Economics and Technology, Inc. -- Views and News, November/December 2011

November/December 2011

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FCC Intercarrier Compensation Order: Boon or Bust for VoIP Providers?

The long-awaited order ushering in comprehensive reform of Universal Service Funding (USF) and Intercarrier Compensation (ICC) finally hit the presses on November 18, 2011. At 750 pages, the order isn't exactly light reading – the executive summary alone goes through page 16. Of particular interest is the FCC's treatment of intercarrier compensation for so-called "VoIP-PSTN" traffic.

The FCC has promulgated these new rules in an attempt to promote a shift to an all-IP environment, and to clarify widespread uncertainty and disagreement regarding intercarrier compensation for VoIP traffic. But rather than provide clarity and certainty, the Commission has generated additional unknowns, and has force-fit its aging TDM compensation regime onto existing and emerging IP services that are not well suited to traditional distance- and jurisdiction-based access charges.

Most long distance or "interexchange" calls are subject to FCC- or state PUC-regulated "switched access charges" imposed at both the originating and terminating ends of the call by either an incumbent or a competitive local exchange carrier (ILEC or CLEC). However, the requirement that VoIP providers pay access charges when they hand-off a VoIP-originated call to a TDM carrier for termination to the called party has been ambiguous at best, and up to now the FCC has generally not enforced such a requirement. That is about to change. The immediate effect of the newly-adopted rules will almost certainly be negative for VoIP providers, driving up the prices for what are generally referred to as "interconnected VoIP services" – i.e., where one end of a call either originates or terminates in TDM at an ILEC or a CLEC.

Where a call both originates and terminates as VoIP – even where different VoIP providers are involved – there are no access charges to pay, and that will not change under the new ICC rules. The differential treatment of calls that never touch any legacy TDM carrier gives them a significant cost advantage, one that may ultimately be relfected in differentiated pricing for VoIP-VoIP vs. VoIP-TDM traffic. ILECs – which had been pressing the FCC to require that interconnected VoIP calls be subject to access charges – might now experience even faster traffic erosion than in recent years. The old adage, "be careful what you wish for, you might get it" may well be the unintended consequence of the ILECs' push for "parity" treatment of VoIP-TDM and TDM-TDM calls. If VoIP providers translate the cost advantage being afforded VoIP-VoIP traffic into lower prices for such calls, the result could be to accelerate the migration to VoIP, especially among business and enterprise customers.

VoIP-PSTN Traffic

The FCC's new intercarrier compensation rules for VoIP apply only to the exchange of VoIP traffic between a Local Exchange Carrier ("LEC") and another carrier where the traffic involved is so-called "VoIP-PSTN" traffic. The FCC defines such traffic as

traffic exchanged over PSTN facilities that originates and/or terminates in IP format. In this regard, we focus specifically on whether the exchange of traffic between a LEC and another carrier occurs in Time- Division Multiplexing (TDM) format (and not in IP format) [...]

In other words, the new rules apply only where the IP traffic is exchanged with providers that utilize legacy TDM facilities (and significantly, not to situations where the exchange is accomplished entirely in IP form). Calls that originate from a legacy carrier such as AT&T and terminate at a subscriber served by a VoIP provider (e.g., Vonage) qualify as PSTN-VoIP. Similarly, calls that originate in IP format and terminate on legacy PSTN facilities also qualify as VoIP-PSTN. Calls between two IP voice providers, even when they use North American Numbering Plan ("NANP") PSTN-style telephone numbers, do not fall into this category because they never touch the PSTN, and are not subject to the new compensation regime.

The New Rules for Voice over IP

The FCC summarizes the changes as follows:

• We bring all VoIP-PSTN traffic within the section 251(b)(5) framework;

• Default intercarrier compensation rates for toll VoIP-PSTN traffic are equal to interstate access rates;

• Default intercarrier compensation rates for other VoIP-PSTN traffic are the otherwise-applicable reciprocal compensation rates; and

• Carriers may tariff these default charges for toll VoIP-PSTN traffic in the absence of an agreement for different intercarrier compensation

First, the Commission effectively eliminates the pricing distinction between access charges and reciprocal compensation rates by governing all traffic under § 251(b)(5), including intrastate access. Interstate and intrastate toll traffic is to be terminated at current (capped) interstate access rates, and all other traffic is to be terminated at current (also capped) recip comp rates. Carriers can tariff these charges, but can negotiate separate interconnection agreements if they so choose. These rates will all eventually decline over the next several years, first to $0.0007 per minute (the current reciprocal compensation rate applicable to ISP-bound traffic), and then eventually to zero as all telecommunications services transition to a "bill and keep" regime.

The structure of payments is symmetrical, and is applicable both to VoIP and TDM carriers. Any carrier that is advantaged by lower VoIP-PSTN rates when their end-user customers' traffic is terminated to other providers' end-user customers are also restricted to charging the lower VoIP-PSTN rates when the other provider's traffic is terminated to their end-user customers.

An end to all intercarrier compensation disputes? Not so fast...

Although the FCC promotes this new framework as a panacea to end all of the uncertainty surrounding VoIP and intercarrier compensation, it seems unlikely to put an end to all of the disputes: For example, the Commission has left unanswered the question of how the toll/non-toll jurisdiction will be determined. Under existing rules, calls that are originated or terminated to a wireless carrier are considered "local" and subject to local reciprocal compensation treatment as long as both endpoints of the call are within the same "Major Trading Area," an expansive geographic region that in some instances embraces several entire states. With the exception of calls that stay within a wireline LEC's "local calling area" (usually within an 8 to 20 mile radius), those same wireline intraMTA calls would be treated as "toll" and subject to higher access charge parity rates.

For most wireline calls, the local/toll designation and state/interstate jurisdiction has traditionally been determined by geographic rating points associated with the calling and called telephone numbers based upon their respective area codes (NPAs) and central office codes (NXXs). This has become increasingly problematic in recent years, as the growth of nomadic VoIP, wireless, and other number-using services has largely de-linked the NPA-NXX codes and the physical locations of the endpoints of a call.

To address this problem, the FCC in its Order has declined to mandate the rating of an IP call based upon the calling party telephone number, but does not actively provide an alternate standard or method that could be utilized. In fact, the FCC leaves it up to the "LECs to address this issue through their tariffs," which sounds like an easy way to create a whole new spectrum of disputes, especially since the use of the calling party telephone number is not expressly prohibited either. Given the history of interconnection disputes, it seems unlikely that this laissez-faire, "work cooperatively" method will be a success.

Perhaps more importantly, IP-based services are inherently not tied to specific geographies, so force-fitting a jurisdictionally based intercarrier compensation regime onto a technology where it is difficult, if not outright impossible, to determine geographic jurisdiction, cannot increase clarity. Consider these very likely scenarios:

• A customer of a nomadic VoIP provider (such as Vonage) living in Boston orders the service and is assigned a '617' Boston phone number. A year later the customer moves to Chicago but retains his original Boston number, which Vonage allows him to do. If he then places a call to a friend in Chicago, is that a local or a "toll" call? If the determination is driven by the originating (Boston) phone number, the call would appear as "interstate toll" to the terminating carrier, when in fact it is an intrastate local call.

• The same Vonage customer, now living in Chicago, receives a call from a friend in Boston, dialed to the Vonage customer's Boston phone number. To the caller, the call appears "local" even though it is actually being routed to and terminated in Chicago.

Because IP services can be used from virtually any Internet connection worldwide, and because it is inherently difficult to determine the geographic basis of an IP-based call, there are any number of likely convoluted routing options that will mislead any geographically- or jurisdictionally-based intercarrier compensation process. Almost all non-telephony IP services and applications are priced today in a manner that is not distance-sensitive nor based upon the jurisdictional location of the consumer. Consumers don't pay extra to access a website that is hosted outside of their home city, state or country. E-mail doesn't require extra "postage" to get to a distant location. Distance-sensitive costs are zero or so close to zero as to be immeasurable. Most retail wireless pricing has eliminated all distance and jurisdictional distinctions. Distance-based charges are a relic of ancient technology, and the FCC's decision to maintain it for IP-based services seems more likely to frustrate the adoption of VoIP, rather than to promote it.

Network Effects

Eventually, intercarrier compensation will evolve to "bill and keep," at which point these distortions will dissolve away and IP-based services will stand on their own as an alternative product. Bill-and-keep pricing emerged entirely without regulatory involvement among interconnecting Internet Backbone carriers, but here the FCC seeks actually to retard its adoption as a pricing standard for voice telephony via a transition that will last for some ten years, even where voice traffic is carried over the same Internet. That transition scheme – and the legacy wireline carriers it is intended to protect – will be undermined as the higher prices of VoIP-TDM calls operates to accelerate customer adoption of SIP and other IP-based voice services.

For more information, contact Colin B. Weir at cweir@econtech.com

Read the rest of Views and News, November/December 2011.

About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.