Small, Midsized Rural Carriers Slam Martin’s Intercarrier Comp Plan

Large long-distance carriers and VoIP providers benefit most from reduced access fees, Stifel Nicolaus said in a recent note. The draft order is also “somewhat favorable” to the smallest, rate-of-return carriers because it lets them recover revenue from the universal service fund, Medley Global Advisors said. Both analyst firms said the FCC’s intercarrier-compensation draft poses problems for midsized carriers, which will have less money to cover costs, and no USF support to help them.

NTCA, representing rural rate-of-return carriers, might sue if the FCC adopts the draft and the rural carrier association’s members are hurt, Mitchell said. Martin’s plan unlawfully preempts states by telling them to set intrastate rates equal to reciprocal compensation rates, he said. And the plan appears to use a new pricing methodology that’s never been put up for public comment, Mitchell said. That means it may violate the Administrative Procedure Act, the Regulatory Flexibility Act and the Fifth Amendment’s ban on takings without compensation, he said. To fix the issue, the FCC should let states “voluntarily” reduce rates, he said.

If reports are accurate, the Martin plan is “inequitable” and “unacceptable,” Mitchell said. Reduced rates appear to apply only to central office switches, excluding the mostly Bell-owned tandem switches used for long distance, he said. Bells need to “ante up” on their tandem switches, Mitchell said. And the plan appears to set rates only for terminating access, putting off originating charges for later, he said. Transit and special access transport must be part of any comprehensive plan, and originating access should be dealt with “upfront,” he said.

One Communications, a competitive local exchange carrier, doesn’t see legal problems with the rate-setting process, said Greg Kennan, federal counsel. But he said it could be “inefficient” for each state to hold a proceeding.

The lack of readily available USF support for midsized rural carriers is a concern, said Curt Stamp, president of the Independent Telephone & Telecommunications Alliance, in an interview. ITTA represents Qwest, Embarq and other midsized carriers. Rural ILECs rely on access revenue to cover costs, Stamp said. But Martin’s plan only allows for the smallest, rate-of-return carriers to recover revenue through USF, he said. Midsized price cap carriers in rural areas would only get USF support if they demonstrate costs to the FCC, a process that would be burdensome for both the carriers and regulators, Stamp said. It’s unclear if USF support will be “automatic” for rate-of-return carriers either, Mitchell said. The official fears NTCA members will have to go through a “duplicative” cost assessment proceeding to get support, he said.

The squeeze on midsized carriers would “severely limit rural broadband expansion,” said Mike Rhoda, Windstream senior vice president. To make up for access revenue losses, midsized companies will trim spending, rather than look for new places to invest, he said. “We need reasonably balanced reform and this is not it.” Embarq agreed. “The proposal’s promise of 100 percent broadband appears illusory since, in the first two years alone, it would purportedly eliminate half a billion dollars of annual revenue for rural broadband providers, with additional cuts in succeeding years,” the carrier said.

A USF recovery mechanism should bar no carrier, Kennan said. He said he also has concerns about raising subscriber line charge caps. Incumbents shouldn’t be allowed to make up business revenue losses by increasing residential SLCs, Kennan said. However, Martin’s plan may be more palatable because it puts most of the SLC cap boost on the business side, he said. Under the plan, the residential SLC cap would increase by $1.50, while the business cap would go up $5, Martin said Wednesday.

Martin’s plan rightly shifts the focus of USF and intercarrier compensation to broadband, said Jim Kohlenberger, executive director for the VON Coalition. Those programs should promote broadband, not block it, he said. But jurisdictional issues related to the handling of VoIP traffic causes concern, Kohlenberger said. For example, the plan could require high access fees on free VoIP applications on Facebook, which the VON Coalition opposes, he said. And under Martin’s plan, residential lines would pay into USF $1 per phone number, while business lines would continue to pay based on interstate revenue. That could complicate applying the rules, he said. Though switch-based wireline carriers distinguish between residential and business traffic, wireless and Web-based VoIP services frequently don’t, he said.

Verizon and AT&T were upbeat on the FCC’s draft, though the Bells said they needed to study it further. “It sounds like Chairman Martin is trying to take a balanced approach to achieve these objectives,” a Verizon spokesman said. An AT&T spokesman said, “While the full impact of Chairman Martin’s proposals are still to be analyzed and understood, we are encouraged.”

Now that a draft is available, industry representatives are flocking to the eighth floor. Whether Martin can get competing industry interests in line is unclear. The NTCA “will make [its] case” to commissioners to try to get a revised plan, Mitchell said. The VON Coalition is hopeful an intercarrier compensation overhaul goes through, “but the details are critical,” Kohlenberger said. Stamp said, “Never say never.”

Analysts from Stifel Nicolaus said they doubted the FCC will finish by Nov. 4. The firm cited “deep divisions, huge complexities, high stakes, serious litigation risk, and [a] tight and congested timetable.” If the FCC can’t agree by the meeting, an overhaul soon is unlikely, they said. “The election results and other factors could alter the dynamics and sap momentum, as commissioner changes loom.”