Drawing Battle Lines

is brewing. Numerous coalitions have assembled a number of proposals to replace the system governing how phone companies pay one another to complete calls. Billions of dollars are at stake, and the issues are as complex and emotionally charged as the battle that has been raging over the fate of wholesale phone regulations.

Many telecom executives claim the intercarrier compensation system has encouraged telecom companies to dodge fees and exploit rules for purposes regulators didn’t envision. They also say the regulations no longer reflect current trends and advances in technology - notably the explosion of wireless services and extraordinary growth and promise of Internet-based phone service.

“Carriers understandably are anxious to lower their significant access costs as long-distance revenue declines. The commission has recognized that our intercarrier compensation system is under severe stress in light of technological change,” FCC Chairman Michael Powell says in a statement released April 21.

“We have committed ourselves to reforming the system and I am aware that carriers themselves are working toward solutions. The appropriate way to address these challenges is through intercarrier compensation reform and we will focus our efforts there.”

The chairman directed his staff at the beginning of the year to make intercarrier compensation reform a priority after the regulator took care of some business that is now finished, says an FCC source. “I would say [the] time for it to be a No. 1 priority is right now,” the source says.

The Intercarrier Compensation Forum is among the coalitions developing a proposal to submit to the FCC. As of late May, the ICF had not submitted a proposal the FCC considers significant because it represents a wide spectrum of interests. However, two of the biggest local phone companies, BellSouth Corp. and Verizon Communications Inc., have withdrawn their support. “Generally speaking, we question the political viability of the current proposal. Second, the proposal does not adequately address VoIP, a critical intercarrier compensation issue,” says Verizon’s Susanne Guyer, senior vice president -federal regulatory matters. “And third, if legislation is required in conjunction with this proposal, it may preclude more comprehensive solutions to the challenges facing our increasingly evolving industry.”

An attorney involved with the ICF did not return a phone call seeking comment. “Obviously if they had held together as the large group they started out as … it would have been stunning,” says an FCC source. “It would have made our job way easier.”

The ICF comprises phone companies that typically are clawing at one another’s throats in Washington. The regional Bells and the biggest long-distance phone companies, for example, frequently clash when it comes to policy decisions.

Think Triennial Review Order. Beyond the ICF, several other coalitions have sprouted to reform intercarrier compensation rules. For example, the Cost-Based Intercarrier Compensation Coalition has 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 phone company in a territory.

John Sumpter, vice president-regulatory for Pac-West Telecomm Inc. and a 33-year telecom veteran, says the proposal simplifies the intercarrier compensation rules.

Access fees represent an enormous expense for long-distance carriers. However, the fees have plummeted by 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; it now averages 1.44 cents per minute.

In 1998, local phone companies collected $18.4 billion in access revenue, while in 2002, the 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.

Beyond the decrease in regulated per-minute access charges, there is another reason the total amount of access revenue has declined. Some 164 million Americans have cell phones, and billions of minutes that used to travel over the PSTN are being routed wirelessly. In 2000, switched access minutes reached the highest point at 566.9 billion, but by 2003, switched access minutes declined to 444.1 billion, the FCC reports. The rapid growth of Internet-based phone service is expected to accelerate the decline.

In July 2005, local exchange carriers no longer will be required to cut their switched access rates. The FCC adopted rules in 2000 that resulted in a decrease in access charges. That FCC order reduced he access charges AT&T and other long-distance phone companies paid local exchange carriers for access to their networks by $3.2 billion in 2000, and resulted in smaller reductions in subsequent years, according to AT&T’s annual filing with the Securities and Exchange Commission.

Under the rules, incumbent local phone companies charged other carriers less money for switched interstate access, but they were authorized to increase the subscriber line charge on consumer bills by up to $6.50 depending on whether they had reached a cap on their regulated revenue.

In November 2001, the FCC adopted measures that reduced the per-minute interstate access charges that long-distance carriers pay to local exchange carriers operating under rate of return regulation and providing about 8 percent of the country’s phone lines, according to the SEC filing.

By July 2003, long-distance carriers started paying about $900 million per year less in access charges to the carriers, which are generally small rural phone companies, according to the filing.

Some phone companies have supported abolishing access 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 the Universal Service Fund.

In 2001, the FCC sought comment on such a system and proposals. An FCC source contends consumer bills are not likely to rise. One hypothesis goes something like this: Even if the local phone company charged consumers a few more dollars for service, long-distance companies would have an incentive to drop prices because they would no longer have the burden of paying access charges.

Not everybody is a fan of the bill-and-keep proposal, particularly rural phone companies. Groups like the National Telecommunications Cooperative Association adamantly oppose the proposal because small phone companies rely heavily on the fees they collect from other carriers. Abolishing the fees, these companies argue, could require the telcos to jack up retail rates to excessive levels because they have relatively few customers to spread out of 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 phone 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-andkeep] is not a financially feasible concept for rural ILECs,” NTCA CEO Michael E. Brunner said.

“Without a sound financial base, these companies will no 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.”

Some executives contend the wide disparity between two distinct types of intercarrier compensation - interstate and intrastate access fees and reciprocal compensation rates - has created incentives for phone companies to dodge the higher rates through a variety of tactics. Access fees can be as high as 15 cents a minute, while reciprocal compensation rates can be as low as seven one-hundredths of a penny, says Pac-West Telecom’s Sumpter.

“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 reports in a paper released May 5 outlying goals for a new intercarrier compensation system.

Last year, AT&T and local phone companies accused MCI of cheating them out of hundreds of millions of dollars by illegally avoiding the payment of access fees. SBC Communications Inc. and Qwest Communications Inc. recently accused AT&T of breaking the law by evading access charges.

The allegations draw attention to 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.

Allegations of fraud, however, did not reportedly drive the FCC to reform the intercarrier compensation system. In April 2001, the FCC issued a broad inquiry to reform the regulations. The FCC noticed a trend several years ago in which carriers sought opportunities to exploit the rules for purposes regulators did not envision nor desire. For example, competitive carriers were making a business out of collecting reciprocal compensation revenue by terminating a high volume of dial-up Internet traffic. As a consequence, the local phone company was required to pay a disproportionate amount of money to the competitive carrier.