Intercarrier Compensation: A Balancing Act

The FCC had hoped to decide intercarrier compensation issues by the end of the year, however, the enormous dockets submitted contain thousands of pages of comments and reply comments from IXCs, CLECs, RBOCs, CMRS (commercial mobile radio service) carriers, rural ILECs, cable, Internet, and video content providers—each with its own set of concerns and needs.

The sheer number of documents added to the multitudes of intercarrier compensation structures that exist among states and jurisdictions fosters an environment of massive complexity.

Tremendous disparity in opinion exists about state regulations, competition, and wholesale costs. That has pushed proposals into two camps: “bill –and keep” compensation versus “unified calling party’s network pays” (CPNP) compensation. Under the former, rural carriers would have to recover their costs from their customers or from some new support fund, rather than charge IXcs and others for termination of traffic. With the latter, carriers would compensate each other for the termination of traffic, but the rate charged by each carrier would be the same, regardless of the traffic type. The unified CPNP regime could require LD carriers to continue paying LECs for the origination of LD calls, and this also would require some adjustment in support flows.

Basically, it comes down to the fact that what is good for big-city competition is not necessarily good for competition in high-cost or rural areas. In a time when the government is pushing for equal broadband access across America, the challenge is to create compensation mechanisms that encourage investment in all areas of America, so all people have access to VoIP and other IP-based technologies.

Additionally, telecoms like SureWest are "rate-of-return" organizations that are excluded from much of the “safety net” offered by proposals under review with the FCC, such as the hotly contested Intercarrier Compensation Forum (ICF).

According to RBOCs, IXCs and larger CLECs, the long-standing regulatory rules for access charges are antiquated and should be eliminated, as they see it as a hindrance to competition in smaller markets. According to rural LECs, the access charges are needed to compensate for what can be very expensive build-outs in rural areas. They cite the fact that RBOCs and bigger carriers have not focused much on rolling out superior customer service or lower prices on rural areas where there is less capital to tap into.

“No matter how many hundreds of miles they have to travel or how sparsley populated an area, they are pressured to build out broadband networks to everyone,” says Glen Brown, president of telecom consultancy McLean & Brown (www.mcleanbrown.com), which advises the The Rural Alliance on issues involving Universal Service, access reform, and state and federal advocacy planning. “There have to be rules and formulas to mitigate the cost of building out such networks. It’s ludicrous to expect rural carriers to give away access for free when they have gotten compensated in the form of interstate access rates for so long.”

“There exists disparity between current rates and the actual costs rural carriers incur for terminating inter-state traffic,” says Roger Nishi, VP of industry relations for Waitsfield and Champlain Valley Telecom. He advocates implementation of a cost-based intercarrier compensation structure where rates would be based the actual costs are for providing services to other carriers. “There should be a mechanism that takes into account how the cost increases as the size of the carrier decreases,” says Nishi. “The FCC recognizes that to keep prices reasonable for customers, there has to be mechanisms that compensate rural carriers for their network build-outs and terminating traffic over those networks,” says Nishi. He added that access charges had also been used by the FCC for funding of local switch and interstate common line support mechanisms prior to being made explicit.

Regardless of the rules initially used to devise tariff rates, the disparity in price for inter- versus intraLATA traffic is engendering an environment where carriers are engaging in arbitrage, (see “Phantom Traffic: Identifiable But Not Billable,” BW August 2005) which masks the origination of calls so they are mistaken as intrastate traffic and charged lower rates.

The ICF has submitted a fairly detailed proposal to the FCC to move the industry to the edge of a full bill-and-keep structure. While the ICF proposal does not go immediately to bill-and-keep, it is viewed as a "bill-and-keep" proposal because it’s end point rate is so low, many view it as “bill-and-keep.” With it, small ILEC interstate access rates are about 2 cents per minute, with intrastate access rates being much higher.

“The ICF proposal is very detailed, and the industry needs to move ahead as access charge reform is long overdue; it should be pursued vigorously,” says Qwest’s senior VP for policy and law, Steve Davis, who believes carrier-to-carrier charges should be decreased or eliminated in a way that is “economically feasible.” To do that, he contends the composition of IOC revenues needs to be made clear. “The local rates, intercarrier compensation and universal service support is where rural carriers’ revenue comes from, so there needs to be verification of how much revenue is generated by access charges, how much from basic rates, and how much from universal service and inter- and intra-LATA traffic,” says Davis. “If they are ‘over-earning’ there should be room for compromise in terms of the access rate problem.”

However, those in opposition contend the ICF is skewed more toward the interests of IXCs, as the ICF proposal would take most industry access rates, including those of some smaller ILECs, to less than two-hundredths of a cent in a span of four years or so. (That means a transition from $.02/min or higher to $.000175/min for some.)

For now, the RBOCs possess differing views, as evidenced by the fact Verizon and BellSouth do not support ICF. The biggest proponents is SBC, which some speculate could be due to the acquisition of AT&T, where a substantial reduction in access rates would increase AT&T's enterprise value for SBC.

Consequently, CMRS (commercial mobile radio service) carriers, rural ILECs, small CLECs, and even cable, Internet, and video content providers have chosen to submit different proposals--some individually and some via various industry consortia. Proposals have been submitted by The Alliance for Rational Intercarrier Compensation (ARIC), the Expanded Portland Group (EPG), and the National Association of State Utility Consumer Advocates (NASUCA). Additionally, the NTCA and National Association of Regulatory Consumer Advocates (NARUC) have proposed guidelines through meetings with rural ILECs and the ICF, ARIC and EPG.

“The FCC has to do more than just compromise, as it has to truly consider what it wants to accomplish and then somehow devise sub-solutions for each facet of the industry, while ensuring the individual pieces fits into the whole,” says Scott Reiter, senior telecom specialist at NTCA. NTCA studies have found that “bill and keep” would transfer more than $2 billion from access charges and reciprocal compensation directly to subscriber bills or the universal service fund. The average impact per rural subscriber was estimated to be $22 per month. “You cannot just eliminate all access charges and reciprocal compensation by making the subscribers responsible for all costs. That may be feasible in metropolitan areas, but it’s not in rural areas,” adds Reiter.

To compensate for the loss of revenues garnered from access charges, larger companies like Qwest propose an increase in subscriber line charges. “That means any increase in basic surcharges would be nominal, as it would be dictated by market competition,” says Davis, who believes reductions in monthly fees will offset any increase. “A rate increase of a dollar or two could be beaten out before it’s even effective because of competitive factors.”

However, Reiter contends subscriber line charge increases cannot begin to compensate for the level of rate reductions sought by the ICF and other similar proposals, since access charges account for as much as half of the revenues for smaller carriers with low basic rates. “For IOCs with less than 500 lines, the impact would be an average of $50 per line,” says Reiter, noting that it could actually be as high as $100 in some cases. “You obviously can’t charge your customers $50 more.”

However, Davis notes that a rural carrier charging about $6 for basic service could raise the fee to $15, thus offsetting the need for 10-cent/per minute access rates,” says Davis. He also suggests a price cap, where basic service charges would not go above a certain price level without a subsidy mechanism in place to accommodate carriers and to keep them revenue neutral

Some have suggested subsidizing the loss through the USF. However, the problem with the USF is that the pay-outs are growing tremendously with no cap. It has been suggested that legislation mandate that rural companies make a ‘rate case’ so it can be determined whether money from the USF needs to be used.

According to Brown, the entire notion of making rural companies “wards of the state” is ridiculous. “If rural carriers have to do away with access fees, then they are giving away their product and thrown to the mercy of the USF.”

He believes that implementation of uniform rates would resolve the issue of phantom traffic to some degree. “Then companies won’t search for the cheapest rates as there would be a standard. But there has to be acknowledgement that there is a cost to providing access to other carriers,” says Nishi, who believes there should be assessment and development on what it costs for rural carriers to provide services to other carriers. “It is definitely more expensive for the smaller carriers than for larger carriers in urban areas.”

It seems there is a middle ground, “however, everyone has to stop worrying about their ‘pet projects’ and one-off demands about offsetting particular types of traffic or other things so that common ground can be found,” admits Davis. “It remains to be seen if the FCC sees a need to push its authority and to drive the industry to some final solution. An alternative might be for the FCC to take steps more like what it has done in the past – making changes over a four to five year period that push the industry toward greater uniformity, without creating a host of problems for individual carriers.”

With so many proposals, it will be difficult for the FCC to come up with a future-proof solution. The FCC may have to look just a few years ahead, and adjust with mid-course corrections as the industry evolves. It still remains to be seen whether Congress will even confirm or give the FCC power to act where authority is somewhat suspect.