November FCC Meeting Key to Future of Intercarrier Compensation, USF

Anticipating expansive action, Verizon filed details Friday on a proposal by a broad industry coalition to set terminating access rates for all traffic including VoIP calls at $0.0007. AT&T filed an ex parte reporting on a meeting on USF revamping between senior executives and Wireline Bureau officials including Don Stockdale, a top bureau economist.

Other matters may come up at the meeting, including an end to the identical support rule, a proposal for reverse auctions, an item on traffic pumping, measures to address wireless carrier concerns on the compensation that wireless carriers pay rural local exchange carriers to terminate calls and perhaps creation of a USF broadband pilot program, a priority of commission Democrats. The FCC is also likely to release other rulemakings delaying settlement of some matters, probably under the next chairman.

Many in the telecom industry said they believe the FCC Wireline Bureau is working hard on a broad revamp of intercarrier compensation and the Universal Service Fund. A final draft could circulate this month. John Rose, president of the Organization for the Promotion and Advancement of Small Telecommunications Companies, got that impression in a recent ex parte meeting with the bureau, he told us.

At a recent news conference, Martin wouldn’t confirm that perception (CD Sept 8 p4) but said the bureau was working on a response to the court order, adding that he would prefer to see a comprehensive solution by the deadline. USF and intercarrier compensation issues are “intertwined,” said Josh Seidemann, ITTA regulatory policy director. If the FCC cuts terminating access rates in a compensation revamp, a way must be found to protect carriers’ ability to provide carrier of last resort service, he said. A realignment of the current USF could be a first step, he said.

“All I've had to go on is Martin’s public statements,” said an FCC official. “There will be some sort of reverse auction… some end to the identical support rules. But the question remains whether there would be a flash cut or something else. Those are the big things.”

“FCC Chairman Martin is shooting for big reform that appears to have a better shot than in the past, though he faces major obstacles that may dictate more modest changes,” Stifel Nicolaus said Friday in a research note. “At a minimum, the debate sets the stage for 2009, and trends suggest that RLEC political defenses of the status quo are starting to weaken.”

David Kaut, an analyst at Stifel Nicolaus, said the overhaul proposal seems to be coalescing. “The ideal solution would be doing something comprehensive all at once rather than doing it piecemeal,” Kaut said. “If [Martin] can’t get comprehensive done, the backup is probably to do piecemeal things.”

“It will be very, very difficult,” for the FCC to complete USF and intercarrier revamps by Nov. 5, Dan Mitchell, legal vice president for the National Telecommunications Cooperative Association, said in an interview. If the FCC is “smart,” it will focus on ISP- bound traffic, then spend the rest of the year on broader matters, he said. It could be easier for the FCC to focus on revamping USF contributions before tackling distributions, he said. It’s “a lot to get done before” Commissioner Deborah Tate leaves the FCC, said James Ramsay, general counsel of the National Association of Regulatory Utility Commissioners. Tate’s departure, expected by year-end, will leave the agency with two Republicans and two Democrats.

“It’s pretty clear he’s trying to do something,” an industry attorney active on USF issues said of Martin. “The view is they're going to do everything they're going to do at the November meeting.”

Getting a majority of FCC commissioners to agree may not be as complex as it sounds, said one industry official. The commissioners deal daily with these issues, and have spent years discussing them, the official said, noting that many “very engaged” companies are pushing for reform. When that happens, things tend to move, the official said. Another industry official put the odds at 50-50 that the overhaul will occur by Nov. 5. The revamp must be packaged properly, the official said. Much depends on positions taken by OPASTCO and other advocates for rural carriers, which would be hurt most by access- charge reductions, the official said.

The USF revamp would cover distribution and contribution, industry officials said. “Everything is potentially on the table, including a numbers-based contribution reform,” said an industry official. AT&T and Verizon met Wednesday with the Wireline Bureau on details of a system that would base a carrier’s contribution on how many phone numbers it owns (CD Sept 12 p8). “Since there has not been three votes for numbers in the past, there may be some horse trading in the end game on what comprehensive intercarrier compensation and universal service options might look like,” the industry official said.

On intercarrier compensation, questions remain as to whether the FCC is moving toward a “uniform” or “unified” terminating rate, said OPASTCO’s Rose. A uniform rate be the same for all traffic. Under a unified rate, carrier rates would vary by study area factors, based on a standard formula. An industry coalition including the top four wireless carriers and the VON Coalition (CD Aug 8 p5) seeks a uniform rate of $0.0007. The Independent Telephone & Telecommunications Alliance, whose members include Qwest, Embarq and other non-Bell incumbent local exchange carriers, has pushed for a unified rate. OPASTCO, representing small rural carriers, hasn’t taken a position, a spokeswoman said.

The bureau seems to be moving toward a single rate for all traffic, an industry source said. But it still appears to be in “information gathering mode” without a “definite direction,” the official said. The bureau is meeting with all those interested and asking what rate and what access-recovery mechanism would be appropriate, the source said. Another industry source said the Bureau isn’t leaning toward any proposal but is considering three paths: Bill and keep, reciprocal compensation rates varying by study area and a uniform rate like $0.0007. Martin said this month that a uniform or unified rate is possible, but a uniform rate would be the “easiest” way to “minimize regulatory arbitrage.”

New $0.0007 Filing

Verizon spelled out the industry coalition proposal to set a $0.0007 uniform terminating access rate for all traffic. In a Friday filing, Verizon proposed that the FCC require a transition to that rate over three years. The commission should consider “stepping down rates” over time, for example reducing intrastate access rates to interstate levels, Verizon said. For rural carriers dependent on access revenue, the plan would set up an access-replacement mechanism funded from the USF, Verizon said. The plan would increase the cap on subscriber line charges so carriers have the option of recovering revenue from their own customers, Verizon said. To keep consumer prices in check, the FCC should set a benchmark reflecting what residential end users “can reasonably be expected to pay” for monthly telecom service, Verizon said.

The industry coalition endorsing a $0.0007 uniform terminating rate met this month with the Wireline Bureau and General Counsel office. Discussion focused on “why such a broad cross section of industry has come together, how the commission can underpin any decision with a strong legal rationale, what the actual incremental costs for termination are, and why a rate should be low and uniform,” an industry official close to the proceeding said. The meeting drew representatives of AT&T, Verizon, T-Mobile, Sprint Nextel, CTIA, the VON Coalition, Skype, Microsoft, Telecommunications Industry Association, Global Crossing and the National Association of Manufacturers, according to an ex parte filing.

At the meeting, the FCC “appeared very receptive” to the industry coalition proposal, though bureau “staff made clear that there are a variety of ways the commission can tackle comprehensive reform,” said the industry official. “There appears to be a growing recognition [at the Wireline Bureau] that the current broken system is an enormous barrier to extending broadband benefits to more parts of the country.” The bureau indicated that “Band- Aid” interim solutions backed by some in industry “would actually make matters worse,” the source said.

The bureau asked OPASTCO its thoughts on the industry coalition proposal at a recent meeting, Rose said. The association spurned the proposal, saying it would cut access revenue 95 to 97 percent, he recounted. The coalition proposal might be acceptable if an adequate access recovery mechanism were attached, Rose said. But with so many diverse companies in the coalition, it probably will be difficult for the group to decide, he said. OPASTCO gave Verizon a response to the group’s proposal two or three weeks ago but hasn’t heard anything back, Rose said.

NTCA opposes the industry coalition proposal, Mitchell said. The FCC lacks authority to reduce intrastate access rates, he said. Congress gave states that power, he said. In recent talks with AT&T and Verizon, NTCA urged them to change their proposal so it would allow voluntary state rate reductions, and authorize a Separations Joint Board process, he said. But the carriers didn’t seem receptive, he said.