Intercarrier Compensation Uncertainties Continue to Plague Billing

Reciprocal compensation has been an important yet controversial source of revenue for many CLECs and others since it was created after the passage of the Telecommunications Act of 1996. The controversy has resulted largely from claims by RBOCs and other ILECs that CLECs have targeted ISPs as customers to take advantage of the high volume of calls terminating at ISPs, and thereby the significant reciprocal compensation for which they could bill the relevant ILECs. The ILECs have previously argued that this was an unforeseeable result and that it represents regulatory arbitrage of market mechanisms. Initially, some ILECs refused to pay for such traffic.

The issue has bounced around the state public utility commissions (PUCs), the Federal Communications Commission (FCC) and the courts. Meanwhile, the FCC is actively considering changes to all forms of intercarrier compensation, which includes access charges as well.

How these continuing issues get resolved over time may have a huge impact on intercarrier billing and other issues, and on the bottom lines of CLECs, wireless providers and other carriers.

Reciprocal Compensation Controversy

From 1997 through 1999, ILECs often refused to make reciprocal compensation payments for ISP-bound traffic, arguing that the imbalance of payments were unforeseen at the time they entered interconnection agreements with the CLECs. CLECs sought remedy with the state PUCs, and the majority of the PUCs agreed with the CLECs that the balance of traffic was foreseeable and that the CLECs should be compensated for it. Many disputes ended up in court, again with the CLECs as winners most of the time.

The ILECs took their concerns to the FCC, arguing that reciprocal compensation for ISP-bound traffic represents a form of regulatory arbitrage that distorts the market and that the FCC should do something to close this loophole. The FCC agreed with the ILECs and issued a declaratory ruling in February 1999 concluding that ISP-bound traffic was “largely interstate, and the reciprocal compensation obligations do not apply to this traffic.” It delegated authority to the state PUCs, however, and reciprocal compensation continued under the then-existing contracts of carriers. The PUCs generally reaffirmed their original positions in favor of the CLECs.

On March 24, 2000, the Court of Appeals for the District of Columbia Circuit vacated the key provisions of the Commission’s reciprocal compensation ruling and remanded the matter to the FCC. After a public notice and comment, in April 2001, the FCC announced the adoption of a new order and rules (ISP Order).

This time, the FCC concluded that telecommunications traffic delivered to an ISP is interstate access traffic, specifically “information access” that is a category exempt from the reciprocal compensation provisions of the Act. It removed authority from the state PUCs to further address this issue and established a transitional cost-recovery mechanism for the exchange of this traffic. Importantly, the FCC indicated that the ISP Order “is considered just an interim step while [it] considers the broader issues of intercarrier compensation,” including access charges.

In the notice of proposed rulemaking (NPRM) it released at the same time, the FCC initiated a “36-month transition towards a complete bill and keep recovery mechanism while retaining the ability to adopt an alternative mechanism based upon a more extensive evaluation.” The interim, transitional recovery scheme capped compensation for ISP-bound traffic at a rate of $.0015/minute-of-use (MOU) for the first six months; $.0010/MOU for the 18 months thereafter; then at $.0007/MOU. It also capped total ISP-bound MOU at the existing level plus a 10 percent growth factor. The FCC required the rates to apply to all local traffic should the ILECs adopt them, which would include wireless. Finally, the FCC adopted a rebuttable presumption that traffic exchanged between carriers that exceeds a 3:1 ratio of terminating to originating traffic is ISP-bound traffic subject to its compensation mechanism.

The FCC indicated in its ISP Order that the interim compensation regime it established applies as carriers renegotiate expired or expiring interconnection agreements. It does not alter existing contractual obligations, except to the extent that parties are entitled to invoke contractual change-of-law provisions. The FCC also specified that carriers may no longer invoke section 252(i) of the Telecommunications Act to opt into an existing interconnection agreement with regard to the rates paid for the exchange of ISP-bound traffic.

Chris Van de Verg, general counsel at CLEC Core Communications, echoes the frustration of many CLECs following the ISP Order: “CLECs can survive in any environment, but if the FCC changes the rules every time they succeed, then the CLECs will not survive. In our view, it’s not the kind of consideration an ILEC would receive—the FCC’s policies are supposed to be revenue-neutral, but this has not held true for the CLECs.”

Access Charge and Unified Intercarrier Compensation

At the same time as its ISP Order last year, the FCC engaged in two related actions. As another interim measure, it regulated CLECs’ access charges to IXCs so that tariffed CLEC access charges would become incrementally lower over a three-year period. This was a double hit to CLECs’ intercarrier revenues. In fact, Time Warner Telecom announced a reduction of approximately $8 million in third quarter intercarrier compensation revenues last year as a result of the reduced switched-access rates and lower cash collections for reciprocal compensation, among other things.

The FCC also began a “fundamental re-examination of all currently regulated forms of intercarrier compensation” (all access charges and reciprocal compensation) in its Unified Intercarrier Compensation NPRM. Specifically, the FCC proposed to apply a bill-and-keep approach to ISP-bound traffic and sought comment on the feasibility of applying this approach to all intercarrier compensation in general. In addition, it sought comment on all alternative reform measures for existing intercarrier compensation regimes. The FCC does not intend to regulate other interconnection arrangements not currently subject to rate regulation, such as Internet backbones and CLEC-to-CLEC, IXC-to-IXC, wireless-to-wireless or wireless-to-IXC arrangements.

Jonathan Askin, general counsel with the Association for Local Telecommunications Services (ALTS), believes these proceedings are “the biggest morass confronting the FCC right now—so many pricing principles that they have to reconcile. … The CLECs and ILECs are so opposed on the different issues that the FCC will likely take baby steps.” In his view it would be extremely unfair to bring reciprocal compensation to bill-and-keep and not access charges, and he thinks the FCC understands this.

“It would be amazing to me if the ILECs allow a radical change on the access side of the house,” says J.T. Ambrosi, vice president for carrier and government relations at CLEC PaeTec. “If they were to take [a] reduction on the access side, they would have to pass their costs on to end users, and that’s not politically tenable either.” The big ILECs have been cautious about this issue, but BellSouth supports intercarrier compensation reform, including removal of access charges, according to Whit Jordan, vice president for federal regulatory affairs at BellSouth.

CLECs have pointed out that while the ILECs allege that recent reciprocal compensation mechanisms resulted in a windfall for CLECs, the ILECs terminate far more calls from wireless and pager providers than they originate, so ILECs benefit from this heavy imbalance of traffic as the net recipients of reciprocal compensation revenue.

Indeed, wireless carriers would like a bill-and-keep regime for LEC-wireless interconnection, because approximately 65 percent of all wireless traffic terminates on landline networks, according to the Cellular Telecommunications & Internet Association (CTIA). The CTIA finds conversion to bill-and-keep “essential for wireless if other telecommunications are converted to ‘bill & keep.’ ”

Where Does This Leave Carriers?

How these continuing issues get resolved over time will have a huge impact on intercarrier billing and on the bottom lines of CLECs, wireless carriers and integrated communications providers, because intercarrier billing accounts for 30 percent or more of some carriers’ total revenues.

Yet the FCC’s interim ISP Order has not provided regulatory certainty even for the brief period it was designed to cover. Commissioner Harold Furchtgott-Roth issued both a blistering and prescient dissent to that rule, stating that the FCC was ignoring the court’s concerns and contradicting its other policies, and that further litigation and uncertainty would result. Sure enough, many of the CLECs and ILECs are currently battling over how to implement the ISP Order, even as WorldCom, other CLECs and state PUCs are challenging the FCC again before the same court, in a suit filed last June.

Among the issues recently argued before state commissions is whether the rates identified in the FCC’s order should automatically substitute for rates in existing interconnection agreements, or whether they have to be renegotiated if required by “change-of-law” provisions in those agreements. Because the FCC rates are lower than what’s in the agreements, the Bells would prefer the FCC rates apply. The CLECs argue they must be renegotiated.

Richard Whitt, director and senior counsel for Internet data law and policy for WorldCom, says, “There’s a widespread sense of confusion, because the FCC order is not crystal clear in terms of how to implement this brand new process over the three years. Because of the ambiguities, the RBOCs have been trying to take advantage.”

“We’ve taken the position [the ISP Order] is self-effectuating,” says Scott Randolph, director of federal regulatory affairs at Verizon. “So we’ve gone back to the CLECs and insisted that they begin to pay reciprocal compensation right away based on the FCC ratios. The basis for that is in their interconnection agreements that have change-of-law provisions that state the terms change with legal or regulatory changes.” Jordan at BellSouth also believes such contract provisions make the ISP Order self-effectuating, but he says the company hasn’t encountered any significant disputes with other carriers over the issue.

Meanwhile, a three-judge panel of the Court of Appeals for the D.C. Circuit heard oral arguments on February 12 in the suit filed against the FCC last June. The FCC asserted that calls to ISPs were “information access” and should be exempt from reciprocal compensation.

In a quirky opinion, the court decided on May 3rd to leave the current rules in place, but says the FCC will have to find another legal basis for those rules, and it suggests bill-and-keep as a likely option.

Regardless of what the court decided, the underlying issues are not likely to be definitively resolved anytime soon.

John Sumpter, vice president of regulatory affairs at CLEC PacWest, believes the impact on carriers will depend upon whether the ISP Order stands. “Intercarrier compensation rates are going to continue to decline towards costs,” he says. “ILECs will experience a more significant decline in the rate per minute for intercarrier rates, especially for access charges,” which he thinks will eventually approach reciprocal compensation rates.

Billing Feels the Effects

So how do carriers deal with the uncertainty and continue to maximize their intercarrier revenues while minimizing their intercarrier costs? Whitt at WorldCom says, “The greater the confusion between what rates apply to what carriers, the more the strain on your billing system. Because the legal and policy fights are going on in so many venues, it does have a real impact on the billing systems. The FCC should take that into account, but unfortunately it doesn’t seem to worry about this problem.”

What To Do?

As a letter late last year to the Maryland PUC from attorneys at Kelley, Drye & Warren states, if a CLEC renegotiates its interconnection contracts it could legitimately include a provision to ensure that it is “made whole” in the event the ISP Order is eventually held unlawful by the court. A CLEC could also reasonably “expect [an ILEC] to make all … payments under the pre-existing reciprocal compensation provisions before agreeing to amend” its interconnection agreement to implement the FCC’s new rules. It might negotiate the same result for any new interconnection agreements.

That letter also stated that “parts of the FCC’s new regime—e.g., the 3:1 ratio for identifying ISP-bound traffic, and the so-called growth caps—are neither self-executing nor fully developed; they require further clarification and elaboration before they can be implemented as a practical matter.” But whether it makes sense for carriers to pursue that clarification right now, so close to the court’s expected decision, is another story. The FCC does allow carriers that seek to rebut the 3:1 ratio presumption to show that traffic above the ratio is not ISP-bound traffic or, conversely, that traffic below the ratio is ISP-bound. Such carriers can seek their remedy with their state commissions in rebutting this presumption.

For terminating carriers, especially those with call detail records that don't contain the necessary calling party numbers, there are certain steps that help to ensure proper billing, whether from a non-SS7 trunk, another carrier's tandem or other problematic scenarios. The first step is to ensure that all incoming traffic is recorded and monitored. Next is to ensure that incoming trunk groups from tandem switches are set up to receive intra-LATA traffic, as opposed to inter-LATA. Also, to the extent possible, a switch manager should establish an incoming trunk group solely for traffic that legitimately excludes calling party numbers in the associated CDRs.

If you are a net payer of reciprocal compensation, and assuming adoption and renegotiation of rates, you might minimize costs by identifying which of your outbound calls are terminating at ISPs that are not your customers. However, there is no natural flag in call detail formats to identify traffic as ISP-bound, and an originating carrier must use alternate measures. To identify ISP calls, the carrier might utilize a heuristic process to pick out individual 10-digit numbers that are high-probability targets of ISPs. For example, the carrier might search for all telephone numbers to which calls were placed that were over 20 minutes long and which received more than 50 calls in an hour or two. A random spot check, performed by dialing these numbers, will demonstrate that the originating carrier has correctly identified the ISP numbers.

Wireless providers are also subject to reciprocal compensation rules, which apply to LEC-wireless traffic that originates and terminates within the same major trading area. Wireless carriers are entitled to demonstrate that their termination costs exceed those of ILECs, however, and that they would therefore be entitled to “asymmetrical” reciprocal compensation. Sprint PCS sought and received clarification on this point last year from the FCC, which stated that the wireless carrier can submit a cost study to justify claims for greater traffic-sensitive costs associated with spectrum, cell sites, backhaul links, base station controllers and mobile switching centers. This strategy is something for wireless carriers to consider, especially when they receive significant invoices for reciprocal compensation from others.

Outsourcing Minimizes Risks

Regulatory uncertainties are not the only problems billing and revenue assurance departments face as they deal with intercarrier compensation issues. Negotiating agreements, filing the proper tariffs, continually updating switch programming and dealing with hundreds of other carriers lead to plenty of challenges.

Savvy carriers dealing with the complexities of intercarrier billing are constantly evaluating their current processes and billing systems, and where they can modify them to make them more efficient and to assure revenues. According to a June 2001 report by telecom market analysis firm Insight Research, these carriers are increasingly realizing the value of outsourcing for various billing and revenue assurance functions and as a supplement to existing staff. In the uncertain regulatory and economic environment, outsourcing can become even more valuable for limiting the risks of significant up-front expenditures for purchasing or upgrading billing systems and software.



Perry Goldschein is with Advanced Technologies & Services Inc., a network integrity, billing solutions and revenue assurance company. He can be reached at pgoldschein@atso.com.