FCC Releases National Broadband Plan: Intercarrier Compensation Reform Recommendations

On March 16, 2010, after a 13-month study, the Federal Communications Commission (“FCC”) released to the public and Congress “Connecting America: The National Broadband Plan,” containing its policy recommendations for achieving national goals identified by Congress in 2009 legislation, including ensuring that every American has “access to broadband capability.”

The Plan states that there are now 14 million people, living in 7 million housing units, who lack access to terrestrial broadband networks capable of meeting the FCC’s target speeds of 4 Mbps downstream/1 Mbps upstream. To close this gap, the FCC proposes to redirect Universal Service Fund (“USF”) subsidies and intercarrier compensation (“ICC”) revenues that currently support single-use voice networks to support multi-use broadband platforms capable of providing many applications, including voice and data. (Please see our companion analysis of the USF proposal for more details on that aspect of the Plan.)

To accomplish long-term and short-term ICC reforms, the Plan lays out an ambitious three stage transition. In the first stage (years 2010-2011), the FCC will adopt a framework for long term ICC reform and address arbitrage issues on an interim basis. This framework will include proposed offsets for lost ICC revenue through gradual SLC increases and state commission rate rebalancing. The second stage (2012-2106) involves reductions in above-cost per-minute access charges for the origination and termination of telecommunications traffic. The third stage (2017-2020) would complete the transition by phasing out per-minute charges for the origination and termination of telecommunications traffic. Each of these steps is described below along with a summary of the historical context set forth in the Plan.

Background

The Plan asserts that the current ICC regime was not designed to promote deployment of broadband networks and is ill suited for such purposes. For instance, the Plan suggests that in an all IP world, costs are not traffic sensitive, but are instead bandwidth sensitive and that ICC rates should reflect charges for bandwidth rather than per-minute charges. While acknowledging that LECs currently incur traffic sensitive costs to originate and terminate telecommunications, the Plan states that current intrastate access charges are “set above cost and provide[] an implicit subsidy.” It acknowledges numerous problems with the current regime, including rate differences that result in arbitrage opportunities such as phantom traffic and access stimulation. It also suggests that LECs’ practice of denying IP-based interconnection hinders the transition to broadband networks.

The Plan posits that the current compensation regime may be “hindering investment and introduction of new IP-based services” due to lack of uniform rates and the “regulatory uncertainty about whether or what intercarrier compensation payments are required for VoIP traffic.”

To address these inefficiencies and implement a long term vision for ICC reform the Plan proposes a three stage reform process between 2010 and 2020.

Stage 1 — 2010-2011 (Plan Recommendation 8.7)

The Plan proposes that during this stage, the FCC would lay out the institutional foundation of reform and the long term vision for ICC reform through rulemaking proceedings, in which the FCC should:

• require carriers to reduce intrastate terminating switched access rates to interstate terminating switched access rate levels in equal increments over a period of 2-4 years. The Plan states that the FCC has authority to take these steps but recommends that Congress make this explicit by amending the Act;
• permit gradual increases in the SLC and consider deregulating the SLC in areas where local rates are deregulated so as to offset decreasing ICC revenue;
• encourage states to complete rebalancing of local rates to offset the impact of lost access revenues, including moving away from artificially low $8–$12 residential rates that represent old implicit subsidies to levels that are more consistent with costs;
• adopt interim rules to reduce ICC arbitrage, including phantom traffic, by:
• prohibiting carriers from eliminating information necessary for terminating carriers to bill the originating carrier for a call;
• adopting rules to reduce access stimulation and to curtail business models that make a profit by artificially inflating the number of terminating minutes; and
• addressing the treatment of VoIP traffic for purposes of ICC.

Stage 2 — 2012-2016 (Plan Recommendation 8.11)

The Plan proposes that during this stage, the FCC:

• Would implement the changes proposed in Stage 1;
• Would implement the phased reduction of intrastate access rates to interstate access rates;
• Could reduce rates further from interstate access to reciprocal compensation levels;
• Would reduce originating access rates in equal increments.

Stage 3 — 2017-2020 (Plan Recommendation 8.14)

The Plan proposes that during this stage: 

• The FCC would continue to phase out per minute rates for ICC;
• The elimination of “per-minute above-cost charges” would encourage carriers to negotiate alternative compensation agreements; and
• The FCC should carefully monitor IP traffic compensation agreements for market power abuse by terminating carriers so that these arrangements do not harm the public interest.

This is one of a series of reports by Bingham’s Telecom, Media, and Technology practice group focusing on specific aspects of the FCC’s National Broadband Plan. If you would like to receive our reports on other topics, or to consult with us about how the Plan and its implementing proceedings may affect your business, please contact:

Andrew D. Lipman, Partner
andrew.lipman@bingham.com, 202.373.6033

Tamar E. Finn, Partner
tamar.finn@bingham.com, 202.373.6117

Or any other member of the Telecom, Media, & Technology Practice Group.