Democracy & Technology Blog Further uncertainty for universal service and intercarrier compensation reform

The National Telecommunications Cooperative Association (NTCA) began the process of litigating the Federal Communications Commission’s recent Connect America Fund Order on in the U.S. Court of Appeals for the Fourth Circuit Friday.
NTCA, which represents over 570 “locally owned and controlled telecommunications cooperatives and commercial companies throughout rural and small-town America,” notes, among other things, that “[p]rovisions [of the Order] mandating an ultimate price of zero for all switched access and reciprocal compensation services, imposing retroactive and dynamically changing caps on USF-supported costs and blurring the lines between regulated and nonregulated operations are inconsistent with law.”
What this particular dispute is ultimately about is not whether NTCA’s members are entitled to recover their reasonable costs as a matter of law (they certainly are), but whether they should continue to be allowed to shift a significant portion of those costs to the urban and suburban customers of unaffiliated communications providers that are subject to intensive competition. Implemented to ensure reasonably comparable rates throughout the nation, this arrangement has become difficult to justify for many reasons, one of which is that, in many cases, urban and suburban consumers are forced to pay rates that are much higher than the rates charged by small phone companies who receive the subsidies.
According to the Order, two carriers in Iowa and one carrier in Minnesota offer local residential rates below $5 per month (�235), and approximately 60 percent of small company service territories studied have local residential rates that are below the 2008 national average local rate of $15.62. (�236). “While individual consumers in those areas may benefit from such low rates,” the FCC commendably acknowledges, “when a carrier uses universal service support to subsidize local rates well below those required by the Act, the carrier is spending universal service funds that could potentially be better deployed to the benefit of consumers elsewhere.” (fn. 378)
The FCC, to its credit, has acted decisively in adopting a long-overdue “bill-and-keep” framework for both inter- and intrastate telecommunications. “Under bill-and-keep,” the commission has explained, “carriers look first to their subscribers to cover the costs of the network, then to explicit universal service support where necessary.” (�34) In other words, providers will no longer charge originating and terminating access fees for inter-exchange (toll) traffic. Bill-and-keep is just like an Internet peering agreement. Telecommunications providers will transition to bill-and-keep within six years for larger (price cap) carriers and nine years for smaller (rate-of-return) carriers.
There are many other wonderful reforms in the Order; unfortunately, the treatment of VoIP traffic is not one of them. The FCC has hesitated for years to rule whether VoIP is a “telecommunications” service that should bear a full measure of the burden of subsidizing legacy networks throughout rural and small-town America. Almost everyone recognizes that taxing a more efficient new technology to subsidize a less efficient legacy technology does not tend to promote innovation.
The commission has imposed subsidy obligations on some VoIP services, but not others. The resulting “lack of clarity,” by the FCC’s own admission, has led to “significant billing disputes and litigation,” including pending disputes in a number of courts and state commissions. (�937) I recently noted one of these, the case of Southwestern Bell Telephone Company et al. v. IDT Telecom, Inc., et al., here. The FCC further acknowledges that “the current uncertainty and associated disputes are likely deterring innovation and introduction of new IP services to consumers.” (�939)
Here, the FCC has decided to subject “toll” VoIP traffic to interstate switched access fees and local VoIP traffic to lower “reciprocal compensation” fees (note: it is still up in the air whether the VoIP services at issue in IDT Telecom are toll or local; the FCC refuses to say). Although some VoIP services may not currently be fully taxed as if they are telecommunications services (which they are not, since the FCC has declined to rule), and although all traffic, including VoIP, will ultimately be subject to a bill-and-keep framework, the commission has decided to treat VoIP as a telecommunications service for billing purposes during the 6-9 year transition. Why? Politics are politics.

By declining to apply the entire preexisting intercarrier compensation regime to VoIP-PSTN traffic prospectively, we recognize the shortcomings of that regime. At the same time, we are mindful of the need for a measured transition for carriers that receive substantial revenues from intercarrier compensation. (�935)

Since some VoIP services currently generate less taxes than others, the FCC could have lowered taxes for all VoIP services to the lowest current level (a bill-and-keep framework is the goal, after all). Nope. The commission has resolved some uncertainty (although it has not resolved the IDT Telecom issue), in favor of more interim taxation, not less. This is a politically-driven decision which attempts to generate payoffs for politically-influential “stakeholder” groups for 6-9 years. Tributes for trolls is another way of looking at this.
The FCC’s treatment of VoIP services is unsatisfactory. It does not tend to promote innovation; rather, it tends to penalize innovative new approaches for promoting consumer welfare. We now face a new round of litigation. The NTCA lawsuit is the first major challenge, and there may be others.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.