Intercarrier Comp in ‘Free Fall,’ AT&T Exec Says

The intercarrier compensation system is “in free fall” and can’t stand a long revamp transition, AT&T Vice Robert Quinn said Wednesday at an FCC workshop. “We're in free fall and I don’t think anybody can plan on having the kind of transition that’s going to provide that sort of certainty,” he said. In 2006, after acquiring BellSouth, AT&T controlled more than 37 million switched access lines. Last year, the company had about 22.5 million lines, Quinn said. The compensation structure is already collapsing, Quinn said: “The market is transitioning this stuff today, and it’s not going to stop."

Quinn was responding to OPASTCO President John Rose and Frontier Communications Vice President Kenneth Mason, both of whom had said the FCC should allow a transition of several years for companies to recover revenue lost in an overhaul. “It’s a very important point to us,” Rose said. “RLECs need a transition.” RLECs rely on access charges for 30 percent of their revenue and on Universal Service Fund payments for 40 percent, he said. Frontier relies on access charges and USF combined for about 10 percent of its revenue, Mason said. The commission would take “major steps” to help RLECs by dealing with phantom traffic and by making intercarrier comp rules and rates apply to Voice over Internet Protocol traffic, Rose said.

Sprint Nextel Vice President Charles McKee drew laughs when he told the audience that he was “in the awkward position of immediately agreeing with Bob [Quinn] on something.” The country has about 280 million wireless connections, and increasing numbers of customers are relying on broadband for their voice service, McKee said. “The point being that the government is not going to be able to somehow stop that tidal wave of change,” he said. “We need to do this as quickly as possible, where we're actually trying to live in a competitive environment as fast as we can."

But customers “would prefer a longer transition,” said Ohio Assistant Consumers’ Counsel David Bergmann who chairs the NASUCA telecom committee. “It needs to be long enough so that this can work its way through the courts, as it inevitably will,” he said.

Raymond James analyst Frank Louthan also encouraged the FCC to move slowly on change. “Investors just want certainty,” he said. “If it happens very quickly, you'll see investment capital leave the space.” Already, midsize telcos’ stock ratings “are depressed because of uncertainty,” Louthan said.

Charging VoIP traffic the same rates as public switched traffic “is the only option that would provide stability and certainty for rural carriers” and so is the only course that major institutional investors in the U.S. would support, MF Global Vice President Paul Gallant said Wednesday at the FCC workshop. Gallant said proposals for bill-and-keep or for a separate category of rates for VoIP offer “a potential for a significant reduction in access charges,” which “would introduce even more uncertainty in the way Wall Street views” midsize rural carriers. “Wall Street may look at that and say, ‘These models aren’t predictable anymore, and we're going to adjust ratings downward,” he said: That would make it harder for the telcos to attract financing, hindering broadband deployment.

Move Quickly, Verizon Official Urges

If the FCC wants to provide stability in the market, it will move “quickly” to create a single, low rate for all traffic, said Verizon Senior Vice President Kathleen Grillo. She defended her company’s decision to pay $0.0007 for VoIP traffic, saying the agreements it’s worked out with Bandwidth.com and other carriers allow for more flexibility. In any case, Verizon wouldn’t mind if the agency set a “default rate” for all traffic, Grillo said. “But I think that we all agree that this is a problem that needs to be fixed quickly.” For now, the commission has “arguably” not ruled on whether VoIP should be covered by the same intercarrier compensation rules as traffic on the public switched telephone network, Grillo said: Setting a low rate like what’s called triple-zero seven helps prevent arbitrage.

Windstream Vice President Eric Einhorn criticized “very large providers” that he said have “unilaterally” decided to pay lower rates for VoIP traffic. “If the FCC doesn’t act now, this self-help may destabilize the network,” he said. “There’s no rational basis for treating VoIP and existing PSTN differently. This will harm consumers rather than encourage broadband deployment.” It isn’t yet “a huge dispute,” but it is “a huge drain on our resources,” Einhorn said. Setting rates lower for VoIP than PSTN traffic would abruptly upset the industry, he said. “Suddenly, a lot of traffic that isn’t classified as VoIP would be,” he said. “This problem could explode."

A billing dispute between Verizon and cable operator RCN over the second company’s charges for switched access service and for reciprocal compensation is making it hard to resolve other issues between the companies, RCN said in an FCC filing posted Tuesday to docket 10-90. It asked the commission to clarify carriers’ obligations to pay intercarrier compensation charges for services rendered. RCN representatives described to Wireline Bureau officials the difficulty of what’s called carrier self-help -- telcos’ taking it on themselves to resolve billing issues.

Verizon disputes the bills on grounds that because traffic exchanged with RCN is IP-originated or IP-terminated, it’s an information service, so interconnection agreements between the companies don’t apply, the cable operator said. “Even if some IP-based telephone services are ‘information services’ (an issue the Commission has not yet decided), the providers of those services might be able to purchase end use exchange services from local exchange carriers, but they could not thereby create an access charge exemption.” However the commission classifies VoIP providers and their traffic, it should clarify that a 1987 ruling, in effect rejecting Verizon’s current stance, governs IP-based services that the FCC classifies under Title I.

For Verizon, the dispute “is another example of why the FCC has acknowledged that VoIP compensation is an issue it needs to address,” said a company spokesman. “Verizon, along with many other players in the industry, are encouraging the FCC to do just that."

"Self-help” regarding VoIP is destabilizing the industry, said General Counsel Peter McGowan of New York state’s Department of Public Service. “The balance of power is … altered when a carrier unilaterally announces that it’s moving to a lower rate,” he said. “That to me is not a particularly well arranged, well balanced position. Obviously, if you work out an arrangement with the carrier, then fine. But what’s the default?” CLEC Cbeyond has filed a federal lawsuit challenging Verizon’s new VoIP rates (CD March 10 p11).

The FCC should set a low, uniform rate, and the commission has established in the Vonage order that VoIP is a telecom service, said Time Warner Cable Vice President Julie Laine. So VoIP should come under the same intercarrier comp rates and rules as all other traffic. Time Warner Cable, too, thinks that the FCC should move quickly, Laine said. “In the long run, we would say let’s hasten that process, rather than have a long period where you give people an opportunity to game the system."

Vonage Vice President Brendan Kasper disputed Gallant’s position and defended bill-and-keep. A transition will come in any event, and by subjecting the new technology of VoIP to the old intercarrier comp regime, “we will harden the carriers’ dependence on intercarrier charges and only make it more difficult to reform,” Kasper said. Told by Einhorn that VoIP traffic is relatively low in volume but increasing because of the self-help, Kasper replied, “Doesn’t that give us time to phase in the system? That gives you a chance to get those mechanisms installed and identify specifically what the subsidies are."

Einhorn said Kasper’s proposal “sounds good, but I think it’s impractical and it wouldn’t play out” in beneficial changes. “There’s really no way to confirm what this traffic is,” Einhorn said. “We have to take carriers’ words for it.” Wireline Bureau Chief Sharon Gillett, who moderated the discussion, asked Einhorn whether any company had claimed all its traffic was VoIP to obtain lower rates. Einhorn said “some” companies had, but “the problem is there are now big carriers that are telling us that the VoIP is growing."

XO Communications Vice President Lisa Youngers spoke up for its proposal for VoIP. XO’s plan would create a separate category for VoIP charges, but require telcos to exchange all their traffic in IP format within five years. The participants were asked whether any FCC decision to subject VoIP to conventional rates should apply only going forward or be retroactive. Einhorn and Laine said they thought the rates should apply now, so it should be both. Gallant said investors are only “forward looking” and so would expect a prospective ruling. He added that a “retrospective” finding would be “free money.” The others supported a prospective order. “There’s been enough litigation, enough uncertainty,” Youngers said.

Panelists were also asked whether they saw a role for states in the new VoIP world. Grillo and Kasper said the FCC has decided that VoIP is an interstate matter. The other participants saw a limited role for states.