Bringing the Access Charge Structure into the Digital Age

Posted: 12/1998

Bringing the Access Charge Structure into the Digital Age

By Jonathan E. Canis

Just last year, the Federal Communi-cations Commission (FCC) completed a plenary review of the rules that govern the access charges that the incumbent local exchange carriers (ILECs) impose on interexchange carriers (IXCs) and others to gain "access" to end-user customers on the ILEC networks. The new access charge rules were promulgated in an order issued by the FCC in May 1997, and were implemented in a series of ILEC tariff filings in mid-1997, and early and mid-1998. In many ways, this wholesale review of the access system was one of the crown jewels of the Hundt administration, and was a masterpiece of regulatory policy. It implemented some sweeping reforms, including:

• Removing about a half-billion dollars in hidden universal subsidies from access charges;
• Shifting access charges from per-minute charges (which penalized larger carriers and heavy users of telecom services) to more economically rational flat-rated charges; and
• Shifting part of the charges away from terminating access to originating access, where there is more of a chance that competitive pressure will move rates toward market-based levels (this is because end users pick their long distance carrier to originate their calls, but have no control over the carrier that delivers terminating traffic to them).

In a testimony to how fast this industry is moving, the FCC apparently has come to the conclusion that this plenary reform of access charges, which was concluded only a year and a half ago, is outmoded and needs to be revisited. In particular, the administration of FCC Chairman William Kennard apparently believes that the introduction of new digital technologies has rendered some of the existing access rules outmoded, and perceives a need to modernize the access rules in an "Access Reform II" proceeding that likely will be initiated by the end of 1998.

Before we proceed, however, an important caveat: The FCC has not, at press time, issued any formal statement on an access reform agenda, and has not even identified the issues it may address in any future proceeding. As a result, the issues raised below are pure speculation on my part. With that statement made, let's proceed with a discussion of issues that likely will be placed before the FCC during the process of an Access Reform II review.

IP Telephony

Internet protocol (IP) telephony is plain old telephone service (POTS) offered over telecom networks that use IP conversion as a means of converting telephone conversations into packets of data, and transmitting those packets across local and long distance networks. IP telephony comes in several flavors: computer-to-phone, computer-to-computer and phone-to-phone. The first two flavors involve the installation of IP telephony software and a microphone in the user's personal computer (PC), while the last looks like regular telephone service because the IP conversion is transparent to the user.

Under current rules, IP telephony is considered an "enhanced" or "information" service, and so is not regulated. As discussed in earlier State of the Nation articles, IP telephony also has the distinct advantage of allowing carriers to avoid certain interstate access charges on domestic calls, and settlement rates for international calls, which can be a very attractive prospect for both carriers and their prospective customers.

The regulatory treatment of this service--and particularly whether IP telephony carriers must pay access charges when they originate or terminate calls on ILEC networks--is an issue that almost certainly will be at the top of the FCC's agenda. In fact, we hear that recent statements by the regional operating companies of BellSouth Corp. and US WEST Inc.--which claim they will unilaterally impose access charges on IP telephony carriers--played a major role in prompting the FCC to initiate a review of existing access charges.

In addition, FCC attention to this matter has been assured by the aggressive advertising that is now under way from carriers providing IP telephony services. Until recently, the service was seen as a technically inferior kind of telephone service that was targeted to a niche market of computer enthusiasts. Now, however, several domestic and international carriers are aggressively advertising the service as a full substitute for local, long distance and international POTS. The possibility that carriers could provide IP telephone service--sans access charges--that is fully substitutable for, and competitive with, POTS, effectively forces the FCC to revisit its policies that define IP conversion as a factor that makes a service "enhanced."

Of course, IP telephony is not the only service that uses IP conversion. If the FCC finds that IP conversion should be eliminated from the definition of enhanced services, such a decision could impact other Internet-based services (such as Internet "chat"), possibly subjecting them to regulation and the application of access charges, universal service subsidy payments and regulatory fees. Again, there is no indication that the FCC desires such an outcome, but unintended consequences will have to be considered in the Access Reform II process.

ISP Mutual Compensation

As discussed previously in this column, the current status of mutual compensation for local calls made to Internet service providers (ISPs) is a hugely controversial issue that has generated dozens of lawsuits. In a nutshell, the issue is this: Under the Telecommunications Act of 1996, ILECs and competitive LECs (CLECs) must pay one another when they hand off traffic to be terminated on the other carrier's network.

Per-minute rates for such compensation have been set by the majority of the states. (About a dozen states, mostly in the West, have mandated "bill and keep," in which no money changes hands between the ILEC and the CLEC.) The per-minute rates generally range from about 1 cent to half a cent (the level of mutual compensation amounts has been going down in most states as old interconnection agreements expire and new ones are negotiated or arbitrated). Many CLECs provide service to ISPs, which generates a lot of traffic that terminates on the CLEC networks, and these CLECs often collect substantially more mutual compensation from the ILECs than they pay to the ILECs.

Generally, the ILECs don't like the idea of being net losers of mutual compensation revenues and have refused to pay CLECs. This position has forced CLECs to complain to their state public utility commissions (PUCs), and at press time, the PUCs have ruled in the CLECs' favor in 23 states, with no state PUC ruling to the contrary.

It is possible that the FCC may address this issue, and may seek to set mutual compensation rates that will reduce the level of controversy. (Again, at press time, the FCC has not indicated an intention to do so, and the FCC's involvement in this matter is speculative.) If the FCC does enter this fray, however, such action could have significant consequences.

For example, if mutual compensation for Internet-based services is lower than that for traditional telephone services, how would such a decision affect IP telephony traffic? If the FCC justifies lower mutual compensation rates on the grounds that Internet traffic is "one-way" traffic that causes large imbalances in traffic between ILECs and CLECs, how would such a decision impact other one-way traffic, such as 800 service and paging service? How would it impact "two-way" traffic that is not in balance, such as cellular traffic, which can be 75 percent to 80 percent in one direction and only 20 percent to 25 percent in the other direction?

Other Access Charge Issues

The reform of the access system raises a host of other issues as well. For example:

• Terminating access charges: The FCC has indicated in the past that, as a matter of economic theory, there is no rational reason why transporting and terminating long distance traffic should cost more than local traffic. Currently, transport and termination of long distance traffic is subject to terminating access charges, which can run about 1 cent to 2 cents per minute. The transport and termination of local traffic is subject to mutual compensation rates, which in recent interconnection agreements have been falling from about 1 cent to about half a cent and may be going lower still. The FCC may very well seek to equalize these rates in Access Reform II.
• ILEC high capacity special access rates: The FCC has in the past suggested two different treatments of ILEC special access charges, particularly charges for digital signal level 1 (DS-1) and DS level 3 (DS-3) high-capacity services. On the one hand, the FCC has considered deregulating the ILEC pricing of these services altogether, which presumably would result in reductions in the charges for these services, at least for high-volume users or users in urban areas subject to competition.

On the other hand, the FCC has considered imposing presubscribed interexchange carrier charges (PICCs)--new per-line monthly charges ranging from about 50 cents to $3--to these special access lines. (The FCC initially considered this out of a concern that the PICCs now apply to switched access service lines, but not to special access lines, and the FCC did not want this regulatory inequality to cause an uneconomic migration from switched to special access service.) It is possible that the FCC may revisit both of these issues, both of which could have significant consequences. For example, how many PICCs would apply to high-capacity special access services such as DS-1 (which can carry the equivalent of 24 voice-grade lines) or DS-3 (which can carry the equivalent of 672 voice-grade lines)? If special access is deregulated, will dedicated switched access (which is technically the same as special access and is priced about the same) also be deregulated?

• Intercarrier compensation for digital services: Now, for the most part, carriers pay on a per-minute basis when they hand off traffic to terminate on another carrier's network. What happens in the future, as carriers upgrade their current circuit-switched networks to more efficient packet-switching technologies? The new packet-switching technologies--asynchronous transfer mode (ATM), frame relay, digital subscriber line (DSL), IP--currently have no reason to measure service on a per-minute basis, and there's no technical reason why they should. Are other methods of measuring traffic--per bit, by capacity, by cell, by service quality guaranteed--more efficient methods of doing so? Is a nonmeasured means of handling this traffic--such as "bill and keep" (in which carriers bill their respective end users, and not each other) or "peering" (how similarly situated Internet carriers currently trade Internet traffic) a preferred way to go? It is likely that the FCC will receive proposals for all of these different methods, and likely some additional ones as well.

Jonathan E. Canis is a partner in the communications practice group of Kelley Drye & Warren LLP. He can be reached at (202) 955-9664.