The Commission proposes to reform, and then ultimately eliminate, the existing intercarrier compensation (ICC) regime, which it views as an impediment to investment in broadband infrastructure.

Background

Prior to 1996, “universal service” was paid for largely through inflated access charges that long-distance providers (i.e., interexchange carriers (IXCs)) paid to local exchange carriers (LECs). By creating the universal service fund (USF) program as part of the 1996 Telecommunications Act, Congress and the FCC hoped that explicit USF payments would allow for the eventual phasing out of the implicit subsidies represented by the above-cost access charge regime.

This did not happen. While the USF program now distributes more than $8 billion, collected from assessments on various telecommunications and interconnected VoIP service providers, access charges remain above cost. Moreover, the FCC did not anticipate the market-distorting effects that variation within the intercarrier compensation regime would have. Disparate intercarrier compensation rates for functionally identical traffic—local, long distance, interstate and intrastate traffic are all subject to different rates—has created arbitrage incentives and complaints from competitive carriers, ILECs, IXCs and regulators alike. Even worse, from the Plan’s perspective, the current system deters investment in broadband infrastructure.

Analysis

The Plan proposes reform in three steps. First, carriers’ intrastate terminating switched access rates, currently overseen by state commissions, would be lowered to the interstate rates, currently subject to oversight by the FCC. This would occur incrementally over the next two to four years, to be completed by 2014. To offset the lost revenue, the Plan calls for the “rebalancing” (i.e., raising) of local telephone rates and increasing the fixed per-line subscriber line charge (SLC) that carriers charge their customers.

In phase two (2012 to 2016), ICC rates would continue to be reduced. The Plan suggests that terminating switched access rates would be lowered to reciprocal compensation rate levels and that a uniform rate for all ICC eventually would be established.

Finally, in the third phase (2017 to 2020), per-minute ICC would be phased out entirely. The Plan contemplates that ICC will not be necessary in a broadband-only world. IP networks exchange traffic through peering arrangements, with settlement payments from one provider to another made based on traffic imbalances. In the future, when voice traffic represents only a small portion of the traffic carried on providers’ IP networks, the FCC assumes that per-minute intercarrier compensation payments will not be required. The Plan recognizes that a few consumers will remain tied to voice-only networks, but puts off dealing with that problem to another day.

ICC reform has been a rallying cry of every FCC chairman since Reed Hunt, and none of the proposals in the Plan are new. The FCC recognizes that it may lack the legal authority to impose some of them. For example, there are questions about the agency's ability to regulate intrastate terminating access rates. Also, Section 251(b)(5), which requires all LECs to pay reciprocal compensation to one another “for the transport and termination of telecommunications” may prevent the agency from abolishing all per-minute ICC.

Many carrier segments have a lot to lose under these proposals and opposition will be strong. We expect the FCC to release a series of notices launching this proceeding and other elements of the Plan in rapid succession. DWT will be participating in those proceedings on behalf of our clients.