FCC Adopts Notice of Proposed Rulemaking to Reform Intercarrier Compensation and Universal Service Fund Distributions

February 08, 2011

At its open meeting today, the FCC adopted a Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking to reform its intercarrier compensation and universal service distribution policies.

Intercarrier Compensation

The FCC is seeking comment on a number of intercarrier compensation (“ICC”) reforms designed to facilitate the transition from voice networks to all-IP networks and at the same time reduce waste and inefficiency in the intercarrier compensation system. The FCC’s Notice of Proposed Rulemaking (“NPRM”) will address both long term and near term reforms. The near term reforms will include rules to reduce phantom traffic (calls where the information necessary to render a bill is missing) —  which according to the FCC may amount to 8% of all traffic — by changing its rules to ensure that terminating carriers receive information necessary to bill the responsible carrier. The NPRM will also seek comment on how to address compensation for interconnected VoIP traffic and a proposed rule to require LECs participating in access revenue sharing arrangements that stimulate additional access minutes to refile their tariffs to reflect lower rates associated with those additional minutes.

In addition, the NPRM will address long term issues, including reducing per-minute ICC charges gradually as well as how to address the bifurcated jurisdiction between the FCC and the states. The NPRM will propose a choice between two alternatives: First, the FCC could maintain jurisdiction over the interstate compensation regime and allow states to continue to handle intrastate compensation issues. In conjunction with this alternative, the NPRM asks if there are measures the FCC can take to provide states incentives to reform their compensation regimes. Second, the NPRM asks whether the FCC should exercise its jurisdiction under Section 251(b)(5) (which provides that all LECs have a duty “to establish reciprocal compensation arrangement for the transport and termination of telecommunications”). Under this alternative, the FCC would adopt the methodology and the state commissions would implement it by setting rates. As stated in the National Broadband Plan last year, the ultimate goal of the FCC’s long-term reforms is expected to be the elimination of per-minute compensation for the exchange of voice traffic among carriers.

Finally, the NPRM seeks comment on whether it should adopt financial recovery mechanisms that may be needed to provide certainty for carriers who may still need ICC revenues to sustain service in certain areas. One possibility would be for such companies to offset ICC rate reductions with support obtained from the new Connect America Fund.

The NPRM will have two comment cycles: first, an accelerated cycle — 30 days after Federal Register Publication for comments and 45 days for reply comments — for phantom traffic, VoIP compensation and traffic stimulation issues; and second, 45 days for comments and 60 days for reply comments on all other issues.

Universal Service Fund

In the USF portion of the NPRM, the FCC proposed reforms to the existing High Cost Fund component of the Universal Service Fund (“USF”) to implement the proposals issued in the National Broadband Plan (“NBP”) last year. As expected, the FCC has proposed to phase out existing support mechanisms for traditional voice services and transition toward support of broadband services.

The NPRM seeks to modernize support in high-cost areas through changes that the Commission has characterized as “incentive-based” and “market-driven”. As contemplated in the NBP, the proposed changes would be implemented slowly to avoid disruption and flash cuts to current support levels. 

During stage one of the transition, the FCC proposes to eliminate Local Switching Support for small incumbent LECs, and to transition Interstate Access Support for price-cap LECs from the High Cost Fund to the new Connect America Fund (“CAF”). This stage one CAF support, coupled with a modified version of the existing High Cost Fund and some additional recovery for carriers who will lose ICC funds, will ease the transition toward stage two, in which most or all of existing High Cost support will be eliminated and replaced with the CAF. The CAF will likely only support advanced broadband services and not legacy voice networks. The Commission has sought comment on how to implement the CAF, whether support should be given out based on cost models, reverse auctions, or some combination thereof. The NPRM specifically notes that different approaches may be used in different parts of the country. 

While the FCC has not yet announced a plan to reform contribution to the USF system that will provide sufficient funding for these proposals, the Commission did note that it will propose changing certain rules of significance mostly to competitive ETCs, such as the Identical Support rule, which would likely reduce CETC recovery from the existing High Cost system. The NPRM also proposes an annual cap of $3,000 per line for support in the continental U.S. The Commission has indicated that such savings would be put into broadband deployment in the CAF. Based on post-meeting remarks, it is not clear that Chairman Genachowski believes additional USF contribution reform proceedings are needed, as there already is a record on this issue. 

If you have questions regarding this matter or would like to further discuss these issues, please contact the following lawyers in our Telecommunications, Media & Technology Group:

Russell M. Blau, Partner, 202.373.6035

Tamar E. Finn, Partner, 202.373.6117

This article was originally published by Bingham McCutchen LLP.