It has been more than four years since the FCC released its monumental Order in Docket 10-90 reforming the inter-carrier compensation system, including interstate and intrastate access charges. The goal of the Order was to unify all inter-carrier compensation charges by moving to a bill-and-keep regulatory system in which all carriers would recover the costs of transporting and terminating local and long-distance traffic from their end user customers and not from each other. Unfortunately, as we discuss below, the Order has led to considerable confusion in the industry regarding how it applies to the transport rate element.

To avoid rate shock, the Commission determined it would be beneficial for the transition to bill-and keep to occur over multiple years (six for large price-cap ILECs and nine for smaller rate-of-return ILECs), and initially apply to only some access rates. Thus, the transition schedule applied to terminating access only, while a schedule for originating access was left for a future date.

Somewhat baffling was how the FCC addressed the transition to bill-and-keep for the transport access elements. In the switched access world, terminating transport access charges recover the costs LECs accrue for moving long distance traffic from a long-distance provider’s point-of-presence (POP) to the LEC end office serving the end user. While all long-distance providers purchase a flat-rated Entrance Facility between their POPs and the serving wire center for those POPs, there are two types of transport LECs provide to move access traffic from those serving wire centers to the end offices serving their terminating customers:

Direct-Trunked Transport - A long-distance carrier that has sufficient traffic between its POP serving wire center and a particular end office could purchase a dedicated circuit between the two locations and pay flat monthly charges;

Tandem-Switched Transport - If a long-distance carrier does not have sufficient traffic between its POP serving wire center and an individual end office to make purchasing direct-trunked transport economical, or for overflow traffic, it could choose to utilize a LEC tandem where traffic to a particular end office is aggregated and then transported to the terminating end office through a dedicated circuit.

In the Order the Commission decided to treat these two types of transport Differently regarding the move to bill-and-keep. For example, other than a requirement that intrastate direct-trunked transport charges must be reduced to interstate levels, direct-trunked transport rates were not affected by the Order. Thus, switched access customers will continue to pay these direct-trunked transport charges until the Commission chooses to address them in the future.

Making the situation more complex, the Order only reduced tandem-switched transport in certain situations. To protect the access revenues of rural rate-of-return ILECs, their tandem-switched transport rates were capped at interstate levels but not reduced any further. Price cap LECs and the CLECs in their serving areas on the other hand, were required to reduce terminating tandem-switched transport to bill-and-keep within a tandem serving area only when the terminating carrier owns the serving tandem switch.

In specifying that the transition to bill-and keep would only apply only when a LEC owns the tandem that terminates a call, the Commission was differentiating between situations in which the LEC tandem is used to actually terminate access traffic and those in which a tandem is used to only aggregate traffic for a carrier before that traffic is handed off to the carrier that will actually terminate the call. This practice of an intermediate carrier providing its own tandem facilities to aggregate traffic for other carriers that do not have sufficient traffic to make direct connections with each other is called “transit” service.

Transit service offered by ILECs and competitors is an optional service that these carriers choose to provide on their own volition. It is not a required access function. Therefore, no access charges apply to it. Transit costs are usually recovered by the provider of the intermediate tandem through minute of use charges. A carrier that is providing transit service is not terminating access traffic, therefore transit service is not impacted by access reform.

Transit service has become a competitive service in the last few years in which ILECs and independent tandem providers seek to aggregate traffic for carriers not directly connected. Since it is unregulated, however, transit customers have complained for years that they are being overcharged. Although sympathetic, the FCC has not been moved to take any action on “excess” transit charges.
Apart from transit service, the Commission is cognizant that the disparate treatment of direct-trunked and tandem- switched transport must be eventually addressed but left it to an unspecified future time period:

Ultimately, we agree with concerns raised by commenters that the continuation of transport charges in perpetuity would be problematic. For example, the record contains allegations of “mileage pumping,” where service providers designate distant points of interconnection to inflate the mileage used to compute the transport charges. Further, Sprint alleges that current incumbent LEC tariffed charges for transport are “very high and constitute a sizeable proportion of the total terminating access charges ILECs impose on carriers today.” More fundamentally, if transport rates are allowed to persist, it gives incumbent LECs incentives to retain a TDM network architecture and therefore likely serves as a disincentive for incumbent LECs to establish more efficient interconnection arrangements such as IP (Access Reform Order, at. para. 820).

Unfortunately, four years after the Order became effective the Commission has given no indication that it will ever address these remaining transport issues.

The transition to bill-and-keep for tandem-switched transport begins July 1, 2017 for price cap ILECs and the CLECs in their serving area. Switched access customers need to be cognizant about which LEC is terminating their traffic in a given serving area to ensure that their tandem-switched transport charges are reduced as scheduled.

They also need to ensure that to the extent they purchase transit service, they are negotiating the best deal for themselves, either from an ILEC or an independent tandem provider. Most importantly, they need to be aware that transit costs are not moving to bill-and-keep and they cannot rely on the FCC to keep these costs in check.

Switched access customers must closely monitor their networks to ensure that they take advantage of lower tandem-switched transport costs vis-à-vis direct-trunked transport charges. Remember, there is no requirement that direct-trunked transport rates must move to bill-and-keep, therefore as tandem-switched transport rates shrink, this type of transport will become increasingly economical.

By Andy Regitsky, CCMI