traffic. The notice also seeks comment on the type of transition that would be needed to move to a new regime.

CMRS.

Under the FCCs so called “IntraMTA Rule,” traffic to and from a CMRS network that originates and terminates within the same Major Trading Area (MTA) is subject to reciprocal compensation obligations under Section 251(b)(5), rather than interstate or intrastate access charges. Thus, the FCCs rules define telecommunications traffic between a LEC and a CMRS provider that is subject to reciprocal compensation as traffic that, at the beginning of the call, originates and terminates within the same MTA. The purpose of the IntraMTA Rule is to distinguish access traffic from Section 251(b)(5) reciprocal compensation traffic. Many of the proposals being considered by the FCC eventually would eliminate the IntraMTA Rule and treat CMRS traffic the same as all other wireline traffic for compensation purposes. The notice seeks comment on this potential reform.

Initial comments in the FCC’s intercarrier compensation proceeding are due 60 days after the FCC’s notice is published in the Federal Register and reply comments are due 90 days after publication in the Federal Register. At press time (May 9), the item had not yet been published in the Federal Register.

The FCCs intercarrier compensation reform proceeding can be expected to impact virtually all sectors of the telecommunications industry, spanning wireline, wireless and VoIP service providers, state public utilities commissions, and perhaps, most directly, end-user customers. Not only does the proceeding have the potential to affect the rates that end users pay (e.g., the SLC and provider charges), but it also can be expected to impact the Universal Service program itself.

Thomas K. Crowe, Esq. is a Washington, D.C.-based attorney specializing in communications legal/regulatory matters. He can be reached at +1 202 263 3640 or via email at [email protected].