Coalition Submits Proposal to Fix Intercarrier Compensation Regime

The telecommunications industry has begun outlining proposals to fix the controversial, complex, and what many call antiquated, system governing how phone companies pay one another to complete calls.

Within the past week, a coalition announced a proposal to replace a smorgasbord of fee structures with a single cost-based rate. All telecom providers would pay the same amount of money to access other networks no matter how regulators classify the voice traffic. Under the proposal, state regulators would set one rate for the incumbent local phone company in a territory.

John Sumpter, vice president-regulatory with Pac-West Telecomm and a 33-year telecom veteran, says the proposal simplifies the intercarrier compensation rules. Pac-West is part of the Cost-Based Intercarrier Compensation Coalition (CBICC).

A number of coalitions have sprouted to reform intercarrier compensation rules. Wanda Montano, vice president, regulatory and industry affairs for US LEC Corp., a CBICC member, says companies should submit more proposals to the FCC within the next two months. The FCC will see a great deal of activity in the next 60 days on this issue, she says.

The FCC issued a notice of proposed rulemaking three years ago in order to reform the system, but an FCC spokesman could not provide a timeline for releasing new rules.

A regulatory executive at one of the countrys biggest phone providers says the company would rather develop an industry-sponsored solution than turn to regulators. We know our business much better than a bunch of regulators know it, the source says.

Some phone companies have proposed abolishing intercarrier compensation fees altogether. Under the so-called bill-and-keep system, local phone companies could make up the difference in lost revenue by recovering costs directly through their customers and possibly dipping into money from the Universal Service Fund (USF).

Elimination of access charges will shift large dollars to either or both end users and USF or a third recovery mechanism, the National Telecommunications Cooperative Association (NTCA) said in a 2003 paper.

Some groups like NTCA vociferously oppose the proposal because small phone companies rely heavily on fees they collect from other carriers. Abolishing the fees, these groups argue, could require the telcos to jack up retail rates to excessive levels because they have relatively few customers to spread out the cost of providing service.

In a letter to the FCC, the National Exchange Carrier Association said access charges represent more than $2 billion in revenue for small telephone companies, and up to 70 percent of their total revenue. An NTCA study finds, on average, a rural phone company generates 27 percent of its revenue through state and interstate access charges.

“Simply put, the study results show that COBAK [bill-and-keep] is not a financially feasible concept for rural ILECs, NTCA CEO Michael E. Brunner said. “Without a sound financial base, these companies no will longer be able to continue to provide outstanding services and public benefits; neither will they be able to invest in the infrastructure necessary to offer advanced services as mandated by the Telecommunications Act of 1996.”

The Cost-Based Intercarrier Compensation Coalition also opposes a bill-and-keep proposal because, in part, it does not recognize the capital and operational costs associated with providing other telecom companies access to the network. We dont believe bill-and-keep is the right scenario. It doesnt recognize there are costs to complete a call, US LECs Montano says.

Does System Create Incentives to Dodge Access Fees?

There are principally two forms of intercarrier compensation. Reciprocal compensation is the payment method for exchanging local traffic, and access charges interstate and intrastate apply to long-distance calls. Some regulatory executives say the huge disparity between access fees and reciprocal compensation rates has created incentives for phone companies to dodge the higher rates through a variety of sordid tactics. Access fees can be as high as 15 cents a minute in some rural areas, Sumpter says, while reciprocal compensation rates can be as low as seven one-hundredths of a penny.

Because it was assembled piecemeal over time, the current intercarrier compensation system has inconsistencies that can result in discriminatory practices, arbitrage or gaming of the current system, and other unintended consequences, the National Association of Regulatory Utility Commissioners said in a paper released May 5 outlying goals for a new intercarrier compensation system.

Last year, AT&T and local phone giants accused MCI of cheating them out of hundreds of millions of dollars by illegally avoiding the payment of access fees. Yet, SBC Communications Inc. and Qwest Communications International Inc. have recently accused AT&T of breaking the law by evading access charges. The allegations highlight a bitter fight that has been raging for years: discrepancies over who owes whom money for completing calls. Many rural phone companies say they cannot identify part of their traffic because, in part, call detail records are missing.

Access fees represent a massive expense for long-distance carriers. Still, the fees have plummeted 92 percent since 1984, the year the Bell monopoly was divested. That year the interstate access fee for origination and termination was 17.26 cents per minute, according to FCC data; its now 1.44 cents per minute on average. In 2002, local phone companies collected nearly $14 billion in access charges, including $5.5 billion in interstate fees and $8.4 billion in intrastate fees, according to FCC data. Those figures exclude the subscriber line charges consumers pay. In 1998, local phone companies collected $18.4 billion in access revenue, according to FCC data.

Access charges evolved after the break-up of the old Bell system in 1984 but they were really driven by the competition for long distance that started much earlier when MCI started competing with AT&T, says Qwest spokesman Skip Thurman.

The Bell monopoly relied heavily on long-distance revenue to help pay for a local phone line. In 1976, it cost $22.96 to make a call from Boston to Los Angeles for an hour during a weekday, according to FCC data. Taking into account inflation, Verizon Communications Inc. says that figure is equivalent to $73.

When the Bell system was divested — with AT&T being split off from the Bell operating companies — access charges helped stabilize the price of local phone service. Factoring in inflation, the rates have pretty much stayed the same. In 1976, the price for basic phone service was $7.81 on average, according to FCC data. Factoring in inflation, Verizon calculates that amount is equivalent to $24. Today dial tone is about $23.

Since 1996, subsidies in interstate access charges have been replaced with support from the Universal Service Fund to keep local rates affordable, according to the FCC.