FCC To Take Up "Intercarrier Compensation"
After years of discussion and litigation, but little reform, and prompted by a negative ruling from the U.S. Court of Appeals, FCC Chairman Kevin Martin has announced his intention to hold a Commission meeting on November 4 to consider a plan to completely revamp the system of “intercarrier compensation”. This plan would encompass both the access charges which local carriers charge to long distance companies, and the reciprocal compensation schemes which govern the amounts that local carriers pay to one another for terminating each other’s calls. The agency also may consider a dramatic revision of the universal service fund mechanism at that time. AT&T and Verizon have proposed a “numbers based” USF system.
The focus of recent discussions about revisions to intercarrier compensation has centered on a plan proposed by AT&T this summer, as modified on September 12 by Verizon in a public letter to the FCC. The Plan would involve a single, unified rate for all terminating services, whether interstate, intrastate or local, of $0.0007 per minute (yes, seven hundredths of a cent). Obviously, this charge would be based on current reciprocal compensation rates and would be a dramatic reduction for access charge rates. The move to this approach would be phased in over three years and would involve other changes designed to ensure that the lost access revenues would be recovered through other means, primarily an increase in the end user Subscriber Line Charge.
As Verizon describes its Plan, it would be based on five “principles.” First, the new regime would be a default plan only. Companies thus would be allowed to negotiate alternative arrangements among themselves if they choose. Second, the default uniform termination rate would apply equally to all providers (e.g., CLECs and wireless carriers) and all technologies, including wireless and VoIP. Third, local companies should be given some means to recover revenues lost to the reduction in access charges from their own end users, through an increased federal Subscriber Line Charge. Fourth, any shortfall in the recovery of lost revenues after SLC increases should be covered by revisions to the universal service fund regime. This Plan thus would reduce access charges at both the state and federal levels to a very low rate, and then increase the SLC and modify the USF fund to make up for any lost revenues. Fifth, the revisions would be structured to avoid any changes in the architecture of the public switched telephone network, something that Verizon says would unnecessarily divert resources away from further broadband deployment.
The implementation of the Verizon plan would rely on four primary elements or “dials”. (The “dials” is a term taken from AT&T’s earlier proposal.) First, the FCC would set the Rate Dial at a national default termination rate of $0.0007 per minute for all traffic, regardless of jurisdiction (interstate, intrastate and local would all be covered) or technology (wireline, VoIP and wireless). Second, the FCC would require all providers to transition to this plan over the course of three years. The transition period would involve incremental “step downs” in prices as directed by the FCC, but in each case implemented simultaneously by all providers.
Third, the agency would set the other three “dials” to “give providers the opportunity to recover revenues that they previously have collected through access charges.” The Subscriber Line Charge Dial would be raised from $6.50 to $10.50 per month for first line residential subscribers and all additional non-primary residential lines. The multiline business SLC also would increase from $9.20 to $10.50 per line per month. The Benchmark Dial would be set at a level representing the monthly amount residential users would expect to pay today for service: Verizon suggests this would be in the range of $22-26 per month including SLCs. Then the Replacement Mechanism Dial would be used to make up any revenue shortfalls not covered by the increases in the SLC. To receive payments under this Replacement Mechanism, carriers would first have to show that even with all their SLCs set at the new, higher maximums, their revenues do not equal their prior revenue from access charges. In that case, they would be allowed to recoup the shortfall from the new universal service fund Replacement Mechanism up to a maximum that would put their rates at the Benchmark Dial rate.
Obviously there are major questions about this complex proposal, both legal and policy. One question that arises immediately is whether the FCC has the legal jurisdiction to mandate intrastate and local rates. At least some of the State PUCs are likely to challenge the FCC’s authority to usurp rate-setting that has traditionally been viewed as within state jurisdiction. Another likely issue is whether the FCC can justify a national rate of any sort, without taking into account state and regional differences in costs and market conditions. The FCC has encountered problems with the courts in the past when it sought to set a rate on a national basis. On the other hand, if the FCC is required to review and analyze rates on a state-by-state basis, the process of doing so may be more time-consuming than its resources will allow.
Whether a particular company would be helped or harmed by this plan depends
primarily on whether they are mostly a payor of access charges or a recipient of them. The rural telephone companies are one group that is used to a significant portion of their revenue coming from higher than average access charges. While the Verizon plan seeks to provide a Replacement Mechanism to enable those rural ILECs to be made whole, the small ILECs may have a different view.
In fact, a group of them known as the Independent Telephone and Telecommunications Alliance has proposed modifications to the Verizon plan. The ITTA plan would essentially leave the Verizon plan in place for everyone but smaller ILECs. For the rural ILECs, there would be a separate Track 2 and Track 3. Track 2 companies (small ILECs under price cap regulation) would use the same approach as the Verizon plan except that their final rate would be $0.0095 per minute, significantly higher than the Verizon rate of $0.0007. Track 3 would apply to the remaining small, local ILECs that are still under rate of return regulation. Those companies would have their interstate/intrastate rates unified at the current interstate level. Other ITTA variances from the Verizon plan include a lower increase in the SLC, ($2.25), a benchmark of $20.76, and a transition period of two years rather than three.
Companies that are primarily interexchange carriers and VoIP providers likely would welcome the certainty – and the lower rates – that would come from the Verizon plan. In particular, the reduction in high intrastate access charges would be welcome to that group. However, they might object to the idea that lesser charges could be negotiated between carriers, since the largest ILECs (AT&T and Verizon) are also the largest IXCs and the largest wireless carriers. The Verizon plan would allow them to negotiate volume discounts with each other that no competitor could obtain. On the other hand, some CLECs receive a significant portion of their revenue from intrastate access charges and might object to portions of the plan that limit CLEC access charges. VoIP providers and IXCs in litigation with ILECs over access charges also undoubtedly would like any FCC action to clarify that the new charges apply to VoIP going forward and there is no basis for continued action to collect amounts due before the reforms were enacted.
Whether the FCC will manage to take action or not on November 4 is still unclear. If it does, the plan that is adopted is likely to be similar, but not identical to, the Verizon plan. IP
Danny E. Adams currently serves as managing partner of Kelley Drye & Warren’s Tysons Corner office and is a member of the firm’s Executive Committee. He is a member of the bar in Virginia, District of Columbia and Arizona. He can be reached at DAdams@kelleydrye.com
