Intercarrier compensation reform: Now what?

Kevin Martin, Chairman of the Federal Communications Commission, shocked the telecom industry by vowing, in the final months of his term, to ambitiously enact sweeping reforms to the nation’s intractable and long-controversial intercarrier compensation rules. Though those plans were dashed before last year ended, the debate that ensued left roadmaps to reform for the incoming administration.

“The Martin plan is pretty much dead,” said Bill King, an analyst with Stifel Nicolaus. “That’s not going to be a starting point for any discussions going forward. Whether [the new administration] can reset the shot clock back to ‘one,’ that’s another issue.”

President-Elect Barack Obama has already signaled clearly that his FCC will have bigger priorities than intercarrier comp when it takes power: namely, broadband availability and net neutrality. However, when the new FCC does look at intercarrier comp reform, it will likely look at the existing public comments regarding Martin’s plan as a sort of primer on the issues involved. And to that extent, those existing comments have mapped out the fault lines in this debate.

Perhaps the largest fault line lies between Bells and large rural carriers, and not surprisingly, since much of the thrust of Martin’s original plan was largely beneficial to Bells at the expense of RLECs.

“Part of the issue with the Martin plan is it seemed like a massive transfer of wealth from the mid-cap RLECs to the Bells,” King said.

Citing the inconsistency of compensation rates that vary from state to state and the incentive it creates for arbitrage, Martin’s proposal contained, first and foremost, a so-called “glide path” for reducing intercarrier comp. He proposed a 10-year plan to decrease access charges, starting with, in the first 2 years, a reduction in intrastate charges (typically a few cents per minute) to interstate levels. In the following 2 years, access charges would fall to reciprocal compensation levels (less than one cent per minute) and averaged within states. By the tenth year, all rates would be cut and unified to less than a tenth of a cent per minute, following an “additional cost” formula.

Many of the largest providers, including all three Bells and Comcast, asked that the FCC reduce that transition period from 10 years to five. But RLECs, which rely on intercarrier comp much more so than their big-city cousins, fought to hang on to that revenue. As a group, Stifel Nicolaus said, RLECs get about 12% of their total revenue from intercarrier comp. Paetec, citing FCC data from 2006, claimed that Martin’s proposed rate cuts would mean a loss in local service revenue of 7% for Bells, 8% for CLECs and 18% for non-Bell incumbents.