Entries in ICC Reform (17)


Introducing ICC Reform: RM, ARC, and Eligible Recovery

FCC Drops Heavy Hints about its Preference for RLEC Consolidation (In Switching, at Least)

ICC reform: it’s perplexing, frustrating and complicated! If only that was all that needed to be said on this daunting topic…The FCC’s new rules for access revenue recovery are supposedly designed to “eliminate the uncertainty carriers face under the existing ICC system, allowing them to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Whether this desired outcome will ring true for RLECs, however, remains to be seen. For now, JSI Capital Advisors is here to help you try to understand the new rules (as we try to understand them ourselves).

Adding to the complexity, there are different rules for price cap and rate-of-return carriers—this article will only address rate-of-return carriers. Overall, it is important to add three new terms to your telecom vocabulary: Recovery Mechanism (RM), Access Recovery Charge (ARC), and Eligible Recovery.  Understand what these terms mean, and how they will impact your companies, and you will be well on the way to understanding this bristly, convoluted web of changes we call ICC reform.

The Recovery Mechanism (RM) – Two Roads Lead to Access Recovery for ILECs

The RM is the overall framework “to facilitate incumbent LECs gradual transition away from ICC revenues.” In addition to reducing access rates to an end-state of $0 with bill-and-keep, the RM component of ICC reform gradually decreases the amount of access recovery that carriers may receive—and it sounds like the FCC eventually wants to eliminate the RM altogether. ILECs—but not CLECs—have two ways to mostly recover lost ICC revenues: by charging a limited fee to end-users (called the Access Recovery Charge, detailed below), and through CAF support (for RLECs, coming out of their $2b slice of the CAF pie). Note that CLECs can only recover access revenue by increasing end-user rates, which may create some challenges for RLECs with substantial CLEC operations.

The FCC argues that the RM will help eliminate uncertainty and allow ILECs “to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Driving the sweeping rule changes are some industry trends that both price cap and RoR carriers know all too well: declining demand for voice service and the related decline in minutes of use (MOU). Under the current system, access rates remain steady even though the market forces dictate otherwise. As a result, opportunities for arbitrage arise and incentives are distorted.

The FCC continues by arguing, “Ultimately, consumers bear the burden of the inefficiencies and misaligned incentives of the current ICC system, and they are the ultimate beneficiaries of ICC reform.” ICC reform is about benefiting consumers (even if rates are increased), not keeping carriers whole. The FCC does not think the entire RM burden should be placed on consumers, which is why the RM has two methods for recovery. What is confusing is that the FCC says consumers should not be responsible for the entire RM burden, yet both the ARC and CAF support come directly or indirectly from consumers. The ARC is a new independent end-user fee, and the CAF is collected through the traditional USF contributions methodology. Either way, consumers are paying.

In addition to consumer benefits like lower costs for long distance telephony and innovative new services, the FCC expects that carriers too will benefit from the RM framework: “Carriers will provide existing services more efficiently, make better pricing decisions for those services, and innovate more efficiently. Carriers’ incentives to engage in inefficient arbitrage will also be reduced, and carriers will face lower costs of metering, billing, recovery, and disputes related to intercarrier compensation.” This all sounds pretty great, but it definitely remains to be seen if RLECs and their rural customers will see any of these benefits.

Eligible Recovery – A 5% Annual “Haircut” and Pressure to Consolidate Switching

Determining Eligible Recovery is “the first step in [the] recovery mechanism.” The FCC contends that determining Eligible Recovery will help RLECs know with some certainty “their total ICC and recovery revenues for all transitioned rate elements, for each year of the transition.” The details for calculating Eligible Recovery are explained in the Order (starting on page 313), but essentially RoR carriers start with a “Rate-of-Return Baseline” equal to the carrier’s “2011 interstate switched access revenue requirement, plus FY2011 intrastate switched access revenues and FY2011 net reciprocal compensation revenues.” The baseline will be adjusted “to reflect trends in the status quo absent reform,” such as declining MOU and switching costs. The various access revenue components, illustrated below, have been projected to decline at different rates over the next six years, and the FCC has determined that an overall 5% decrease in baseline support for Eligible Recovery is “appropriately conservative.”  The baseline amount is then recovered by three sources: traditional ICC revenue (which is decreasing in the move to bill-and-keep), the ARC, and the CAF.

It is important to discuss one seemingly passive-aggressive element of Eligible Recovery: the FCC’s apparent desire for RLECs to consolidate switching operations. On one hand, it might be entirely appropriate for some small carriers to share switches. On the other hand, this almost sounds like yet another situation where the FCC is dropping hints that RLECs should consolidate. One could get a feel that they are saying “consolidate switching today, merge tomorrow;” but this section of the Order is certainly open to interpretation. The FCC explains, “Our framework allows rate-of-return carriers to profit from reduced switching costs and increased productivity…For example, small carriers may be able to realize efficiencies through measures such as sharing switches, measures that preexisting regulations, such as the threshold for obtaining LSS, may have deterred.”

The FCC later takes a slightly harsher dig at RoR carriers: “Retaining rate-of-return regulation as historically employed by the Commission risks ‘perpetuat[ing the] isolated, ILEC-as-an-island operation,’ thus increasing the costs subject to recovery to the extent that, for example, each individual incumbent LEC purchases its own facilities, rather than sharing infrastructure with other carriers where efficient.” While it may be true that small carriers could realize efficiencies by sharing facilities, is it the FCC’s place to encourage sharing arrangements or should carriers come to this conclusion based on their unique market forces and cost structures?

Access Recovery Charge – “All End Users Should Contribute…”

The ARC, the direct end-user component of the new ICC recovery regime, is probably what consumers will be most interested in learning about. Some basic “rules of the road” for the six-year RoR ARC include:

  • Residential ARC cannot increase by more than $0.50 per year, and cannot be increased further once a company hits the $30 per month Residential Rate Ceiling—this protects consumers in states with reformed rates, but provides very little wiggle-room for carriers who already charge close to, or above, $30 per month.
  • Multi-line business ARC cannot be increased by more than $1.00 per year, and cannot be increased further once a company hits a $12.20 maximum per-line SLC plus ARC ceiling.
  • The ARC revenue in one year cannot be greater than a carrier’s Eligible Recovery for that year.
  • The ARC cannot be charged to Lifeline customers.
  • ARCs must be allocated to a mix of business and residential customers, to “spread the recovery…among a broader set of customers, minimizing the increase experienced by any one customer.”
  • Carriers do not have to charge the ARC; but if they don’t, the full amount that could be charged will be imputed from Eligible Recovery.

The FCC predicts “the average actual increase across all consumers to be approximately $0.10-$0.15 each year, peaking at approximately $0.50 to $0.90 after five or six years, and declining thereafter.” Carriers will need to study the costs vs. benefits of charging an ARC based on their unique competitive environment as well as the threat of reduced Eligible Recovery if the full ARC is not charged.

Still not Enough? Return to CAF.

If Eligible Recovery is not met though the mechanisms described above, carriers will have an opportunity to supplement their support from the CAF. The FCC “anticipates[s] that end user recovery alone will not provide the full recovery permitted by our mechanism for many incumbent LECs, particularly rate-of-return carriers.” Any supplemental CAF disbursements are subject to the same public interest obligations, like deploying 4/1 Mbps broadband upon reasonable request, as regular CAF support.

If this is still not enough, there is always the waiver process—however, carriers have to show serious financial harm and will be subject to a total company cost and earnings review. The FCC attempts to protect itself from carriers invoking the takings clause by insisting that the RM “goes beyond what might be strictly required by the constitutional takings principle underlying historical Communications regulations.” In other words—carriers should take what they get and be happy with it, because things could be worse. Keep in mind that all this ICC recovery is intended to be “truly temporary in nature.”

Well there you have it—ICC in all its anxiety-inducing glory! What do you think about these significant changes?


Let the Challenges Begin! USF/ICC Order under Attack as Parties Turn to Courts

NTCA Files Petition for Judicial Review

As many of us are still trying to read and digest the 750-page USF/ICC Order, at least 3 parties have moved forward with court challenges—perhaps hoping that the judicial branch will alleviate some of the threats to various stakeholders as the December 29 start-date for the rules looms dangerously close. Earlier this week, small Virginia provider Core Communications and the Pennsylvania Public Utility Commission filed lawsuits in their respective states.  On Friday December 9, NTCA announced that it has filed a petition for judicial review of the USF/ICC Order with the U.S. Court of Appeals for the Fourth Circuit (in Richmond, VA, where Core filed its lawsuit).

NTCA’s press statement by senior vice president of policy Mike Romano explains, “To be clear, we appreciate the FCC’s attempt to loosen, if not untie altogether, the Gordian knots that have existed around the USF and ICC program for years. The order represents a historic step forward, and a significant achievement for the… stakeholders who worked to shape the reforms.” The court filing gets right down to business, however: “Portions of the FCC’s decision in the FCC Order are arbitrary, capricious, an abuse of discretion, contrary to statute and to the Fifth Amendment of the United States Constitution, in excess of or contrary to statutory authority, a departure from reasoned decision-making, and otherwise unlawful."

The press statement further explains that NTCA is specifically concerned with provisions in the order that “put at risk the ability of small, rural, community-based providers to access capital and invest in broadband-capable networks in their hometowns and surrounding countryside.” Specifically, NTCA points to the bill-and-keep access methodology that will ultimately price all switched access and reciprocal compensation at 0; the $250 cap on per line USF support; and provisions “blurring the lines between regulated and nonregulated operations.” According to NTCA, “These provisions will harm rural communities, and will not help to advance the availability and affordability of services for all rural consumers.”

Let’s talk about bill-and-keep for a moment.

Throughout the numerous comment cycles, rural stakeholders warned that bill-and-keep or access rates of 0 would be extremely harmful. The rural associations settled on an end-rate of $0.0007 in the Consensus Framework, but this rate was still considered by many to be too low. Despite the warnings and pleadings, the FCC still decided on bill-and-keep, which it claims in the Order “has significant policy advantages over other proposals in the record. A bill-and-keep methodology will ensure that consumers pay only for services that they choose and receive, eliminating the existing opaque implicit subsidy system under which consumers pay to support other carriers’ network costs…A bill-and-keep methodology also imposes fewer regulatory burdens and reduces arbitrage and competitive distortions inherent in the current system, eliminating carriers’ ability to shift network costs to competitors and customers.”  The FCC continues by arguing that bill-and-keep is less burdensome, and “reduces the significant regulatory costs and uncertainty associated with” a specific rate, like $0.0007.

Price cap carriers have a 6-year transition to bill-and-keep, and rate-of-return RLECs have a longer 9 year transition, illustrated below:

Rural carriers have shown concern that bill-and-keep is more favorable for carriers that exchange relatively equal traffic volume, and that this methodology will prevent small companies from recovering costs. The FCC rejects the argument that bill-and-keep is only appropriate for balanced traffic exchange. Furthermore, the FCC responds in the Order, “To the extent carriers in costly-to-serve areas are unable to recover their costs from their end users while maintaining service and rates that are reasonably comparable to those in urban areas, universal service support, rather than intercarrier compensation, should make up the difference.”

Except…. Per-line USF is capped per month at $250 (an amount which some fear could be arbitrarily lowered in the future, making even carriers who are “safe” today subject to drastic cuts), which appears to be NTCA’s other major concern in their petition to review filing. If you remember the pie chart from JSI Capital Advisor’s first article on USF reform which shows such a large slice of support going to RLECs ($2b of the $4.5b total), it begins to look like meager crumbs when you consider all of the elements in both USF and ICC support that are being reduced, capped, or otherwise manipulated by the new rules.

It will be very interesting to watch how NTCA’s petition for review, as well as the lawsuits filed by Core and the Pennsylvania PUC, progress in the coming months. Do you think the courts will make a reasonable decision? Are there any other major issues in the FCC’s Order that should be reviewed by the courts?

Read NTCA’s press statement here.


Introducing ICC Reform: New Rules to Reduce Arbitrage

FCC Puts Providers “Exploiting Loopholes” Under Fire (Finally)

JSI Capital Advisors continues its detailed analysis of the 759-page USF/ICC Reform Order by looking at the FCC’s new rules for curbing access stimulation and phantom traffic—two forms of access charge arbitrage, which together have likely cost the telecom industry and consumers hundreds of millions of dollars per year. The new rules to reduce arbitrage are not especially drastic, and for the most part reflect the FCC’s initial recommendations in the USF/ICC NPRM. The intention is that these new rules, in conjunction with the overall transition to bill-and-keep, will eventually eliminate access stimulation and phantom traffic…and hopefully not give rise to new forms of arbitrage along the way.

Access Stimulation – A Two-Prong Definition  

Access stimulation is a pervasive problem that “occurs when a LEC with high-switched access rates enters into an agreement of high call volume operations such as chat lines, adult entertainment calls, and ‘free’ conference calls.” The FCC explains, “the arrangement inflates or stimulates the access minutes terminated to the LEC, and the LEC then shares a portion of the increased access revenues resulting from the increased demand with the ‘free’ service provider, or offers some other benefit to the ‘free’ service provider….Meanwhile, the wireless and interexchange carriers (collectively IXCs) paying the increased access charges are forced to recover these costs from all their consumers.” The FCC claims that access stimulation “imposes undue costs on consumers,” has cost IXCs over $2b in the last five years, and harms competition especially in the conference calling market.

A sudden jump in traffic can equal a boon for the LEC because “they are currently not required to reduce their access rates to reflect their increased number of minutes.” Not all situations that result in drastically increased traffic are a result of an access stimulation scheme, and may occur if a new call center or other call-heavy business moves into the area. However, the FCC is hoping that the new rules will weed out the “bad actors” and ensure that access rates are not “unjust and unreasonable under section 201(b) of the Act.”

The FCC adopts a definition of access stimulation that includes two conditions, and “if both conditions are satisfied, the LEC generally must file revised tariffs to account for its increased traffic:”

  1. A revenue sharing condition
  2. An additional traffic volume condition, achieved by either a 3:1 interstate terminating-to-originating traffic ratio in one month; or a greater than 100% growth in interstate originating and/or terminating traffic compared to the same month in the previous year

To help identify LECs who may be engaging in access stimulation, IXCs can file “complaints based on evidence from their traffic records.” Following a complaint, the LEC has the burden of proof to “establish that it has not met the access stimulation definition and therefore that it is not in violation.” The FCC explains that it adopted the two-prong definition for access stimulation because “the use of a revenue sharing approach alone was criticized by some as being ambiguous, circular, or a poor indicator of access stimulation.” The definition that the FCC adopts for revenue sharing arrangements is contingent on a net payment from the LEC to its revenue sharing-partner. The FCC believes that this definition “best identifies the revenue sharing agreements likely to be associated with access stimulation and thus those cases in which an LEC must re-file its switched access rates.”

The traffic volume condition has two triggers in order to “address the shortcomings of using either component separately.” The FCC intends for the 100% growth trigger to act as backup insurance in case a carrier tries to “game” the 3:1 ratio trigger: “The traffic growth component protects against this possibility because increasing originating access traffic to avoid tripping the 3:1 component would likely mean that total access traffic would increase enough to trip the growth component.”

Once it has been determined that a LEC is engaged in access stimulation, the carrier must file a revised tariff “except under limited circumstances.” RLECs and CLECs cannot file a new tariff again until their revenue sharing agreements are terminated, even if the 3:1 or traffic growth conditions are no longer met. Access stimulating RLECs are also no longer able to base rates on historical costs and demand, and cannot participate in NECA tariffs. Carriers who are currently engaged in access stimulation have a bit of a window to end this behavior before facing the consequences: “If a carrier sharing access revenues terminates its access revenue sharing agreement before the date on which its revised tariff must be filed, it does not have to file a revised tariff,” because “traffic patterns should return to levels that existed prior to the LEC entering into the access revenue sharing agreement.”

One last point worth mentioning about the access stimulation rules is that CLECs engaged in access stimulation have to benchmark their interstate switched access rates to the lowest in the state, and the FCC concludes “the lowest interstate switched access rate of a price cap LEC in the state” is the appropriate benchmark.

Overall, the FCC anticipates that “the approach we adopt will reduce the effects of access stimulation significantly, and the intercarrier compensation reforms we adopt should resolve remaining concerns.”

Phantom Traffic – “Gamesmanship is Rife”

Phantom traffic in the most basic sense, “refers to traffic that terminating networks receive that lacks certain identifying information.” The FCC further explains, “In some cases, service providers in the call path intentionally remove or alter identifying information to avoid paying the terminating rates that would apply if the call were accurately signaled and billed.” The FCC estimates that the problems are “widespread,” and anywhere from 3-20% of all traffic is missing identifying information. This costs carriers and consumers “potentially hundreds of millions of dollars annually.”

The FCC is taking a straightforward approach to reducing phantom traffic—simply requiring that certain identifying information be included in PSTN and VoIP calls. As with access stimulation, the FCC is adopting its recommendations from the NPRM with some minor modifications. The new rule is as follows, which the FCC anticipates “will assist service providers in accurately identifying billing for traffic terminating on their network, and help guard against further arbitrage practices:”

Service providers that originate interstate or intrastate traffic on the PSTN, or that originate inter- or intrastate interconnected VoIP traffic destined for the PSTN, will now be required to transmit the telephone number associated with the calling party to the next provider in the call path. Intermediate providers must pass calling party number (CPN) or charge number (CN) signaling information they receive from other providers unaltered, to subsequent providers in the call path.

The FCC believes that requiring all telecommunications providers (PSTN and interconnected VoIP) to maintain the integrity of the calling party information, and prohibiting the stripping or alternation of such information, is in the public interest. The FCC is not allowing any general exceptions to the phantom traffic rule, for example if a carrier does not have the technical feasibility to comply. However, “parties seeking limited exceptions or relief” can file a waiver.

Simple and straightforward, right? The FCC maintains that the phantom traffic rule “is consistent with our goal of helping to ensure complete and accurate passing of call signaling information, while minimizing disruption to industry practices or existing carrier agreements;” and “should significantly reduce the amount of unbillable traffic that terminating carriers receive.”

Do you think that the FCC’s access stimulation and phantom traffic rules will get to the root of the problems? Will the rules provide necessary relief for the carriers and consumers who are pulled into these costly arbitrage schemes, and prevent future arbitrage schemes from arising? The rules appear to be very uncontroversial, obvious and easy remedies; and it is almost surprising that they have not been adopted sooner.

Coming up next, we will take a look at the new bill-and-keep ICC transformation regime that surely has some RLECs quite concerned.

The full FCC Order is available here, with access stimulation and phantom traffic rules covered on pages 209-240.


FCC Approves Still-Unseen USF/ICC Reform Order

Executive Summary Released Minus the 493 Pages that Matter

If you were expecting the unveiling of all the juicy details of the USF/ICC-Connect America Fund Order at the FCC’s Open Meeting today, then you, like me, were probably disappointed after the 3 hour meeting that consisted primarily of the Commissioners thanking each other and their staff for all the hard work in drafting this monumental order. That’s not to say that there wasn’t any good information, but many questions will definitely remain until the allegedly 500+ page R&O and FNPRM is released.

A packed house anxiously sat through the first item on the agenda, “Modernizing Television Broadcaster Requirements to Make Information Available to the Public,” which was approved unanimously. After what seemed like an eternal wait, Wireline Competition Bureau Chief Sharon Gillett opened the discussion on USF/ICC Reform. She delivered what I felt was some of the most important information revealed in the entire meeting: the amount of funding that the various industry sectors will receive.

According to Gillett, Rate of Return carriers will receive $2b, price cap ILECs will receive $1.8b, there will be a one-time $300m Mobility Fund plus an additional annual $500m for mobile broadband, $100m for Tribal Lands mobility, and $100m per year for the super-remote households. The funding methodology for this $100m Dedicated Remote Areas Fund will be determined via future proceedings.

According to the Executive Summary that was released during the time it took me to take a cab from the FCC to my house after the meeting concluded; the FCC will establish “a firm and comprehensive budget for the high-cost programs within USF. The annual funding target is set at no more than $4.5 billion over the next six years, the same level as the high-cost program for Fiscal Year 2011, with an automatic review trigger if the budget is threatened to be exceeded.” After 6 years, the budget may be revisited. This appears to be a fairly reasonable compromise between the eternal hard cap supported by some (like the cable industry), and no cap at all supported by others.

The new Connect America Fund (CAF) will “replace all existing high-cost support mechanisms,” and “will rely on incentive-based, market-driven policies, including competitive bidding, to distribute universal service funds as efficiently and effectively as possible.” CAF support for price cap companies will be introduced in two phases. The first phase will include freezing existing support but also infusing an additional $300m to “expediently” deploy broadband to unserved price cap areas. According to the Executive Summary, “Any carrier electing to receive the additional support will be required to deploy broadband and offer service that satisfies our new public interest obligations to an unserved location for every $775 in incremental support. Specifically, carriers that elect to receive this additional support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications…” This doesn’t sound much like the “Rights of First Refusal” proposal in the ABC Plan, and it does sound like the FCC is going to put a heavy emphasis on public interest obligations. The second phase of price cap CAF support “will use a combination of a forward-looking broadband cost model and competitive bidding.”

Moving on, it sounds like mobile broadband providers will get a much better deal than originally anticipated—at one point they were looking at a single $300m influx only, and now it looks like they are getting the $300m plus $500m per year. I anticipate that some wireless carriers will still say that this isn’t enough (some associations have asked for $1b per year, and even parity with wireline carriers). One interesting aspect of the Mobility Fund is that “the winners will be required to deploy 4G service within three years, or 3G service within two years, accelerating the migration to 4G.” $100m of the annual $500m will go specifically for Tribal areas, which Commissioner Copps emphasized is especially important. He said that some tribal areas have single-digit broadband adoption levels, which is a “national disgrace.” Overall, this Mobility Fund barely resembles the Mobility Fund NPRM that was released a year ago which satisfied very few stakeholders, especially rural wireless carriers.

What about the RLECs? I didn’t hear anything in the meeting that specifically signaled the immediate death of the RLEC industry which was a relief, but as almost everyone has been saying lately, “The devil is in the details.” Supposedly, the Order will “recognize the unique nature” of small rural carriers and attempt to maintain some of the stability of the current system while reasonably transitioning to CAF. According to the Executive Summary, “Rate-of-return carriers receiving legacy universal service support, or CAF support to offset lost ICC revenues, must offer broadband service meeting initial CAF requirements, with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, upon their customers’ reasonable request.” Again, the FCC is pushing hard for public interest obligations.

RLECs can likely expect limitations on capital and operating expenses starting July 1, 2012; less support for “carriers that maintain artificially low end-user voice rates;” phase-out of the Safety Net Additive and of support in areas that overlap with an unsubsidized competitor; and a cap on per-line support of $250 per month “with a gradual phase-down to that cap over a three-year period commencing July 1, 2012.” Most of these changes have been anticipated, but it sounds like the FCC will seek comment on some specific aspects of RLEC funding reductions, including the 11.25% rate-of-return, in an FNPRM.

Finally, Intercarrier Compensation: details seemed especially slim on this topic at the Open Meeting, but were explained somewhat better in the Executive Summary. The FCC will “take immediate action to curtail wasteful arbitrage practices,” specifically access stimulation and phantom traffic.  This might be good news, but the bad news comes next: “We adopt a uniform national bill-and-keep framework as the ultimate end state for all telecommunications traffic exchanged with an LEC.” In the give-and-take spirit of this Order, the FCC does “adopt a transitional recovery mechanism to mitigate the effect of reduced intercarrier compensation on carriers and facilitate continued investment in broadband infrastructure, while providing greater certainty and predictability going forward than the status quo.” I will be interested to see the gap between how much revenue RLECs stand to lose with bill-and-keep and how much the FCC is willing to give back via the recovery mechanism. LECs can also charge an Access Recovery Charge (ARC) limited at $0.50 per month for residential/small business and $1.00 per month for multi-line businesses.

At the Open Meeting, the Commissioners all relentlessly praised one another and their staff on all the hard work, and they all seemed very proud of themselves for finally releasing—and approving—this order (despite the fact that nobody has seen it yet). Copps said that today the Commission is “making telecommunications history,” and Genachowski called this a “once in a generation” achievement that will facilitate “new vistas of digital opportunity.” I will continue to hold my applause until I read the order and learn more about how the RLEC industry will be specifically impacted by the sweeping changes. What do you think—is there enough information to determine if this is a good deal for the RLEC industry? What was the biggest surprise, and the biggest disappointment, in today’s Open Meeting and USF/ICC Reform Executive Summary?

The full 7-page text of the Executive Summary is available here.


Rural Panelists Discuss Call Termination Problems – Causes, Effects, Solutions

A Perfect Storm of Economic Incentives and Technology Brews Arbitrage

USF/ICC reform may be the dominant rural telecom regulatory topic at the moment, but rural representatives from across the country took the initiative to come to the FCC this week and present information about rural call termination problems at a public Workshop. The purpose of the October 18 Workshop, which also included panelists from large ILECs and CLECs (but noticeably no pure VoIP providers), was to identify why these problems are occurring, what impact the problems have on companies and consumers, and how the problems can be solved with regulation, standards, enforcement or best practices.

This Workshop was the result of strong efforts by the Rural Associations and several state Commissions, who have pleaded with the FCC to address rural call termination issues throughout the year (The ILEC Advisor:  FCC Finally Gets the Message about Call Termination Problems). Commissioner Mignon Clyburn opened the Workshop by acknowledging that rural call termination problems are indeed troubling for public safety, health care, businesses and people just trying to communicate by phone. She sympathetically said, “I want my call to go through, and I know you want yours to go through as well.”

The first panel tackled the causes, scope and impact of the problems. Panelists included Robert Gnapp (NECA), Fritz Hendricks (Onvoy Voice Services), Denny Law (Golden West Telecommunications), Dave Lewis (ANPI/Zone Telecom), Kim Meola (AT&T), Dale Merten (Toledo Telephone) and Tami Spocogee (PAETEC). Gnapp summed up the situation by saying, “This is the most troubling, time consuming and frustrating problem [rural providers] have ever had to deal with.”  Hendricks added that it “vilifies” RLECs, even though he has “yet to find a rural carrier” who was at technologically at fault.

Lewis and Hendricks provided insightful comments about how the relationship between economic incentives and technology creates ripe opportunities for arbitrage. Lewis reasoned that as telephone rates increase, companies lose business, and they may look for ways to evade economic challenges and “change the cost dynamics.” Unfortunately, it costs more to terminate calls in rural areas, so companies facing economic pressure might refuse to terminate calls to high-cost areas in an effort to save money. Hendricks explained that “technology provides a vehicle for arbitrage, but economics create the incentive.”

In terms of the causes of call termination problems, many are quick to blame Least Cost Routing (LCR) technologies (and the carriers who utilize LCR). However, several panelists pointed out that LCR has been around for at least a decade, whereas these problems have dramatically increased in the last couple of years. Spocogee stated that LCR isn’t the problem if it is done correctly. Another possible troublemaker called “SIM Box Fraud” was also identified.

There was no shortage of examples of the impact on consumers and rural economies. Merten described a rural community in the Pacific Northwest with an economy based largely on tourism and charter fishing. He claimed that this rural community has been “absolutely devastated” as a result of calls not being completed to the charter fishing businesses. Merten’s company has invested significant resources and time to track and identify the source of call termination problems. In Law’s South Dakota service area, hundreds of automated calls from a school district failed to reach parents to notify them of school closings or other important news. Other panelists and audience members cited specific difficulties experienced by rural health care providers and sheriff’s offices. Gnapp explained that there have been at least 10,000 documented complaints, but the complaints are only a “small subset” of the real number of failed calls to rural areas, which could be in the millions or tens of millions.

The second panel addressed possible resolutions. Panelists included Scott Booth (Verizon), Jill Canfield (NTCA), Martin Corso (TDS Telecommunications Corp.), Penn Pfautz (AT&T) and Rick Ratliff (Sprint). The primary means to address call termination problems appear to be through regulatory intervention, enforcement, industry standards or best practices; but the panelists differed as to which solution is most appropriate. Considering how diverse the sources and causes of call termination problems are, a combination of resolution mechanisms may be the best course of action going forward.

One of the biggest challenges is actually figuring out the source of the problem—without this key information, it is indeed difficult to remedy the situation. A “carrier list” of contacts at IXCs who will help rural carriers address and resolve problems has been created, but Canfield commented that the carrier list is only helpful if the customer complains, the originating IXC can be identified, and the originating IXC is on the list. She also said that it places the burden on the consumer, and Corso later added that business customers are especially reluctant to contact their customers and then tell them to contact their originating carriers—it is definitely a lot of trouble for all parties afflicted.

I thought it was interesting that the large ILEC panelists all seemed sympathetic and dedicated to working with the RLECs on these issues, but the ILECs have the capacity to invest millions of dollars and dedicated staff specifically to monitor and track down non-compliant parties. For example, Ratliff mentioned that Sprint has an email address for call termination complaints and “several staff” who just monitor complaints and “go after bad actors.” Buying expensive monitoring technology and hiring several full time employees to address call termination problems is a luxury that few—if any—small RLECs can afford right now, yet the number of complaints can reach dozens per day. I would imagine some RLECs could keep a full time employee busy by just addressing call termination complaints.

Differences aside, Pfautz insisted that AT&T “[makes] money by completing calls, not by dropping them on the floor.” Booth added that Verizon wants calls to be completed so consumers have a “positive experience;” and Sprint and AT&T are both dedicated to shutting down arbitragers and ending relationships with non-compliant intermediaries.

Will the pledges to take a hard line on arbitrage be sufficient, or does the FCC need to intervene? The rural panelists at the Workshop seemed to agree that the upcoming ICC reforms will not be a solution in themselves, and the ideal course of action may be a combination of best practices, monitoring, reporting and enforcement. Canfield stated that best practices are a good start, but not everyone will follow them so long as there are financial incentives not to; Corso added that monitoring alone is not an appropriate solution. Canfield also argued that the FCC has the authority and ability to issue forfeitures under the current call blocking rules, and these problems could be treated as de facto call blocking.

Overall, this Workshop was very interesting and definitely an important first step in getting the FCC’s attention and moving forward towards consensus and resolution. A number of states are also conducting inquiries on this issue; so hopefully industry, government and consumer stakeholders will begin experimenting with and implementing remedies.

Meanwhile, it would be great if the “bad actors” would take note that RLECs are not going to sit back and continue to let these problems reach an epidemic scale. The fact that a number of panelist and a large portion of the audience in attendance at the FCC came from all over the country really spoke to the gravity of this matter. Indeed the significance and somberness should not be underestimated—as an audience member who traveled to DC from rural Missouri said, “One death because of this issue is not worth the billions of dollars saved.”

The full video recording of the Workshop is available here.