This week we wanted to a highlight an issue that is extremely important to medium and small ILECs. As an outgrowth of the FCC’s inter-carrier compensation (ICC) transition to bill-and-keep since July 1, 2014, ILECs have been recovering significantly less intrastate access revenues due to Section 51.913(a)(2) of the FCC’s Rules. 

This section of the rules governs the switched access rates that apply to intrastate calls that originate over the Internet (voice over Internet protocol) and terminate on the public switched telephone network). This so called VoIP-PSTN traffic was previously billed at the ILEC’s intrastate originating access rate, but since July 1, it is required to be billed at the ILECs interstate originating access rate. The rate between originating interstate and intrastate originating access rates, in many cases, is fairly large and is causing significant intrastate access revenue reductions.   

Exasperating the situation is the fact that the Commission’s current access recovery rules do not permit ILECs to increase rates or recover these access revenue losses through the Connect America Fund (CAF) or through Access Recovery Charges (ARCs). ARCs were put in place to recover lost terminating access revenue losses as terminating interstate and intrastate access rates move to zero. They were not designed to recover lost originating access revenues.

ILECs are asking the Commission for help. In an Emergency Petition for Waiver jointly filed on July 7, 2014 by NTCA, NECA,  ITTA, the Eastern Rural Telecom Association (ERTA), WTA–Advocates for Rural Broadband, Frontier and Windstream. The petitioners requested the Commission to waive the application of Section 51.913(a) of its rules and thereby pause, effective June 30, 2014, any reductions in inter-carrier compensation rates for originating VoIP traffic until full implementation of a CAF Phase II recovery mechanism, in the case of price cap carriers, or a tailored CAF mechanism for rural, rate of return-regulated (ROR) ILECs, respectively

Using FCC data, the petitioners noted that approximately 30 percent of voice connections are at this point VoIP in nature. Thus the estimated annual revenue shortfall for ROR ILECs would exceed $18.5 million.  For Frontier Communications and Windstream Communications, the estimated annual revenue shortfall for these two price cap carriers alone would be $14.5 million.

The Commission reacted to the Petition by accepting industry comments in July and August. However, to this date, it has not ruled on the waiver request. Clearly ILECs are now becoming increasingly concerned.  In a series of ex parte letters to the FCC, USTelecom has suggested specific FCC rule changes to solve the problem. According to the ILEC association, the FCC should:

Implement a mechanism – consistent with how it has otherwise handled all ICC rate reductions – to recover revenues lost due to the reduction in intrastate originating access for originating intrastate toll VoIP. As USTelecom, ITTA, and ERTA demonstrate, such alternative relief would consist of a combination of increases in Access Recovery Charges (“ARCs”) and CAF-ICC support, with a substantial portion of the shortfalls being recovered via ARC increases rather than via CAF-ICC support for larger carriers. Such an alternative remedy would also hold true to the Commission’s “no flash cuts” policy that underpinned the 2011 reforms and provide much-needed relief, particularly for smaller carriers that depend upon a mix of ICC and universal service support to provide quality and affordable services in high-cost rural areas (See, Ex Parte Letter from David Cohen, USTelecom to FCC, WC Docket Nos. 03-109, filed December 11, 2014)

There is no doubt this is a significant issue for small and rural ILECs which continue to obtain a significant percentage of their overall revenues from inter-carrier compensation, especially access charges. Thus, it is surprising, actually shocking, that the Commission which is usually very sensitive to the concerns of rural ILECs, has not acted on this issue.

The situation is especially troubling for ROR ILECs. Eighteen years after the Telecom Act became law, the Commission has still not settled on a long-term universal service recovery plan for these rural carriers.  And there is no permanent plan in sight. We strongly believe that the Commission should protect these carriers and either suspend its rule or adopt the USTelecom proposal. The Commission adopted this rule because it believed it would have the CAF recovery mechanisms settled by July 1, 2014. It should not have been so optimistic.

By Andrew Regitsky, CCMI

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