Connect America Fund order details access charge reforms

The FCC’s Connect America Fund order, adopted in late October and made public shortly before Thanksgiving (FCC adopts Universal Service and inter-carrier compensation reform order), details a plan not only for transitioning today’s voice-focused Universal Service fund to focus instead on broadband; it also lays out a plan for phasing out per-minute access charges, which have been a key source of funding for communications networks.

In addition, the order clarifies a long-standing issue by requiring VOIP providers to pay access charges, albeit under different terms than it applies to traditional carriers. And finally, the order closes several loopholes that carriers have used to game the system.

This week we look at the FCC’s plans for reforming the access charge system, as detailed in the 750-page order.

Access charge phase-out
The current access charge system has come under attack from many quarters. At a time when carriers are striving to operate their networks more cost-effectively, the terminating access charges that they pay to other carriers for completing calls are becoming increasingly problematic. Originating carriers do not control who their customers call and therefore cannot predict what their access charge costs will be. As a result, some carriers have gone to great lengths to avoid paying per-minute access charges, even in some cases deliberately failing to complete calls to rural areas, where those charges tend to be the highest (CP: Fixing rural call completion problem won’t be easy).

The Connect America Fund order cracks down on access charge avoidance in the short term, while phasing out per-minute access charges in the long term. Within six years for price cap carriers and competitive carriers that benchmark access rates to the price cap carriers, the FCC aims to bring terminating access charges to zero. For rate-of-return carriers and CLECs that benchmark access rates to them, the transition will occur over nine years.

The FCC outlines two methods through which carriers will be able to recover some of the revenues lost as a result of this transition. One is by raising rates for basic local service. For incumbent carriers, the transition plan calls for an increase of up to 50 cents per month for residential and small business customers each year. For multi-line business customers, the maximum increase is $1.00 per month per year. There is a $30 cap on basic residential service, and customers who participate in the low-income Lifeline program are exempt from basic rate increases. Competitive carriers are expected to recover reduced access revenues solely through end user charges and are not subject to the limits on rate increases.

An access charge recovery mechanism is the second method through which incumbent carriers will be able to recover some of their lost revenues. The access charge recovery mechanism will be funded through the Connect America Fund and will be part of the $1.8 billion allocated annually to price cap carriers and $2.2 billion allocated annually to rate-of-return carriers.

Between basic service rate increases and the access charge recovery mechanism, price cap carriers will be able to recover 90% of a baseline amount, which will start at the level of their 2011 access revenues plus net reciprocal compensation revenues and will decline by 10% annually. (A somewhat more generous program will be available to price cap carriers that recently converted from rate-of-return.)

The access charge recovery mechanism for rate-of-return carriers initially will be equal to a baseline amount calculated by adding their interstate switched access revenue requirement, their intrastate switched access revenues and their net reciprocal compensation revenues. In future years, the baseline will decline by 5% annually.

New rules for VoIP
As per-minute access charges gradually decline to zero, the FCC also took several steps which, in the interim, should help carriers maximize the amount of access charges they are able to collect.

Perhaps the biggest impact will come from the FCC’s clarification of a long-standing dispute. VoIP providers, some of whom contended they were not subject to access charges, will now be required to pay access on long-distance calls that begin or end on the PSTN (until those charges go to zero).

There is a twist here, however. VoIP providers will pay access charges based on interstate rates, even for calls that begin and end in the same state. Intrastate charges are rarely, if ever, lower than interstate charges—and in many cases they are higher. Rural carriers argued that if VoIP providers were to be charged a lower access rate than other carriers, carriers would have an incentive to deliberately identify non-VoIP traffic as VoIP, but that argument did not sway the FCC. The commission contends that charges could be correctly apportioned based on traffic studies that would determine the percentage of VoIP and non-VoIP traffic sent from one carrier to another.

Yet to be resolved are new issues that are likely to arise as a result of the FCC’s requirement that carriers negotiate agreements to interconnect with one another directly in IP format—and presumably at a lower per-minute cost--in good faith. The Connect America Fund order dedicates more than 100 pages to a notice of proposed rulemaking which, among other things, seeks to determine whether the commission should impose additional requirements involving IP-to-IP interconnection.

Cracking down on access avoidance and stimulation
The other step the FCC took that should help carriers maximize the amount of access charges they are able to collect over the next few years was to outlaw the intentional removal or alteration of information required by the terminating carrier to bill for the charges—a practice that has given rise to a phenomenon known as “phantom traffic.”

On the flip side, the commission cracked down on access stimulation—a practice in which a local carrier serving an area with high access charges shares access revenues with certain free conference call or free chat line operators.

The order states that access stimulation has occurred when two conditions are met. Not only does the local carrier have to enter an access charge revenue sharing agreement with another party. The carrier also must see a 100% increase in access charge revenues from one year to the next or has to experience a three-to-one ratio of interstate terminating-to-originating traffic in a single month.

As Connected Planet has previously noted, the FCC has appeared reluctant to outlaw access charge revenue sharing outright, perhaps because of the consumer benefits of free conference calling services (CP: FreeConferenceCall.com study aims to justify company’s business model).

In case you missed it . . .
In case you missed it, Connected Planet last week looked at Universal Service reform details included in the Connect America Fund order (CP: What service providers must know about the Connect America Fund order).