FCC reform: intercarrier compensation reform

The FCC proposes an entirely new model for ICC, requiring carriers to cap most ICC rates with immediate effect.

Setting out a completely new model for intercarrier compensation, the FCC intends to places wireline and wireless services on an even footing, seeks to ensure that VoIP traffic receives equal treatment in the market, and plans to curtail wasteful arbitrage practices.

It is notable that substantial parts of the Order are dedicated to recovery mechanisms as a result of revenues lost from this new model, however. Hidden away in clause 22 is the phrase: “We reject the notion that ICC reform should be revenue neutral”.

It is clear that while carriers are expected to support goals for increased broadband access in the US, they will be at risk of suffering loss of income as a result of ICC reform.


The FCC is proposing comprehensive intercarrier compensation reform, abandoning what it terms the “calling-party-network-pays” model. It is instead adopting a “bill-and-keep” framework as the ultimate end state for all telecoms traffic exchanged with an LEC.

Bill-and-keep is a model which the FCC believes has worked well for the wireless industry and the intention is to eliminate competitive distortions between wireline and wireless services. The FCC also claims this will facilitate the transition to IP. Carriers will first look to subscribers to cover the costs of the network, and then turn to “explicit universal service support” where necessary.

Although this is a national framework, individual states will have a key role in determining the scope of each carrier’s financial responsibility, and in evaluating interconnection agreements which were negotiated or arbitrated under sections 251 and 252 of the Communications Act.

One of the most significant elements of the reforms is the treatment of VoIP traffic and IP-to-IP interconnection. They establish that all carriers originating and terminating VoIP calls will be on an equal footing with PSTN traffic.

Law firm Bingham McCutchen interprets the legislation: “The Order ensures symmetry in the treatment of VoIP calls that either begin or end on the public switched telephone network, such that LECs serving both VoIP providers and TDM customers are paid for originating and terminating IP-PSTN and PSTN-IP access calls, with safeguards to ensure no double billing. VoIP access (or “toll”) calls will be subject to interstate access charges and VoIP non-access (or “local”) calls will be subject to reciprocal compensation.”

The FCC goes on to express its hope that its reforms will “further promote the deployment and use of IP networks”. It goes on: “We expect all carriers to negotiate in good faith in response to requests for IP-to-IP interconnection for the exchange of voice traffic.”

The transition timetable

The FCC’s initial reforms will focus on reducing terminating switched access rates, which it states are the principal source of arbitrage problems. It will adopt a “gradual, measured transition that will facilitate predictability and stability”.

Its intention is that this will promote migration to all-IP networks, without placing unnecessary financial burdens either on end users or its own universal service budget.

The details are as follows, although the FCC does stress that these are default rules and that “carriers are free to negotiate alternatives that better address their individual needs”:

1) The FCC required carriers to cap most ICC rates as soon as the Order is effective.

2) By July 2013, carriers are required to bring into parity intrastate and interstate terminating end office rates.

3) Carriers are required to reduce their termination rates (and in some cases transport rates) to bill-and-keep: within six years for price cap carriers, and within nine years for rate-of-return carriers.

Immediate ICC reforms

The FCC has also proposed immediate reforms to curtail wasteful arbitrage practices, addressing access stimulation and phantom traffic.

- Access stimulation: The FCC claims these rules are to avoid “harmful practices”, while trying not to penalise those carriers who are not engaging in access stimulation. Competitive carriers and rate-of-return local exchanges are required to reduce their interstate switched access rates if they have a revenue sharing agreement and (a) have a three-to-one ration of terminating to originating traffic in any month; or (b) experience more than 100% increase in traffic volume in any month measured against the same month during the previous year.

- Phantom traffic: The FCC defines phantom traffic as calls for which identifying information is missing or masked in ways that frustrate intercarrier billing. Telecommunications carriers and providers of interconnected VoIP service are required to include the calling party’s telephone number in all call signaling, and intermediate carriers are required to pass this signalling information, unaltered, to the next provider in the call path.

Carrier and LEC compensation

A substantial part of the FCC’s ICC proposals are given over to compensation, which it intends to mitigate “the effect of reduced intercarrier revenues on carriers and facilitate continued investment in broadband infrastructure”.

The FCC allows carriers to charge a limited monthly Access Recovery Charge (ARC) on wireline services, foreseeing that at least some of the carriers’ reduced revenues will be taken from end users, with caps for residential and without caps for business lines. Carriers will be prevented from recovering their entire lost revenue from consumers.

The Connect America Fund (CAF) can provide additional transitional support to carriers who cannot recover lost revenues from the ARC. However, carriers who receive CAF support to compensate for lost revenues will be expected “to use the money to advance our goals for universal voice broadband”.

The FCC states: “We limit carriers’ total eligible recovery to reflect the existing downward trends on ICC revenues with declining switching costs and minutes of use.”

There are variations in how much price cap carriers can recover, largely between 90% and 100% of baseline. For most price cap carriers, baseline recovery amounts will then decline at 10% annually. For rate-of-return carriers, recovery will be based on the 2011 fiscal year, and this baseline will decline at 5% annually.

All price cap CAF support for ICC recovery will phase out over a three-year period beginning in the sixth year of the reform.

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