Posted by Barlow Keener

This month the FCC narrowly avoided addressing the messy political hot-potato of comprehensive intercarrier compensation reform. Very few, even inside the industry, have a full grasp of the complex problems involved with reform. On November 5, 2008, the FCC issued a lengthy order addressing the dial-up reciprocal compensation issues related to the Core Communications order from the D.C. Circuit Court of Appeals.  See my prior post on intercarrier compensation reform. The Commission order included as attachments two draft notice of proposed rulemaking orders addressing comprehensive intercarrier compensation reform.   Fast-track comment and reply dates were set for November 26, 2008, and December 3, 2008, respectively. On December 2, 2008, the day before reply comments were due, the Chief of the FCC Wireline Competition Bureau ordered an extension of the reply date to December 22, 2008. This extension meant as a practical matter that comprehensive reform would not be included in a Commission meeting before the Democrats come to power next year.  After Congress reconvenes in 2009, the Commission will consist of two Republicans and two Democrats as Commissioner Tate’s position will be vacant. Thus, in all likelihood, comprehensive reform for intercarrier compensation will not have to be addressed until there is a new Chairman and a new the Commission.

Many telecom industry executives and analysts are uninformed about the byzantine USF and access fee and subsidy structure. A little back-story is needed to understand the origins and, thus, proposals for reform. In 1983, at divestiture, the FCC created the system of subsidizing local exchange companies (LECs) to ensure universal service through direct payments from IXCs to LECs based on each minute of long distance terminated to the LEC. These access fees, set forth in the ILEC access tariffs, are based on LEC end office and tandem costs. LECs collect and keep the IXC access fees. Rural telephone companies, tasked with delivering high-cost universal service to sparely populated areas, receive a higher rate per minute than LECs serving lower-cost, urban customers. Total access rates vary from $.05 to $.005 per minute for interstate traffic. Intrastate LEC access rates, approved by state commissions, are usually much higher than FCC approved interstate rates. The LEC access rates are adjusted from time to time based on a rate of return methodology.

In addition to the LEC access payment, FCC authorized many years ago a flat rate per line recovery method to allow the LECs to collect an amount associated with the interstate cost of the end-users’ telephone loop. This Subscriber Line Charge or SLC, started out in 1983 at $3.50 per line and increased to $6.50 for residential lines and $9.20 for multi-business lines. Like the LEC access payment, the LEC collects the SLC fee each month and keeps it. The current ILEC proposal for comprehensive reform, outlined in a 2006 document known as the Missoula Plan, recommends “dialing up” the SLC rate for residential lines from $6.50 to $10.00.

The 1996 Telecommunications Act created even more subsidies in an attempt to evolve universal service funding from a monopolistic to a competitive industry. There were several elements involved.  One element is the well-known, “reciprocal compensation” regime created as a per minute local exchange compensation payment between ILECs and CLECs for terminated local calls. Reciprocal compensation was similar to the historic “settlements” compensation paid between two ILECs serving the same LATA. Large ILECs pushed for reciprocal compensation in drafting of the 1996 Act believing that most of the local traffic would favor CLECs owing ILECs. The opposite happened. New dialup ISPs started delivering traffic from ILEC customers to CLECs resulting in ILECs owing the CLECs the larger balance. By 2001, the FCC saved the day for the ILECs by rationalizing that the local dialup ISP traffic was actually “interstate” in nature and, thus, not subject to local reciprocal compensation. This was the dial-up compensation issue FCC addressed in Core Communications and re-addressed in the Commission’s November 4, 2008 order.

The Commission’s two draft reform orders attached to the November 5, 2008 Core Communications order included broad, sweeping proposals. A few of these proposals included: a) increasing the local per line SLC fee to $10, b) creating a per number fee of around $1.00, c) lowering the IXC interstate access fees, d) unifying the intrastate IXC access charges with the interstate access charges, and e) lowering the percentage of USF fees levied on interstate long-distance service.

Comprehensive intercarrier reform was not, is not, and will not be easy. It is a political “hot-potato” being tossed about among the Commissioners.