Will The FCC Pull Off The Band-aid on Intercarrier Compensation?

The FCC has been considering comprehensive intercarrier compensation reform for more than a decade, and on more than one occasion has appeared to be on the brink of issuing a major decision.  Now, once again, there are signs that the FCC may finally take action in this complex area which presents some of the most intractable issues in telecommunications.  This post will provide some background on this issue and focus on one of the more controversial aspects of the debate – possible preemption by the FCC of what have traditionally been intrastate ratemaking decisions.

“Intercarrier Compensation” is the omnibus term used to describe all of the payments made between carriers to compensate others for terminating or originating traffic – including carrier access charges, reciprocal compensation, and payments with cellular carriers.  It has long been evident, since the passage of the Telecommunications Act of 1996, that having different compensation regimes for what is the same or virtually the same service is problematic and not sustainable long term.  These differences  have lead to disputes over phantom traffic, “traffic pumping,” and compensation for Voice over Internet Protocol ("VoIP") traffic, to name a few.  But there has been little consensus in the industry on how that reform should proceed.  These issues are made all the more complicated by the impact of intercarrier compensation reform on universal service, since subsidies in carrier access charges have long been used to keep local telephone rates low, particularly in rural areas.  Therefore, any reform of intercarrier compensation must necessarily also address universal service.

Last February, the FCC issued its Universal Service and Intercarrier Compensation Transformation Notice of Proposed Rulemaking, WC Dkt. 10-90, 26 FCC Rcd. 4554 (2011) (“NPRM”), the most recent of several efforts to address universal service and intercarrier compensation issues.  Comments and Reply Comments were submitted in April and May.  On July 29, a coalition of incumbent Local Exchange Carriers (LECs) and cellular carriers, (including AT&T, CenturyLink, Fairpoint Communications, Frontier, Verizon and Windstar) submitted a compromise proposal entitled the Advanced Broadband Connectivity Plan (ABC Plan).  The ABC Plan addressed both universal service and intercarrier compensation issues.

While a comprehensive discussion of the ABC Plan is beyond on the scope of this post, there are four key elements of the ABC Plan relating to intercarrier compensation reform.  First, all regulated termination  intercarrier compensation rates – ie., interstate and intrastate carrier access terminating and all reciprocal compensation – would be set at a uniform default rate of $.0007 per minute by July 1, 2017.  Second, carriers would be able to make up revenue shortfalls through the Connect America Fund (CAF)(replacement for the Universal Service Fund) and other transitional access replacement mechanisms including increases in the end-user SLC.  Third, all VoIP traffic would be deemed interstate.  Finally, to enforce this uniformity, the ABC Plan asks the FCC  to preempt conflicting laws, including state ratemaking jurisdiction over intrastate access charges.

On August 3, the FCC requested additional comments on the ABC Proposal, as well as other proposals made by a group of rural carriers and state parties.  Comments and Reply Comments were due at the end of August.  Supplemental filings and ex partes have been flooding the FCC for the past several weeks.

Not surprisingly, one of the most controversial aspects of the ABC Proposal is state preemption.  The ABC coalition asserts that preemption is critical to imposing a uniform intercarrier compensation regime, and that uniformity is critical to address the arbitrage and fraud issues that have surfaced under the current scheme.   But the state commissions – including the Pennsylvania PUC -- and other state parties have been virtually unanimous in opposing preemption, even where those parties otherwise support portions of the ABC Proposal and the goal of setting uniform intercarrier compensation rates.  There appears to be little question that these parties would challenge any FCC preemption decision on appeal.

The FCC has indicated that it believes that it has the power to preempt the states in this area.  See NPRM at ¶¶509-520.  It remains to be seen, however, whether the FCC will adopt a uniform intercarrier compensation regime, and if it does so, if it will invoke preemption or use some other kind of “incentive” approach to get state agreement.

When the FCC issued its initial NPRM in February, it indicated that it intended to move forward with universal service and intercarrier compensation reform “within a few months.”  After more than a decade of delay, it seems increasingly likely that the FCC will finally take action.