Overhaulin’: FCC to Reform Intercarrier Comp by November?

Can the FCC take a 7-year-old proposed rulemaking on intercarrier compensation and overhaul the system by November? Chairman Kevin Martin says he’s going to try.

That sound you hear is the industry raising its collective eyebrows, but crossing its collective fingers.

Intercarrier compensation reform will take center stage at COMPTEL this week as telecom insiders debate whether the FCC will reform the intercarrier compensation regime at least in part by Nov. 5.

Genny Morelli, partner at Kelley Drye & Warren, will lead the session on Monday. She’ll be joined by parties that all have a stake in the reform debate. Slated panelists include Jim Kohlenberger, executive director for The Voice on the Net Coalition; Lisa Youngers, director of federal regulatory affairs for XO Communications LLC (XOHO); David Bergmann, chair of the NASUCA Telecommunications Committee, Office of the Ohio Consumers' Counsel; and Hank Hultquist, vice president of federal regulatory at AT&T Inc. (T).

The tangled intercarrier compensation regime is long overdue for reform. Some carriers have figured out how to make IXCs pay thousands, if not millions, of dollars per month through traffic pumping. Others avoid their obligation to pay by disguising their traffic so their peers can’t charge them. Still others want interconnected VoIP providers to pay access charges. All of this bleeds over into the Universal Service Fund (USF) policy, too, complicating an already complex program.

“This is the telecommunications equivalent of health care,” said Andy Lipman, partner in the telecom practice at law firm Bingham McCutchen LLP. “Everybody agrees it needs to be fixed.”

And some are saying the fix will come as early as November.

The impetus stems from a federal appeals court mandate. By Nov. 5, the FCC must — per that D.C. Circuit court — justify its reason for treating ISP-bound traffic as “information access.” If the FCC doesn’t meet the deadline, the court will override the agency’s authority, wreaking havoc on any carrier terminating traffic to an ILEC, sources said. That’s because different state rates suddenly would apply for traffic termination, rather than the across-the-board $.0007 per minute.

It all started in 2001 when ILECs told the FCC they should receive access charges for ISP traffic, rather than pay to use other carriers’ networks. Commissioners concurred and cemented that view in an order. But CLECs pushed back. They filed an appeal and, about a year later, federal judges sided with them and demanded the FCC substantiate the access charges decision. Seven years later, the FCC still has not complied. It must, by early November, or the court has promised to overturn the 2001 order. If that were to occur, wireless providers’ and CLECs’ costs would skyrocket.

But Martin has promised to address the ISP topic in time. And when he responded to the court’s ultimatum earlier this year, he said he would tackle the matter as part of overall intercarrier compensation reform. Martin’s timeline, sources said, is optimistic.

“I think it’s a stretch,” said Lipman. Intercarrier compensation “is about as complicated an issue as you have before the FCC. There are a lot of parties with disparate opinions. Not even the Bells are on the same page on this issue.”

There’s too much at stake to rush, said William Haas, regulatory and public policy vice president for PAETEC (PAET), a New York-based CLEC.

“This is a complex issue and to think that this can be resolved in a rational way in that amount of time ... is really putting a lot of undue strain on all the carriers that would be affected,” he said.

For wireless provider Sprint Nextel Corp.’s vice president of regulatory affairs, Anna Gomez, Martin’s is “a very ambitious agenda.” However, she added, “Chairman Martin, when he puts his mind to something, he does get things done.”

Others are approaching the possibility with more caution.

“We all have to take it very seriously, that they’re really making an effort at this. And since there is a general desire for reform, there’s at least some chance they will find common ground,” said Jeff Lanning, director of federal regulatory affairs for Embarq Corp..

Given the differences over how to change the system, these sources agreed it’s more realistic that intercarrier compensation will get a partial fix by November, not a complete overhaul. The three easiest pieces to tackle would be phantom traffic, traffic pumping and, of course, the ISP order. There’s just too much complexity, especially surrounding the entrance of “alternative providers” to the industry and uncertainty over their roles, to solve all the problems so soon, sources said.

“People just keep putting [reform] off, hoping the industry will fix it or hoping the PSTN will go away,” said one industry insider who would speak only on condition of anonymity.

Indeed, one of the more contentious subjects unlikely to see resolution by election month is whether interconnected VoIP providers qualify as carriers that should pay access charges. Interconnected VoIP providers say no; they argue theirs are not telecommunications services. LECs say yes, they are, since there’s a connection to the PSTN.

FeatureGroup IP brought that question to the forefront with its forbearance petition, due for a vote by January, asking for exemption from classification as a telecom service. Providers offering “telecommunications services” shoulder more regulatory responsibilities than those categorized as providing information services. As several IP companies have said, Texas-based FeatureGroup IP insists it’s not a telecommunications carrier and, therefore, shouldn’t have to pay access charges to LECs and IXCs.

In one of the more colorful comments in the FCC’s intercarrier compensation docket, FeatureGroup on Aug. 22, said, "It is hard to figure out what the ILECs mean when they say ‘PSTN.’ They imply that the ‘PSTN’ is limited to the legacy ILEC wireline telephone network and excludes CLECs and CMRS networks.”

If the FCC were to reject FeatureGroup IP’s request, chances are good interconnected VoIP providers would have to join other carriers in paying the $.0007 per-minute access charge rate. Most LECs embrace that notion on the basis of fairness.

“We’re trying to make sure the carrier-of-last resort obligations that are imposed on us are paid for, bottom line,” said Lanning.

Other groups are taking the idea of “alternative provider” contributions further than just paying access charges. A number of groups have proposed unifying access charge and reciprocal compensation at the $.0007 rate. AT&T, CTIA—The Wireless Association, Sprint (S), The Telecommunications Industry Association and others support this approach. It’s yet another bone of contention and one that hasn’t been worked out. The National Telecommunications Cooperative Association (NTCA) is one of the associations decrying the proposal because it fears the violation of states’ rights. There’s concern over ensuring rural carriers have the subsidies that allow them to deploy in high-cost areas. There’s also a push to federalize all interconnected VoIP traffic. At the same time, IP providers say they can’t be burdened with high regulatory costs or they’ll have less incentive to deliver and route traffic.

It all adds up to a convoluted mess. Plus, commissioners must remember that whatever they do to intercarrier compensation will bleed over into USF policy, insiders say. Experts say the most likely ripple effects would touch on unified interstate access and local charges. Thornier line items, such as intrastate access charges and new network architecture rules, probably will be dealt with later, wrote industry analyst Andy Regitsky in an August 2008 white paper.

“Such actions will help solve some of the arbitrage issues ... and for the first time, force carriers to gain a competitive advantage from serving the public, rather than through a loophole in the rules,” Regitsky said.

Jessica Zufolo, telecom analyst for Medley Global Advisors, made a similar prediction. She stated in an Aug. 18 note to clients that the FCC will propose a unified rate that would help resolve the phantom traffic problem. Commissioners also could present an access replacement mechanism that would be paid for through a new USF sub-fund or through higher interstate rates to get mid-sized LECs on board, she explained.

“The question will be whether all of this can come together by Nov. 5, which we think is possible given the confluence of events involving the reduction in access revenue and certain political realities facing the ILEC industry next year,” wrote Zufolo.

For mostly rural LECs such as Embarq, fairness is paramount. “It would be competitively biased to force our customers to bear an even greater portion of the USF burden,” said Lanning. “And it would harm competition because cable and wireless don’t have [subscriber line charges] and wouldn’t be paying the same amount.” They also contribute less to the USF and don’t make carrier-of-last payments, he added.

But first, FCC commissioners have to tackle intercarrier compensation reform. There could be short-term hope as phantom traffic and traffic pumping are perceived widely as candidates for more immediate change. PAETEC’s Haas said both are “causing a lot of carriers pain,” so targeted revision by November makes sense.

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